Jan 23, 2024 - Economy

Central player in 2022 crypto collapse files for bankruptcy

Illustration of a frowny face with "11" as the eyes.

Illustration: Shoshana Gordon/Axios

Terraform Labs filed for Chapter 11 bankruptcy protection on Sunday.

Why it matters: The company and founder at the heart of the 2022 crypto collapse have so far evaded the scrutiny that bankruptcy proceedings have brought to other crypto firms and executives that fell in its wake.

Catch up fast: Terraform was the company behind the terra usd stablecoin and its backstop LUNA — the twin disasters that have been fingered as the first domino in the crypto credit rout.

  • The company and founder Do Kwon — now wanted in the U.S. and South Korea on allegations of fraud and financial crimes — even drew criticism from Sam Bankman-Fried back in 2022 for standing by the algorithmic stablecoin experiment that eventually failed so spectacularly.

The intrigue: Why Terraform would only now file for Chapter 11 protection, in an effort to preserve something of value, more than a year after its stablecoin's collapse, is an outstanding question.

  • First-day declaration filings will shed light on what precipitated the filing, but those have yet to land as of this afternoon.
  • FWIW, former COO and now CEO Chris Amani said it was a "strategic" decision and spoke of the Terra ecosystem's "unprecedented resilience" and recent acquisitions. (Winter is in thaw, clearly.)

The big picture: As Terraform and Kwon make it through the system, evidence that links Terraform to Three Arrows Capital, FTX and Digital Currency Group's Genesis will likely surface.

Zoom in: Kwon claimed innocence while on the run, and would continue to claim so, even after he was caught with a forged passport in March in Montenegro. (We suspect bankruptcy filings were not a priority before then.)

  • He is serving a four-month sentence for the document forgery and is expected to be extradited to the U.S. or South Korea after.

Details: Singapore-based Terraform has estimated assets and liabilities in the range of $100 million to $500 million, according to a court filing.

  • The number of creditors is estimated at 100 to 199. Not enough information has been submitted to say much more than that.

💭 Crystal's thought bubble: If Terraform has been holding crypto — and it's likely it has — those assets will be valued at Sunday's petition date, eliminating the issue creditors face today from earlier bankruptcies where assets are tied to lower prices from, say, 2022.

  • Terraform was a large holder of luna, and while that blockchain has a 2.0 version of itself, Terra Classic continues to exist.
  • The company likely has significant exposure to both blockchains, each of which has done a miraculous job of not evaporating — much to the world's surprise.

What we're watching: Chapter 11 tends to put civil lawsuits on ice. (The SEC is a listed unsecured creditor, with the placeholder "UNDETERMINED" for how much it is owed.)

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