Do Kwon, the co-founder of Terraform Labs, is at the center of a legal storm as new revelations regarding the terraUSD (UST) stablecoin collapse in 2022 come to light.
Kwon is under investigation, with recent developments indicating that the involvement of market maker Jump Trading could be crucial in the legal proceedings.
Following the collapse of the UST stablecoin in May 2022, Kwon was sued by the U.S. Securities and Exchange Commission (SEC) for allegedly providing false information to investors.
An Oct. 18 filing in a New York court has shed light on the possible significance of Jump Trading LLC in the case. The market maker reportedly made substantial profits, totaling $1.28 billion, during the turbulent period when the terraUSD ecosystem was unraveling.
The focus on Jump Trading arises from an incident a year prior when UST temporarily lost its peg to the U.S. dollar. Kwon had assured investors that the stablecoin maintained its $1 value due to its automated algorithm. However, experts from the SEC contend that Jump Trading played a critical role in stabilizing the coin’s value at Terraform Labs’ request.
The filing stated, “The peg instead recovered because Defendants entered an arrangement with a U.S. trading firm, Jump Trading LLC (“Jump”), to purchase substantial amounts of UST to support the price.”
In response to these allegations, Kwon’s legal team denied any wrongdoing, asserting that Jump Trading’s trades in terraUSD were not responsible for the peg restoration in May 2021. They further claimed that the de-pegging of UST in May 2022 resulted from an intentional effort by third parties to short the stablecoin, causing it to deviate from its $1 price. Kwon’s team argued that this de-pegging incident involved a direct, public intervention in combating the short positions.
Kwon’s defense team has also argued that the SEC lacks jurisdiction in this case because the assets involved, namely cryptocurrencies like UST, are currencies and not securities. This argument highlights a legal gray area that has been a point of contention in the SEC’s cases against cryptocurrency exchanges like Binance and Coinbase.
Meanwhile, Kwon was arrested in March for possessing false identification documents and is currently under house arrest after a request for his release on bail was reapproved by a Montenegrian basic court.