Terraform Labs Halts Terra Blockchain After Complete Collapse of UST and LUNA Destroys $40 Billion

Terraform Labs, led by Do Kwon, temporarily halted the Terra blockchain on May 13, 2022, after a catastrophic four-day collapse that wiped out nearly $45 billion in market capitalization and devastated hundreds of thousands of retail investors globally. LUNA, which traded at $119 in April and $87 on May 5, was trading at $0.0005—effectively worthless. UST, which was supposed to maintain a $1 peg, traded at $0.02. The halt came as LUNA’s circulating supply exploded from 1 billion tokens to over 6 trillion through the failed algorithmic stabilization mechanism, causing hyperinflation that made the token valueless. The blockchain shutdown stranded users unable to access or move their holdings. The Terra ecosystem’s collapse marked one of the largest value destructions in crypto history and triggered a broader market crisis. On June 22, 2022, the SEC launched an investigation into whether Terraform Labs violated securities laws by marketing UST and the Anchor protocol’s 19.5% yields without proper disclosure. However, the investigation came only after billions in retail losses—demonstrating regulatory failure to prevent fraud rather than investigate it afterwards. The regulatory void that enabled Terra’s rise was systemic: Do Kwon operated an algorithmic stablecoin with no reserve requirements, no banking oversight, no audit obligations, and no consumer protections while marketing it to millions of users. The SEC, CFTC, and state regulators all disclaimed jurisdiction over algorithmic stablecoins before the collapse, creating a regulatory dead zone where Kwon could operate a $40 billion pyramid scheme with impunity. Do Kwon fled South Korea after the collapse and was arrested in Montenegro in March 2023 while attempting to board a flight to Dubai using a fake passport. After extradition battles, Kwon was extradited to the United States and pleaded guilty in August 2025 to wire fraud and conspiracy to defraud. In December 2025, he was sentenced to just 15 years in prison for orchestrating what Judge Paul Engelmayer called “fraud on epic, generational scale”—a sentence that barely reflects the devastation to hundreds of thousands of victims. Terraform Labs filed for bankruptcy in January 2024, with creditors seeking billions in unrecoverable losses. The collapse demonstrated that crypto’s promise of “decentralized” finance was a cover for completely unregulated fraud, and that algorithmic stablecoins were inherently unstable financial weapons that regulators allowed to proliferate until catastrophic failure.