Tai Mo Shan, a subsidiary of Jump Crypto, agreed to settle with the U.S. Securities and Exchange Commission (SEC) for 123 million USD on October 20 for misleading investors about the stability of the algorithmic stablecoin TerraUSD (UST) before its collapse.
According to the SEC, Tai Mo Shan signed an agreement with Terraform to purchase Terra LUNA (LUNA) at a significant discount in 2021. Tai Mo Shan then purchased approximately 20 million USD UST to maintain the 1:1 peg of the algorithmic stablecoin to the USD. SEC Chairman Gary Gensler wrote:
"The impact spread across the cryptocurrency market, ultimately wiping out the savings of countless investors. Regardless of any labels, participants in the cryptocurrency market need to comply with relevant securities laws and must not deceive the public."
The collapse of TerraUSD in May 2022 created a shockwave in the cryptocurrency community and had significant implications for stablecoin regulation such as the Lummis-Gillibrand Stablecoin Act of 2024, which bans algorithmic stablecoins.
Approval of the settlement proposal between Tai Mo Shan and the SEC. Source: SEC
The collapse of TerraUSD
TerraUSD, an algorithmic stablecoin that maintained a peg to the US dollar through software and collateralized digital assets, collapsed in May 2022. At that time, TerraUSD was the third-largest stablecoin by market capitalization.
The decline of the algorithmic stablecoin began on May 8, 2022, when a 'whale' sold off approximately 285 million USD UST. This caused UST to lose its 1:1 peg with the USD and trade at an immediate price of 0.98 USD.
By May 10, 2022, TerraUSD plummeted to 0.67 USD, causing a wave of liquidations among traders using long leverage and generating more concern, uncertainty, and doubt among investors.
As UST collapsed, the market capitalization of the algorithmic stablecoin became significantly larger than the underlying LUNA reserves that served as collateral for UST.
This indicates that the algorithmic stablecoin did not have enough underlying reserves to support it — leading to the complete collapse of UST's price as investors panic-sold their UST holdings.
The collapse of UST and its aftermath led to an official investigation by U.S. federal authorities into Terraform Labs and founder Do Kwon, culminating in charges and a large settlement of 4.4 billion USD.
