On December 20, Tai Mo Shan, a branch of Jump Crypto, settled with the U.S. Securities and Exchange Commission (SEC) by agreeing to pay $123 million. This agreement stemmed from allegations that Tai Mo Shan had misled investors about the stability of the TerraUSD (UST) algorithmic stablecoin before its catastrophic collapse.
SEC Findings and Consequences
The SEC’s findings indicated that in 2021, Tai Mo Shan struck a deal with Terraform to acquire Terra LUNA (LUNA) at a notably reduced rate. Following this acquisition, they poured approximately $20 million into UST to help maintain its intended dollar peg. The SEC Chair highlighted the far-reaching consequences of UST’s collapse, noting the extensive losses suffered by countless investors. He stressed that every participant in the crypto market must comply with relevant securities regulations and avoid misleading the public, regardless of the terminology they use.
The Collapse of TerraUSD
The downfall of TerraUSD in May 2022 sent shockwaves throughout the cryptocurrency sector and significantly influenced regulatory discussions about stablecoins. This turmoil contributed to the crafting and introduction of the Lummis-Gillibrand Stablecoin Act of 2024, which outright bans algorithmic stablecoins.
At that time, TerraUSD was the third-largest stablecoin by market capitalization, relying on a combination of software mechanisms and collateral from digital assets to maintain its value against the U.S. dollar. The troubles began on May 8, 2022, when a massive investor sold off around $285 million in UST. This triggered a break in the stablecoin’s dollar peg, causing it to drop to $0.98.
Just two days later, on May 10, UST plummeted to a staggering low of $0.67. This decline triggered a cascade of liquidations among leveraged traders and deepened fears across the investor landscape.
Aftermath and Regulatory Scrutiny
This crisis illuminated a critical issue: the market capitalization of UST far exceeded the reserves of LUNA, which were meant to provide necessary backing. The insufficient collateral set off a frantic sell-off as investors rushed to exit their positions, resulting in a complete collapse of UST’s value.
In the wake of this fiasco, Terraform Labs, along with its founder Do Kwon, came under extensive scrutiny from federal authorities in the U.S. This culminated in charges along with a staggering $4.4 billion settlement. The entire episode not only rocked the stability of a major stablecoin but also reshaped the dialogue around regulatory measures in the cryptocurrency arena.
Source: Cointelegraph
