Crypto-failure Terraform Labs to cough $4.5 billion and then liquidate itself

Terraform Labs, the outfit behind the $40 billion crash of the TerraUSD stablecoin and its sibling Luna (LUNA) tokens, will pay $4.5 billion to creditors and authorities, then wind itself up.

The biz rose to prominence outside cryptocurrency circles in 2022 when the value of TerraUSD dropped from $1 to just nine cents – a disaster given the digital currency was promoted as a “stablecoin” that would maintain its value, in this case by matching the US dollar.

Terra falsely claimed to have achieved the Holy Grail of crypto: a non-illicit use case

In theory, tokens tied to a fiat currency are a useful instrument because moving money around the world is slow and costly. Schemes that tokenize money and make it faster and cheaper to move are being explored by many in the financial services community.

Terraform Labs was one such entity. But its protocol – which aimed to ensure TerraUSD’s price would remain stable – failed miserably in part thanks to its underlying blockchain being unable to scale as scared investors sent demand for transactions soaring.

Within days of investor panic beginning, over $42 billion in value was effectively erased as stabilization measures such as buying Bitcoin failed to stop the bleeding.

Do Kwon, one of Terraform Labs’ founders, went on the lam and eventually popped up in Montenegro, where he was arrested and later jailed after trying to leave on a false passport. He’s since fought extradition to his home country – South Korea – and the US.

While Kwon struggled in Montenegro, US authorities brought a securities fraud case against Terraform Labs, and in April a jury quickly found the company’s principals guilty.

Last week, the US Securities and Exchange Commission (SEC) announced that Terraform Labs had arranged a payout, and would wind up its affairs.

“Terraform agreed to pay $3,586,875,883 in disgorgement, $466,952,423 in prejudgment interest, and a $420,000,000 civil penalty,” an SEC statement revealed. Terraform also agreed to stop selling its crypto asset securities, wind down its operations, replace two of its directors, and distribute its remaining assets to investor victims and creditors through a liquidation plan.

That plan can’t be finalized until a pending bankruptcy case considers what’s left of Terraform Labs.

Do Kwon will personally pay $110,000,000 in disgorgement and $14,320,196 in prejudgment interest on a joint and several basis with Terraform, as well as an $80,000,000 civil penalty.

“Do Kwon and Terra orchestrated one of the largest securities frauds in US history by, among other things, falsely claiming that they had achieved the Holy Grail of crypto: a non-illicit use case,” thundered Gurbir S Grewal, director of the SEC’s Division of Enforcement

“All they succeeded in doing was lying to investors, wiping out tens of billions of dollars in market value, and creating a trail of victims,” the director added.

SEC chair Gary Gensler also welcomed the verdict, and windup of Terraform Labs: “This case affirms what court after court has said: The economic realities of a product – not the labels, the spin, or the hype – determine whether it is a security under the securities laws.” ®