When U.S. regulators sued Do Kwon and Terraform Labs this week for the spectacular implosion of the terraUSD (UST) stablecoin and related LUNA token, a huge question was left unanswered: Who was the trading partner that booked $1.28 billion in profits before Terra’s $40 billion ecosystem crumbled?
According to people familiar with the matter, it was Chicago-based Jump Crypto, a company whose parent has deep roots in conventional finance and has become a giant in digital assets.
A spokesperson for Jump Crypto said the company had no comment. The news was first reported by The Block.
The U.S. Securities and Exchange Commission’s (SEC) complaint this week accused Kwon and Terraform of committing securities fraud and selling unregistered securities that hurt U.S. retail and institutional investors. Within the complaint there’s reference to an unnamed U.S. trading firm that had an exclusive market-making arrangement with Terraform Labs, the developer of the UST stablecoin. That anonymous firm was not accused of wrongdoing.
That company – which CoinDesk’s sources identified as Jump Crypto – was able to buy heavily discounted luna tokens, the assets that supported UST. The firm deployed only $62 million to help keep UST’s price near $1 in May 2021, according to the SEC complaint, but earned $1.28 billion by selling off discounted tokens that it had purchased according to the terms of its agreement with Terraform Labs.
Jump Crypto was active in the Terra ecosystem, frequently posting governance proposals and heavily invested in the project, including building a Terra cross-chain bridge and co-leading a $1 billion capital raise to seed the Luna Foundation Guard. Jump Crypto President Kanav Kariya also served on the board of the Luna Foundation Guard, which stewarded Terra’s multi-billion-dollar bitcoin reserve treasury. The reserves were depleted in May 2022 in a failed attempt to restore UST’s dollar peg and also siphoned to a Swiss bank account controlled by Kwon, according to the SEC complaint.
Terraform Labs said that UST, Terra’s ill-fated “decentralized” stablecoin, would stay pegged to the price of $1 solely as a result of a state-of-the-art “algorithm.” That algorithm – which was codified in blockchain-based computer code called smart contracts – was supposed to print and burn luna, UST’s speculative sister token, to serve as a sort of shock absorber for UST’s price.
The SEC contends, however, that Terra’s stablecoin ecosystem relied on human-driven market-making operations – rather than autonomous bits of computer code – to stay afloat.
According to the SEC, Terraform Labs recruited an unnamed “third party” trading firm – Jump Crypto, according to CoinDesk’s sources – to serve as a market maker for its token ecosystem. According to the terms of the agreement, the SEC said, there were instances when the trading firm was able to buy luna for as little as 40 cents while it traded for $90 on the open market.
When the UST stablecoin briefly wobbled a few cents off of its $1 peg in May 2021, Terraform framed its eventual recovery as a proof-case for the success of its algorithm. But according to the SEC, the stablecoin was only actually able to recover as a result of the third party, which stepped in to covertly buy up Terra’s tokens to backstop the market sell-off.
The SEC says Terra modified its market-making agreements with the firm after this sell-off event, removing the preconditions it needed to satisfy in order to buy up discounted tokens.
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