In the April 10, 2024 edition of the Delaware Business Court Insider, LRC Associate George Williams writes on Terra Luna—Marking the Beginning and the End of the ‘Crypto Winter’?

One of the major catalysts of the “Crypto Winter” that began in 2022 was the collapse of Terraform Labs’s native token LUNA (“Luna”), and its “stablecoin” TerraUSD (“UST”) in May 2022.  Nearly two years and a dozen crypto-related bankruptcies later, Terraform Labs Pte. Ltd. (“Terra”) has filed for Chapter 11 protection on January 30, 2024 as cryptocurrency markets continue a historic bull run to new all-time highs.  Does this mean the Crypto Winter” of 2022 is well behind us?  Many certainly hope so.

Terra Luna—Marking the Beginning and the End of the ‘Crypto Winter’?

Does Terra’s bankruptcy mark the end of the “Crypto Winter”? The recent rebound of the cryptocurrency market seems to suggest so, particularly with Bitcoin setting a new all-time high of $73,805.27 on March 14, 2024.

By George Williams | April 10, 2024 at 09:00 AM

One of the major catalysts of the “Crypto Winter” that began in 2022 was the collapse of Terraform Labs’s native token LUNA (Luna), and its “stablecoin” TerraUSD (UST) in May 2022. Nearly two years and a dozen crypto-related bankruptcies later, Terraform Labs Pte. Ltd. (Terra) has filed for Chapter 11 protection on Jan. 30, 2024, as cryptocurrency markets continue a historic bull run to new all-time highs. Does this mean the Crypto Winter” of 2022 is well behind us? Many certainly hope so.

Prior to its collapse, in early May 2022, Luna was trading above $80 per token and had a market capitalization of approximately $14 billion. Luna was the backbone of UST, which was designed as an algorithmic “stablecoin” that was intended to be pegged one-to-one with the U.S. dollar. However, on or about May 6, 2022, UST experienced a significant “de-pegging” event (i.e., it decreased in value relative to the U.S. dollar to which it was pegged). UST’s de-pegging was brought on by “sudden and heavy selling of UST by a small number of market participants [that] caused UST to de-peg from the U.S. dollar and its price to decline steeply.” These market participants sold off approximately $2 billion of UST in a matter of minutes, which caused UST’s price to drop down to $0.91. At the same time, within the span of approximately one week Luna’s price fell from eight-two dollars and 55 cents ($82.55) to one hundred-thousandth of a cent ($0.000001) per token, eliminating somewhere between $18 billion—$50 billion of Luna’s and UST’s market capitalization. UST became the antithesis of a “stable” coin with its value plummeting to one ($0.01) cent by the beginning of June 2022. The collapse of Terra’s token set off panic across cryptocurrency markets creating a “run on the bank” resulting in over $450 billion in cryptocurrency asset value being destroyed between May and June. As panic ensued and customers sought to withdraw their cryptocurrency holdings across various exchanges, several cryptocurrency companies experienced severe liquidity crises – a domino effect that spread throughout the cryptocurrency industry.

Shortly after the collapse of Terra’s UST and Luna tokens, on June 12, 2022, Celsius Network LLC (Celsius), a cryptocurrency lender with over $11 billion of assets under management, announced that it was pausing all account withdrawals and transfers due to extreme market conditions. On June 27, 2022, the digital asset hedge fund Three Arrows Capital (3AC), which had heavy exposure to UST, defaulted on loan payments to cryptocurrency lenders Celsius and Voyager and, shortly thereafter, commenced liquidation proceedings.

On July 5, 2022, Voyager Digital Holdings, Inc. (Voyager), a crypto trading platform founded in 2018, filed for Chapter 11 bankruptcy protection, citing escalating customer withdrawal requests that, if left unchecked, would result in insufficient assets to satisfy those transactions due to approximately $650 million of Voyager assets remaining frozen in the 3AC estate. On July 13, 2022, Celsius filed for Bankruptcy citing the collapse of Terra’s Luna and UST tokens. These events led to additional contagion in the industry further depressing cryptocurrency prices during the Crypto Winter.

On Jan. 19, 2023, crypto lender Genesis Global Holdco, LLC (Genesis), which had exposure to 3AC, filed for Chapter 11 bankruptcy protection, after the Securities and Exchange Commission (the SEC) sued it and crypto firm Gemini Trust Company, LLC (Gemini), over a lending product. As described by Genesis’ interim chief executive officer, A. Derar Islim, the “collapse of Luna and UST and subsequent liquidation of 3AC signaled the onset of a new ‘Crypto Winter’ and a growing industry-wide reluctance to do business with digital asset companies.”

On March 8, 2023, Silvergate Capital Corp. (Silvergate), a bank that catered to cryptocurrency industry participants, announced that it was winding down operations and voluntarily liquidating its bank as a result of undercapitalization due to recent events in the crypto industry.

Finally, as if to close the circle, nearly two years after the collapse of its native token and stablecoin, Terra filed for bankruptcy on Jan. 30, 2024. Terra’s bankruptcy was brought on not because of a “run on the bank” like many cryptocurrency companies faced at the onset of the “Crypto Winter” but by a potential, significant adverse judgment in favor of the SEC for allegedly orchestrating a multibillion-dollar crypto asset securities fraud. Gurbir S. Grewal, director of the SEC’s Division of Enforcement, has said that the SEC is seeking to hold Terra and its founder responsible “for their roles in Terra’s collapse, which devastated both retail and institutional investors and sent shock waves through the crypto markets …”

Does Terra’s bankruptcy mark the end of the “Crypto Winter”? The recent rebound of the cryptocurrency market seems to suggest so, particularly with Bitcoin setting a new all-time high of $73,805.27 on March 14, 2024.

George Williams is an associate at Landis, Rath & Cobb and concentrates his practice in the areas of corporate bankruptcy and restructuring, bankruptcy litigation and corporate litigation. He represents distressed companies, debtors, financial institutions, lenders, secured and unsecured creditors, plan administrators, liquidating trustees, asset purchasers, landlords, and other parties-in-interest in cases filed under the U.S. Bankruptcy Code including Chapter 7, Chapter 11 and Subchapter V.

Reprinted with permission from the April 10, 2024 issue of the Delaware Business Court Insider. © 2024 ALM Media Properties. Further duplication without permission is prohibited.