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.
SEC Uncovers Hidden Support Behind TerraUSD’s Recovery
In May 2021, after the algorithmic TerraUSD (UST) stablecoin lost its peg to the U.S. dollar, it appeared to recover automatically, stabilizing back at $1. However, behind the scenes, a subsidiary of Jump Trading’s crypto unit, Tai Mo Shan, reportedly 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 and Tai Mo Shan, named after the highest peak in Hong Kong, reached a settlement requiring the subsidiary to pay $123 million in penalties. This amount includes over $86 million in disgorgement (representing profits plus interest) and $36 million as a civil penalty. The SEC alleges that Tai Mo Shan’s actions deceived investors into believing Terraform Labs’ arbitrage mechanism worked effectively during the depeg.
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 unlocked Luna tokens, which it later sold on the market. Although 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 praised TerraUSD’s recovery as a triumph of the algorithmic stabilization mechanism, calling it a “black swan event” that the system withstood under extreme stress. However, the SEC claims that Kwon failed to disclose Tai Mo Shan’s critical role in stabilizing UST, misleading investors into believing the system worked as intended.
Settlements and Accountability: SEC Actions Against Tai Mo Shan and Terraform Labs
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.
In its order, the SEC stated, “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.”
Separately, 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.
