SEC Hits Tai Mo Shan with $123 Million Fine Over TerraUSD Collapse

On December 20, the U.S. Securities and Exchange Commission (SEC) revealed a significant settlement with Tai Mo Shan, a subsidiary of Jump Crypto, over the collapse of TerraUSD (UST), an algorithmic stablecoin that wreaked havoc on the crypto markets in 2022. Tai Mo Shan has agreed to pay $123 million to settle allegations that it misled investors about the stability of the troubled stablecoin.

SEC’s Ongoing Scrutiny of Stablecoins

This settlement marks yet another milestone in the SEC’s ramped-up efforts to scrutinize stablecoins and their operators. According to the SEC, Tai Mo Shan entered into a deal with Terraform Labs in 2021, purchasing Terra LUNA at a steep discount and spending $20 million to help maintain the 1:1 peg of UST to the U.S. dollar. The SEC claims these actions were misleading and contributed to the eventual collapse of UST.

Gary Gensler, SEC Chair, weighed in on the matter, emphasizing that the collapse of UST had a profound impact on the crypto market, erasing significant amounts of value and undermining investor confidence. “Regardless of the labels, crypto market participants should comply with securities laws where applicable and not deceive the public,” he remarked.

The Collapse of TerraUSD (UST)

TerraUSD, once the third-largest stablecoin by market capitalization, was pegged to the U.S. dollar through a unique system that relied on software algorithms and digital collateral. However, when a whale dumped $285 million worth of UST on May 8, 2022, the algorithm failed to maintain the peg, and the stablecoin’s value began to plummet.

By May 10, 2022, UST had sunk to $0.67, triggering mass liquidations and a wave of panic in the crypto markets. This collapse exposed major flaws in the underlying mechanism of TerraUSD and revealed that the reserves of its sister token, LUNA, were insufficient to stabilize the market. The entire TerraUSD ecosystem collapsed, and the market capitalization of UST evaporated.

Regulatory Fallout and Legislative Action

The fallout from the UST collapse has had far-reaching consequences, leading to global regulatory action against algorithmic stablecoins. In the U.S., the collapse of TerraUSD was a key catalyst for the drafting of the Lummis-Gillibrand Stablecoin Act of 2024, which explicitly bans algorithmic stablecoins.

The collapse also led to a formal investigation of Terraform Labs and its founder, Do Kwon, whose actions resulted in a $4.4 billion settlement—a figure that ranks as one of the largest enforcement actions in the history of the cryptocurrency industry.

Jump Trading Faces Legal Backlash Over Alleged ‘Pump and Dump’

Meanwhile, Jump Trading, the parent company of Tai Mo Shan, is now facing another legal headache. Crypto game developer Fracture Labs has filed a lawsuit against Jump Trading, accusing the firm of orchestrating a “pump and dump” scheme involving its DIO gaming token.

In the lawsuit filed in October, Fracture Labs claims that Jump Trading, acting as a market maker, breached its agreement to support the DIO token’s initial offering on the crypto exchange HTX (formerly Huobi) in 2021. The firm had been provided with 10 million DIO tokens, valued at $500,000, to facilitate the token’s launch. Another 6 million DIO tokens, worth about $300,000, were transferred to HTX to help build momentum.

Once the token gained traction, HTX enlisted online influencers to promote DIO, which caused the token’s value to surge to $0.98. At the peak, the 10 million DIO tokens held by Jump Trading were valued at $9.8 million. However, Fracture Labs alleges that Jump Trading then sold its entire DIO holding, triggering a massive sell-off that caused the token’s price to plummet to $0.005.

The Broader Implications for Crypto Regulation

The ongoing regulatory scrutiny on both stablecoins and market manipulation highlights a critical turning point for the cryptocurrency industry. As regulators crack down on misleading practices and enforce compliance with existing securities laws, the industry may face a future that’s more heavily regulated but also more secure and transparent.

The Tai Mo Shan settlement and the lawsuit against Jump Trading underscore the importance of compliance and the need for robust regulatory frameworks. While the crypto industry has long called for clarity in regulations, these high-profile cases show that regulators are not shying away from taking action when they believe the rules are being broken.

As the world of cryptocurrency continues to mature, one thing is certain: the era of regulatory leniency is quickly coming to an end. Crypto firms will need to ensure they adhere to regulatory standards or risk facing similar penalties.