The SEC has fined Tai Mo Shan, a subsidiary of Jump Trading, $123m over allegations that it bought a large volume of the stablecoin UST in an attempt to keep its price at $1. According to the SEC, this created the false impression that UST’s price was being stabilized through an algorithm alone.
That algorithm ostensibly relied on an arbitrage opportunity: UST was tied to sister coin LUNA, and traders could “burn” LUNA and “mint” UST every time UST’s value increased above $1, and “burn” UST and “mint” LUNA every time UST’s value decreased below 1$.
That incentive theoretically meant that UST’s value would remain pegged to 1$, while LUNA would absorb volatility. LUNA could, and did, fluctuate in value, creating a market for speculation.
This made UST different from other stablecoins like Tether, whose value is tied to a store of fiat currency.
According to the SEC’s order, Tai Mo Shan created liquidity by acting as an unregistered distributor of LUNA for Terraform Labs, the issuer of UST-LUNA. In exchange, it received loans of LUNA from Terraform for two years, after which it had the option of returning the tokens for free or buying them at a pre-agreed price. Tai Mo Shan would then sell the LUNA on the marketplace for profit as LUNA’s value surged.
Creating a false sense of security
In May 2021 when UST’s value fell sharply below $1, Terraform Labs incentivized Tai Mo Shan to buy upwards of $20m of UST by vesting the remining portion of LUNA it owed under its contract.
Tai Mo Shan made approximately $73,452,756 in profit as a result of this quid-pro-quo arrangement.
This intervention helped Terraform maintain public perception that UST’s value was algorithmically floating at 1$ rather than being buoyed by large-order purchases that the crypto developer itself was incentivizing, the SEC stated.
According to the SEC’s order, Terraform’s public statements made it seem like UST would remain stable without such interventions. Founder Do Kwon even referred to the Terraform’s algorithm as “automatically self-healing.” Investors watching the charts had no idea that the purchases were connected to a single entity.
The SEC claimed that Tai Mo Shan committed fraud by failing to account for how these significant purchases could deceive investors into believing that UST’s algorithm was functioning as advertised, and that the coin was not at risk of imminent collapse.
Critically, fraud as defined by Section 17(a)(3) of the Securities Act does not require intent or knowledge. Instead, the SEC stated that Tai Mo Shan should have perceived the risk and was negligent in failing to do so.
Tai Mo Shan was also charged with violating Sections 5(a) and 5(c) of the Securities Act, which covers selling securities in unregistered transactions. LUNA and UST are considered securities by the SEC, as their value was tied to promotional efforts under the Howey test.
In 2022, widespread decline in cryptocurrency prices led to a mass selloff of LUNA, causing UST to once again become de-pegged from the dollar. This time, the token’s value quickly fell to zero, wiping out $45bn in the coins market capitalization.
Tai Mo Shan and Jump Trading were not implicated in that final collapse. However, Terraform and its founder Do Kwon were fined $4.5bn as a result, and Kwon is now facing a criminal trial in the US.