Tai Mo Shan, a subsidiary of Jump Crypto, has agreed to pay $123 million to the United States Securities and Exchange Commission (SEC) to settle charges of misleading investors about the stability of the TerraUSD (UST) algorithmic stablecoin prior to its catastrophic collapse.
A Deal That Fueled TerraUSD Collapse
The SEC revealed that in 2021, Tai Mo Shan struck a deal with Terraform Labs to purchase Terra LUNA tokens at a significant discount. The firm later acquired $20 million worth of UST to artificially maintain the stablecoin’s 1:1 peg with the US dollar. However, when UST lost its peg in May 2022, the fallout was devastating, causing widespread financial losses for investors.
SEC Chairman Gary Gensler noted the broader implications of the collapse, stating, “The impact reverberated throughout the crypto markets, eventually costing the savings of countless investors. Regardless of the labels, crypto market participants should comply with securities laws where applicable and not deceive the public.”
The incident has since become an important case for the cryptocurrency industry, fueling regulatory efforts like the Lummis-Gillibrand Stablecoin Act of 2024, which bans algorithmic stablecoins entirely.
The Chain Reaction of Failure
At its peak, TerraUSD ranked as the third-largest stablecoin by market capitalization. Its downfall began on May 8, 2022, when a whale dumped $285 million worth of UST, causing it to depeg and fall to $0.98. The situation worsened rapidly as fear and uncertainty gripped the market, leading to a sharp decline in UST’s value to $0.67 within two days.
The panic-selling and cascading liquidations revealed a critical flaw in the system: UST’s market capitalization had outgrown its collateral reserves of LUNA, making the stablecoin fundamentally unsustainable. The algorithmic mechanism meant to stabilize UST crumbled under pressure, resulting in the complete collapse of its value.
The repercussions were far-reaching. The SEC launched a formal investigation into Terraform Labs and its founder, Do Kwon, ultimately leading to legal actions and fines totaling $4.4 billion.
The settlement with Tai Mo Shan serves as a stark reminder of the risks inherent in algorithmic stablecoins and the importance of regulatory oversight to safeguard investors.
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