As a seasoned crypto investor with battle-hardened experience in this wild frontier, I’ve learned to navigate the turbulent waters of market fluctuations and regulatory shifts with a healthy dose of skepticism and caution. The recent settlement between Tai Mo Shan and the SEC for misleading investors about TerraUSD (UST) is yet another reminder that not all is as it seems in this brave new world of digital assets.
On December 20th, a company called Tai Mo Shan, which is affiliated with Jump Crypto, reached an agreement to pay $123 million to the U.S. Securities and Exchange Commission (SEC), as they were accused of deceiving investors about the reliability of the TerraUSD (UST) algorithmic stablecoin prior to its downfall.
As reported by the Securities and Exchange Commission (SEC), Tai Mo Shan entered into a deal with Terraform in 2021 to acquire LUNA tokens at a significantly reduced price, which is LUNA. Later, Tai Mo Shan invested approximately $20 million in UST to preserve the stability of the algorithmic stablecoin’s value relative to the US dollar. Gary Gensler, the chairman of the SEC, commented on the demise of UST, 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 the securities laws where applicable and not deceive the public.”
The sudden fall of TerraUSD in May 2022 caused ripples throughout the cryptocurrency sector and influenced the regulatory landscape, particularly the Lummis-Gillibrand Stablecoin Act of 2024, a law that forbids algorithmic stablecoins.
The TerraUSD collapse
In simple terms, the stablecoin called TerraUSD, which kept its value tied to the U.S. dollar using software and digital assets as collateral, suffered a collapse in May 2022. At that time, TerraUSD was ranked third among all stablecoins by market capitalization.
Starting from May 8, 2022, the value of the stablecoin, UST, began to decrease. This downward trend was triggered by a large investor (often referred to as a “whale”) selling around $285 million worth of UST. As a result, UST no longer held its original dollar value (1:1 peg) and started trading at approximately $0.98 instead.
2022-05-10 saw the collapse of TerraUSD down to $0.67, which triggered a chain reaction of margin calls for heavily-leveraged traders and intensified apprehension, ambiguity, and unease among investors.
In the midst of UST’s downward spiral, I noticed that the market capitalization of this algorithmic stablecoin surpassed the value of the LUNA reserves serving as collateral for UST. This discrepancy raised concerns about the stability and sustainability of UST’s peg to the US dollar.
This indicated that the stablecoin’s algorithmic foundation didn’t have enough assets to support its value, causing a catastrophic drop in the price of UST as investors rushed to sell their UST assets due to panic.
As a result of the demise of UST and subsequent aftermath, U.S. federal officials launched an official probe into Terraform Labs and its founder, Do Kwon. This investigation eventually resulted in indictments and a significant fine of approximately $4.4 billion being imposed on them.
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2024-12-22 00:20