The Securities and Exchange Commission (SEC) has charged Tai Mo Shan Limited, a subsidiary of Jump Crypto, for allegedly misleading investors about Terra USD (UST) after the stablecoin lost its peg to the US dollar.
Allegations of Misleading Trading Practices
The SEC alleges that Tai Mo Shan conducted trades to create a false impression that UST’s algorithm alone maintained its price. In May 2021, UST lost its $1 peg, prompting Terraform Labs to enlist Tai Mo Shan. The firm purchased over $20 million worth of UST, creating the appearance that the stablecoin’s algorithmic mechanism restored its value.
Role of Tai Mo Shan in UST Stabilization
Terraform Labs claimed that the algorithm could maintain UST’s parity with the dollar. However, the SEC says the token’s stability relied on Tai Mo Shan’s purchases. Incentives allowed Tai Mo Shan to buy LUNA tokens at a discounted rate after UST regained its peg, further undermining Terraform’s claims.
Unregistered Securities Allegations
The SEC also accuses Tai Mo Shan of distributing LUNA as unregistered securities in the United States. The firm acquired tokens from Terraform and quickly sold them in the market, allegedly acting as a statutory underwriter.
Settlement and Penalties
Tai Mo Shan agreed to pay $123 million, including $73.4 million in disgorgement, $12.9 million in prejudgment interest, and a $36.7 million civil penalty. The firm neither admitted nor denied the allegations but committed to complying with registration and fraud provisions moving forward.
Terra Luna Ecosystem Collapse
The Impact of UST’s Depegging
Terra Luna’s collapse in 2022 exposed flaws in its stablecoin model, eroding market confidence. Terra Classic (LUNC), the original chain, operates at reduced valuations and utility. A new chain, Terra (LUNA), was launched to rebuild the project.
Legal and Financial Troubles
Terraform Labs, co-founded by Do Kwon, has faced numerous legal issues. In a recent SEC case, courts found both the company and Kwon liable for fraud and unregistered securities offerings. The firm filed for Chapter 11 bankruptcy in January 2024, reporting assets and liabilities between $100 million and $500 million. Leadership changes, including Chris Amani becoming CEO in July 2023, aim to stabilize the project.
Market Fallout and Accusations
UST’s collapse caused over $40 billion in losses across digital assets. Efforts to rebuild trust, such as launching a new token and chain, have struggled due to ongoing controversies. Allegations that Digital Currency Group and FTX colluded to destabilize Terra LUNA have added to the project’s troubles. Both Terra Classic and Terra (LUNA) tokens continue to trade at significantly lower values.
Legal Challenges for Do Kwon
Do Kwon faces additional legal challenges after his conviction in Montenegro for using fake travel documents. He also faces potential extradition to the United States or South Korea. The fallout from UST’s collapse continues to weigh heavily on Terraform Labs.
Regulatory Oversight Intensifies
Regulators are investigating whether other Terraform-linked tokens qualify as securities. The SEC has flagged disclosure and promotion practices as areas of concern. Several Terra-linked tokens now carry the securities label, increasing oversight of their issuance and trading.
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