But as investors are finding out the hard way, there is nothing stable about UST and its sister token Luna. By June 15, the Luna crashed to $0.0001 and the UST fell 96% to $0.03. Both have been delisted by crypto exchanges, Binance and OKX.
SEC launched probe in Terra and Luna cryptocurrency fraud operations
Now the Securities and Exchanges Commission (SEC) is investigating the operation. Employees at Terraform Labs have revealed that the co-founder and CEO have been cashing out $80 million a month prior to the crash. The court authorized the SEC investigation and even ruled that Kwon and Terraform Labs “failed to answer questions related to their digital assets.” The court warned that Kwon “did not commit to complying with the SEC’s document requests.”
The SEC is conducting an investigation into Terra’s design structure and is surveying the designers and employees. Reportedly, the designers repeatedly warned CEO Kwon Do about an impending collapse of the Terra and Luna. They reported to the SEC that they were “ignored” by the CEO. Further investigation finds that the CEO might have heeded their warnings, as he secretly began cashing out $80 million chunks each month.
A few months before Terra collapsed, approximately 78.1 billion of the company’s funds went out to operating expenses. At least $55 billion of market cap disappeared from May 9 to May 13. Employees provided internal financial statements that showed funds flowing “into dozens of cryptocurrency wallets.” However, the SEC cannot trace the funds back to the CEO directly.
UST was never a “stablecoin” - more like a Ponzi scheme
The SEC is also trying to determine whether or not the company, in the lead-up to the crash, marketed the UST in a fraudulent manner, violating federal investor protection regulation. The SEC investigation will determine "whether appellants violated federal securities laws in their participation in the creation, promotion, and offer to sell various digital assets related to the 'Mirror Protocol.'” The company’s ‘Mirror Protocol’ uses a decentralized finance platform that allows users to issue synthetic assets. These synthetic assets are nothing more than crypto tokens that are tied to the price of real-world assets.
The UST is a unique cryptocurrency because it is backed by an algorithm. When the price goes up, the algorithm adds tokens to the supply. This automatically brings the price back down. If the price falls below the peg, the algorithm removes tokens altogether.
When a UST is minted, $1 worth of Luna is burned... and vice versa. When it appears that the UST is about to go below its peg, then holders will try to make a profit by burning or selling their UST for $1 worth of Luna. When the UST rises about the $1 mark, the same process occurs, but in reverse. When investors began to dump UST en masse, there was a rapid depegging of the UST. This caused even greater panic, driving up the supply of Luna and therefore collapsing its value.
The developers of the UST back up the currency and its sister coin Luna with bitcoin reserves. In the mass sell-off, the Luna Foundation Guard tried desperately to correct the situation by buying up more bitcoin reserves. But as bitcoin predictably crashed from its all-time high, so did the price of the UST. This caused compounding panic as investors withdrew from the UST even more. It turns out that the UST was never really a “stablecoin” after all.
If a new UST and Luna 2.0 are propped up in the coming months, it was likely planned in advance, as the company cashed out $80 million a month in the lead-up to the collapse. "I understand the last 72 hours have been extremely tough on all of you - know that I am resolved to work with every one of you to weather this crisis, and we will build our way out of this. Together," Kwon said on Twitter.
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