Korean cryptocurrency entrepreneur, co-founder of Terraform Labs (Terra Luna), Do Kwon, left, is taken to court in Podgorica, May 11, 2023, following his arrest, March 24, at the Montenegrin capital's international airport. AFP-Yonhap

Terraform Labs received court approval on Thursday to wind down its operations in bankruptcy after agreeing to settle a U.S. Securities and Exchange Commission lawsuit accusing the company of defrauding cryptocurrency investors who lost an estimated $40 billion when the TerraUSD and Luna tokens collapsed in 2022.

U.S. Bankruptcy Judge Brendan Shannon approved Terraform's bankruptcy plan at a hearing in Wilmington, Delaware, calling it a "welcome alternative" to further litigation over the investor losses.

Terraform, which filed for bankruptcy in January, agreed to a $4.47 billion SEC settlement after a jury in Manhattan found the company liable in April for defrauding investors.

The SEC will collect little, if anything, on that settlement amount because it agreed to be paid only after Terraform satisfies crypto loss claims as part of its bankruptcy wind-down. The company said it is currently "impossible to estimate" the total value of crypto losses that will be eligible to be paid during the liquidation.

Terraform estimated that it will be able to pay between $184.5 million and $442.2 million to crypto purchasers and other stakeholders as part of its bankruptcy liquidation.

The SEC had accused Terraform and founder Do Kwon of deceiving investors about the stability of TerraUSD, a stablecoin he designed to maintain a constant $1 price, and falsely claiming that Terraform's blockchain was used in a popular Korean mobile payment app.

A jury found Kwon and Terraform Labs liable on civil fraud charges at trial, and Kwon and Terraform decided to settle with the SEC before a second phase of the trial that would have determined the amount of damages.

Kwon faces related criminal charges both in the United States and his native South Korea. He has denied wrongdoing.

TerraUSD and the closely linked Luna, a more traditional token that Kwon also designed, collapsed in May 2022 when TerraUSD was unable to maintain its peg to the dollar. The collapse of the two cryptocurrencies caused a market crash that triggered a wave of bankruptcies in the crypto industry. (Reuters)