The collapse of the Terra ecosystem has finally led to the closure of Terraform Labs following a settlement with the SEC.
Tai Mo Shan’s Jump Crypto agreed to a $123 million settlement with the U.S. Securities and Exchange Commission (SEC) on December 20 for misleading investors ahead of the launch of its algorithmic stablecoin TerraUSD (UST).
Tai Mo Shan signed an agreement with Terraform to buy Terra LUNA LUNA shares for $0.004375, according to the SEC
In 2021, Tai Mo Shan bought nearly $20 million in UST, a significant price to maintain a 1:1 peg of the algorithmic stablecoin to the U.S. dollar. SEC Chairman Gary Gensler had this to say about the UST collapse:
“The impact was felt across the cryptocurrency market, ultimately costing many savings accounts. Despite the label, cryptocurrency market participants are expected to adhere to appropriate safety regulations and not mislead the public.”
The collapse of TerraUSD in May 2022 sent shockwaves through the cryptocurrency community and had a major impact on stablecoin regulations, such as the Lummis-Gillibrand Stablecoin Act of 2024, which banned algorithmic stablecoins.
TerraUSD collapses
TerraUSD, an algorithmic stablecoin that is pegged to the US dollar through software and digital asset additions, collapsed in May 2022.
The algorithmic stablecoin began its decline on May 8, 2022, when a whale deposited $285 million to UST. This caused UST to lose its 1:1 USD peg and trade at a spot price of $0.98.
On May 10, 2022, TerraUSD fell to $0.67, leading to a number of sell-offs among long-term traders, further fueling fear, uncertainty, and investor skepticism.
During the UST default, the algorithmic stablecoin’s market cap was larger than the underlying LUNA reserves that served as UST collateral.
This indicated that the algorithmic stablecoin was not backed by sufficient underlying reserves – UST prices collapsed as investors panicked and sold their UST.
Due to the collapse of UST and the subsequent recession, US authorities investigated Terraform Labs and its founder, Do Kwon, ultimately resulting in a lawsuit and a large settlement of $4.4 billion.
