Court documents filed on Sunday reveal that Terraform Labs, the entity responsible for the stablecoin TerraUSD, has initiated the Chapter 11 bankruptcy process in the United States.

The Singapore-registered company, led by Do Kwon, explained in an official statement that it strategically opted to file in the Delaware bankruptcy court in order to sustain its operations while addressing ongoing legal challenges. Chapter 11 bankruptcy is commonly known as "reorganization" bankruptcy. 

Terraform Labs Faces Bankruptcy Amidst Cryptocurrency Fraud Investigation

The bankruptcy reports came after the investigation of Terraform Labs for alleged cryptocurrency fraud.

Kwon and Terraform Labs were implicated in the downfall of its blockchain network TerraUSD and Terra's blockchain native token Luna crypto coins, leading to disturbances in the worldwide crypto markets in 2022. The failure of TerraUSD to uphold its $1 peg in May 2022 resulted in losses exceeding $40 billion for both cryptocurrencies.

Specifically, the collapse of TerraUSD and Luna had a cascading impact on various cryptocurrency firms, including well-known ones such as Singapore lender Hodlnaut, lender Celsius Network, hedge fund Three Arrows Capital, and brokerage Voyager Digital, according to The Strait Times.

Due to this, Kwon has been charged by the U.S. Securities and Exchange Commission (SEC) for allegedly defrauding investors of billions of dollars last year. 

"We allege that Terraform and Do Kwon failed to provide the public with full, fair, and truthful disclosure as required for a host of crypto asset securities, most notably for Luna and TerraUSD," Gary Gensler, US Securities and Exchange Commission (SEC) chairman, said in a statement dated February 16, 2023.

In April of last year, Shin, co-founder of Terraform Labs, was also reportedly charged in South Korea in relation to the collapse of TerraUSD and Luna crypto coins last year.

In a recent development, a federal judge has delayed the trial brought by the SEC against the company and its co-founder. This postponement is to facilitate the extradition of Kwon to the U.S. from Montenegro, where he fled and was arrested after South Korea issued an arrest warrant for him in late 2022.

Read Also: Crypto Fugitive, Terraform Labs Founder Do Kwon Sentenced for Forging Travel Documents 

Terraform Labs Pledges Commitment to Stakeholders Amid Legal Challenges

Terraform Labs, in the midst of its Chapter 11 case, assured it would fulfill all financial obligations to employees and vendors without the need for additional financing.

The company, as expressed by CEO Chris Amani, strives to confront legal challenges while staying dedicated to its collective goals.

"The Terra community and ecosystem have shown unprecedented resilience in the face of adversity," Amani said. "[A]nd this action is necessary to allow us to continue working towards our collective goals while resolving the legal challenges that remain outstanding."

In his statement, Amani conveyed optimism, highlighting the ecosystem's ability to overcome significant challenges and thrive after de-pegging. He expressed anticipation for a successful resolution of the ongoing legal proceedings.

The company's estimated assets and liabilities are both in the range of $100 million to $500 million.

According to court documents, Kwon is identified as the majority shareholder, holding 92% ownership of Terraform Labs. The remaining portion of the Singapore-incorporated company is owned by another South Korean entrepreneur, Daniel Shin.

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