After Terra USD lost its dollar peg, the Securities and Exchange Commission charged a subsidiary company of Jump Crypto called Tai Mo Shan Limited with misleading investors.
The regulator alleges that Tai Mo Shan participated in trading designed to create the false impression UST’s advertised algorithm solely sustained its price. When UST lost its peg in May 2021, Terraform Labs enlisted Tai Mo Shan to purchase over $20 million worth of UST, implying that a technical mechanism kept the token’s $1 mark when Tai Mo Shan’s intervention helped restore its level.
The SEC states that Terra’s algorithmic approach did not independently maintain UST’s parity with the dollar, as Terraform implied, but depended on Tai Mo Shan’s purchases. The transaction also included incentives to allow Tai Mo Shan the opportunity to purchase LUNA for a discount once UST stabilised.
The commission argues that such incentives undercut Terraform’s public claims by showing external support played a significant part in restoring the $1 price. Tai Mo Shan was also found responsible in this order for distributing LUNA tokens as unregistered Securities within the United States. Tai Mo Shan allegedly acted in the capacity of a statutory Underwriter, obtaining Terraform’s tokens and selling them quickly into the marketplace.
Tai Mo Shan has agreed to disgorge $73,452,756 and pay $12,916,153 as prejudgment interests, along with a civil penalty of $36,726,378 for a sum totaling $123 millions. The company does not admit or deny the findings, but it will stop violating registration and fraud laws.
Terra Luna ecosystem collapse
Terra Luna’s ecosystem has been under scrutiny since a 2022 collapse exposed deficiencies in its stablecoin model and damaged market confidence. Terra Classic (LUNC), the original chain known, continues to exist at significantly reduced valuations and utility. Meanwhile, a Terra (LUNA), a fork, was created in order to rebuild network.
Terraform Labs (co-founded by Do Kwon) has had to face multiple legal challenges. This includes an SEC action in which Terraform, Kwon and Terraform were found liable of fraud and making unregistered offerings. The company filed Chapter 11 bankruptcy on Jan. 20, 2024 with assets and liability estimated at between $100 and $500 millions. Leadership changes further complicated the project’s recovery path, with Chris Amani stepping in as CEO in July 2023 as part of broader efforts to address legal and financial upheaval.
Market participants had already seen Terraform’s reputation damaged by UST’s collapse, contributing to losses estimated at over $40 billion across digital assets. Despite introducing a new token and chain, Terra’s efforts to regain trust have been hindered by ongoing controversies. A co-founder of Three Arrows Capital alleged that Digital Currency Group and FTX colluded to attack Terra LUNA, adding to the project’s complicated record. Terra Classic is now worth a fraction its former value and Terra (LUNA), the newer token, faces a similar downward pressure.
Terraform’s legal complications have unfolded alongside Do Kwon’s conviction in Montenegro for traveling with falsified documents and potential extradition to the United States or South Korea. Terra’s environment has steadily deteriorated ever since the original UST melting down.
The SEC has intensified its investigation into other Terraform tokens to determine if they qualify as securities. They have also focused on disclosures regarding how assets are promoted and offered. The SEC has labeled several Terra-linked tokens as securities, increasing oversight over issuance protocols and trading on the secondary market.
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