Do Kwon stands accused of providing misleading information to investors regarding the terraUSD stablecoin, the dramatic collapse of which in 2022 had far-reaching repercussions within the cryptocurrency sphere.
Terraform Labs, the company led by Do Kwon, categorically refutes allegations that market maker Jump Trading played a role in restoring terraUSD to its $1 peg in 2021.
The entire legal case against Do Kwon and Terraform Labs hinges on the involvement of market maker Jump Trading, as suggested by documents filed in a New York court on Wednesday.
The crash of Kwon's terraUSD stablecoin (UST) in May 2022 created significant shockwaves throughout the cryptocurrency market and marked the onset of a crypto winter. Subsequently, the U.S. Securities and Exchange Commission filed a lawsuit against Kwon, accusing him of deceiving investors.
Newly revealed documents related to the case emphasize the significance of Jump Trading's role. Jump Trading seemingly profited an impressive $1.28 billion as the ecosystem fell apart.
Jump Trading's involvement is under scrutiny due to an incident occurring a year earlier when UST temporarily lost its peg to the U.S. dollar. While Kwon assured investors that the coin's automated algorithm maintained its $1 value, experts from the SEC contend that it was Jump Trading's intervention, at the behest of Terraform, that truly maintained the peg.
In a letter from Kwon's legal team to the Singapore Supreme Court, included in the New York filing, it is stated:
"Defendants deny these allegations and assert that Jump’s trades in UST were not the cause of the peg restoration in May 2021."
The letter further elaborates:
"The May 2022 depeg was the result of an intentional effort by third parties to 'short' UST causing it to depeg from its price and involved a direct, public intervention in an effort to combat the short."
Shorting is a method of speculating on a price decline. Typically, an investor borrows a financial instrument, selling it with the anticipation that its price will have fallen by the time they repurchase and return it to the lender. The difference constitutes the investor's profit.
Do Kwon, after purportedly going on the run following the crisis, was arrested in March for possessing false identification documents and is currently detained in a Montenegro jail.
Kwon's defense team also contends that the SEC lacks jurisdiction because the assets in question are currencies, not securities. This legal gray area mirrors challenges the regulator has encountered in its cases against exchanges such as Binance and Coinbase.
A recent biography of Sam Bankman-Fried revealed that Jump Trading suffered losses of nearly $300 million when his FTX exchange collapsed in November 2022.
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