The U.S. Securities and Exchange Commission (SEC) recently hit Jump Trading with a hefty $123 million fine for its role in propping up the TerraUSD stablecoin during its dramatic depeg. This incident has sparked fresh debates about market manipulation and the risks in the crypto industry. Let’s break down what happened, why it matters, and what it means for the future of digital assets.
The U.S. Securities and Exchange Commission (SEC) has concluded its investigation into Jump Trading's role in propping up the TerraUSD (UST) stablecoin during its dramatic depeg last year, hitting the firm's crypto unit, Tai Mo Shan, with a hefty $123 million fine. This incident, which sparked fresh debates about market manipulation and the risks inherent in the crypto industry, has now culminated in a legal resolution. Let's unpack the key details of this development.
Following the TerraUSD (UST) stablecoin's loss of peg to the U.S. dollar in May 2021, the stablecoin appeared to recover on its own, stabilizing back at $1. However, behind the scenes, Tai Mo Shan intervened by purchasing $20 million worth of UST to restore the peg, according to an SEC complaint. These actions misled investors about the stability of UST and its related token, Luna, the SEC said.
The SEC and Tai Mo Shan, named after the highest peak in Hong Kong, reached a settlement where the subsidiary will pay $123 million in penalties, which includes over $86 million in disgorgement (representing profits plus interest) and $36 million as a civil penalty. Tai Mo Shan's actions deceived investors into believing Terraform Labs' arbitrage mechanism worked effectively during the depeg, according to the SEC.
The $86 million disgorgement reflects the profits Tai Mo Shan reportedly earned after stepping in with $20 million to stabilize UST. In return, the subsidiary received locked Luna tokens, which it later sold on the market to the tune of $86 million. While the SEC initially accused Tai Mo Shan of profiting $1.28 billion from these transactions in an earlier complaint, the final settlement focused on the $123 million penalty.
Terraform Labs' founder, Do Kwon, had previously hailed TerraUSD's recovery as a triumph of the algorithmic stabilization mechanism, calling it a "black swan event" that the system withstood under extreme stress. But the SEC claims that Kwon failed to disclose Tai Mo Shan's role in stabilizing UST, misleading investors into believing the system worked as intended.
Jump Crypto's president, Kanav Kariya, invoked the Fifth Amendment during a previous deposition when questioned about the deal. As part of the settlement, Tai Mo Shan has agreed to pay the penalty without admitting or denying the SEC's findings.
“Tai Mo Shan should have known that purchasing UST and artificially supporting its price misled the market regarding the stability of UST’s peg and the effectiveness of Terraform’s algorithm designed to maintain that stability,” the SEC said in its order.
In a separate development, Terraform Labs reached a settlement with the SEC, agreeing to pay over $4 billion in fines following the collapse of its ecosystem. Earlier this year, the firm received approval from a U.S. bankruptcy judge to begin its wind-down process in September.
