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Terraform Files For Bankruptcy: What This Means For Crypto

Last Updated January 22, 2024 10:27 AM
Teuta Franjkovic
Last Updated January 22, 2024 10:27 AM

Key Takeaways

  •  Terraform labs wiped out billions in market value and almost collapsed the crypto industry in 2022.
  • The company plans to honor financial obligations and continue Web3 expansion.
  • SEC victorious in part: Terraform Labs sold unregistered securities.

Terraform Labs, known for the TerraUSD stablecoin which significantly impacted the crypto market in 2022, has filed for Chapter 11 bankruptcy  in the U.S., as per recent court documents.

The Singapore-based company’s filing in the Delaware bankruptcy court shows its assets and liabilities are between $100 million and $500 million.

Despite Bankruptcy, Terraform Pledges to Honor Financial Obligations

Despite the bankruptcy proceedings, Terraform Labs has committed to fulfilling its financial obligations to employees and vendors without the need for extra financing. The firm also intends to maintain its expansion in the Web3 sector.

According to the official statement :

“The filing will allow TFL to execute on its business plan while navigating ongoing legal proceedings, including representative litigation pending in Singapore and U.S. litigation involving the Securities and Exchange Commission (SEC).”

Do Kwon, the figure behind the TerraUSD stablecoin and Luna token collapse in 2022, which resulted in a loss of at least $40 billion and exacerbated a $2 trillion downturn in the crypto market, is currently in custody in Montenegro.

His arrest was for traveling with a fake passport, and he faces potential extradition to the US by mid-March on major fraud charges. Court documents reveal Kwon as the 92% shareholder of Terraform Labs, with the remaining share owned by South Korean entrepreneur Daniel Shin. The company is incorporated in Singapore.

“The Terra community and ecosystem have shown unprecedented resilience in the face of adversity, and this action is necessary to allow us to continue working toward our collective goals while resolving the legal challenges that remain outstanding,” Terraform Labs Chief Executive Officer Chris Amani stated. 

Partial Victory – Judge Rules Unregistered Securities Sold

In addition to fraud charges, Do Kwon and Terraform Labs face a lawsuit from the Securities and Exchange Commission (SEC). Last month, US District Judge Jed S. Rakoff sided with the SEC, ruling that Terraform Labs sold unregistered securities.
However, he dismissed claims that the company engaged in transactions involving unregistered security-based swaps. Judge Rakoff determined that the SEC’s fraud allegations against Terraform should be decided by a jury trial.

The trial in the United States concerning Terraform Labs and its co-founder Do Kwon, initially scheduled for January 29, has been delayed. The SEC, which is bringing the case in a Manhattan federal court, requested this postponement , expressing the desire for Kwon to be present at the trial.
The SEC has opposed the idea  of conducting separate trials for Terraform Labs and its co-founder Do Kwon, arguing that the cases against both entities are fundamentally the same. The regulatory body contends that separate trials would be redundant, burdening whistleblowers and retail investors with the need to testify twice. This stance was clarified as part of the ongoing legal proceedings involving Kwon and Terraform Labs.

Ripple’s Alderoty Highlights Impact on Crypto Industry

Stuart Alderoty, the chief legal officer of Ripple, commented  on the Terraform Labs case ruling by Judge Jed Rakoff, which favored the Securities and Exchange Commission (SEC). Although Alderoty did not express a clear stance on the Terraform Labs case, he emphasized three critical aspects of the court’s decision and the widespread implications for the cryptocurrency industry.

Highlighting these key elements, Alderoty underlined  the importance of a factual basis in legal decisions, particularly in cases involving complex financial products like digital assets. He noted the significance of applying the Howey Test, a legal framework for determining if a transaction is an investment contract and thus a security. This application marked Terraform Labs’ digital assets, including UST, as unregistered securities, representing a significant victory for the SEC.

Furthermore, Alderoty observed  the absence of any criticism or reference to a similar ongoing case involving Ripple in Judge Rakoff’s decision, a notable omission considering the similarities between the two cases related to allegations of unregistered securities in the form of digital assets.

His critique also extended to the SEC’s strategy of regulating cryptocurrencies through litigation, which he characterized as an approach more driven by political power than sound policy. This perspective highlights a growing concern within the cryptocurrency sector about the SEC’s regulation methods.

Alderoty’s comments come at a time when the cryptocurrency industry is facing regulatory uncertainties and prolonged legal battles, suggesting increasing resistance within the industry to the SEC’s legal threats. This resilience is becoming evident despite the SEC’s continued attempts to assert its authority over the rapidly changing digital asset landscape.

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