Tai Mo Shan, a subsidiary of Jump Crypto, has agreed to settle with the U.S. Securities and Exchange Commission (SEC) for $123 million on October 20th for deceiving investors about the stability of the Algorithmic Stablecoin TerraUSD (UST) before its collapse.
According to the SEC, Tai Mo Shan had entered into an agreement with Terraform to purchase Terra LUNA (LUNA) at significantly discounted prices in 2021. Tai Mo Shan then purchased around $20 million worth of UST to maintain the 1:1 peg of the Algorithmic Stablecoin to the U.S. dollar. SEC Chair Gary Gensler wrote:
"The ripple effects spread through the crypto markets, ultimately wiping out the savings of countless investors. No matter what labels are used, crypto market participants need to comply with the securities laws and not mislead the public."
The collapse of TerraUSD in May 2022 sent shockwaves through the cryptocurrency community and significantly impacted stablecoin regulations, 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 fixed peg to the U.S. dollar through software and collateralized digital assets, collapsed in May 2022. At the time, TerraUSD was the 3rd largest Stablecoin by market capitalization.
The decline of the Algorithmic Stablecoin began on May 8, 2022, when a "whale" sold approximately $285 million worth of UST. This caused UST to lose its 1:1 peg to the U.S. dollar and trade at a spot price of $0.98.
By May 10, 2022, TerraUSD had plummeted to $0.67, triggering a series of liquidations among traders using long-term leverage and creating further unease, uncertainty, and doubt among investors.
As UST plummeted, the market capitalization of the Algorithmic Stablecoin had become significantly larger than the underlying LUNA reserves that served as collateral for UST.
This indicated that the Algorithmic Stablecoin did not have sufficient underlying reserves to support it - leading to the complete collapse of the UST price as investors rushed to sell their UST holdings in a panic.
The collapse of UST and its subsequent fallout led to an official federal investigation of Terraform Labs and founder Do Kwon, culminating in charges and a $4.4 billion settlement.
