Terraform Labs says bankruptcy filing will help its lawsuit against the SEC

Terraform Labs, the creator of the now-defunct stablecoin TerraClassicUSD (USTC), has filed for Chapter 11 bankruptcy, revealing its intention to use this move strategically to appeal a lawsuit initiated by the United States Securities and Exchange Commission (SEC). The decision to file for bankruptcy is aimed at avoiding the necessity of providing a “supersedeas bond,” which would typically be required for an appeal against the SEC.

Terraform Labs CEO explains the company’s plans

In the bankruptcy filing submitted to a Delaware Bankruptcy Court on January 30, Terraform Labs CEO Chris Amani explained that Chapter 11 protections would allow the company to pursue the appeal without the financial obligation of posting a bond. Amani emphasized the significance of this appeal, stating that it would argue against the SEC’s authority to charge Terraform Labs and its co-founder, Do Kwon. The central argument is based on the assertion that the crypto assets held by the company should not be deemed securities, and the SEC lacks jurisdiction in this particular case.

Providing insights into Terraform Labs’ financial standing, Amani disclosed that the company’s treasury holds approximately $28 million in Bitcoin, $7 million in various other cryptocurrencies, and around $87 million in Luna tokens. These details underscore the complex financial landscape that has unfolded for the company in the wake of the SEC’s civil charges. The SEC initially filed charges against Terraform Labs and Do Kwon in February 2023, accusing them of orchestrating a “multibillion-dollar crypto asset securities fraud.”

Legal battle unfolds as SEC charges the firm

The focus of these allegations revolved around the tokens formerly known as UST and LUNA. The recent bankruptcy filing follows a decision by the SEC to postpone Kwon’s fraud trial to March 25, responding to a request from his legal team to delay the proceedings. The collapse of Kwon’s Terra Money ecosystem in May 2022 marked a significant event preceding the legal troubles. After the collapse, Kwon’s whereabouts remained unknown until his arrest in Montenegro in March 2023. The arrest occurred as he attempted to flee the country using falsified travel documents.

Both the United States and Kwon’s home country, South Korea, are seeking his extradition. If extradited to South Korea, Kwon could potentially face a 40-year jail sentence, as the majority of the alleged crimes occurred in his home country. The Chapter 11 bankruptcy filing positions the upcoming appeal as critical not only to Terraform Labs but also to its creditors and the broader community. Amani argues that a successful appeal would eliminate the most substantial claim against the company, offering financial relief and stability.

This ongoing legal saga sheds light on the intricate regulatory challenges faced by companies operating in the cryptocurrency space. The outcome of this case may contribute to shaping the regulatory framework for crypto assets, potentially influencing how they are classified and regulated by authorities like the SEC. As the legal proceedings unfold, the crypto industry will closely watch the developments and their implications for future regulatory interactions.