Terraform Labs, the company behind the failed algorithmic stablecoin TerraUSD (UST) and the Terra Luna (LUNA) token, is embroiled in a legal battle with the United States Securities and Exchange Commission (SEC).
The SEC has accused Terraform Labs and its founder, Do Kwon, of orchestrating a multi-billion dollar crypto asset securities fraud. In an effort to defend itself against these charges, Terraform Labs is seeking permission from a judge to subpoena data from bankrupt crypto exchange FTX, alleging that crucial information stored in FTX’s digital wallets could support their defense.
The motion, filed on July 19, aims to access records about digital wallets used by short sellers between March 2022 and May 2022, with Terraform claiming that the failure of TerraUSD was the result of a coordinated attack from short sellers, possibly involving Alameda Research, FTX’s sister company.
Background: The SEC’s Allegations
The SEC’s lawsuit, filed on February 16, alleges that Terraform Labs conducted an operation offering unregistered securities through its failed algorithmic stablecoin, TerraUSD, and the Terra Luna token. This operation reportedly led to a substantial loss of over $40 billion from crypto markets. The SEC contends that Terraform Labs misrepresented the recovery of TerraUSD’s price peg, claiming it was achieved through the algorithm, when in reality, the recovery was attributed to an arrangement with Jump Trading, a U.S. trading firm. The SEC accuses Jump Trading of collaborating with Terraform to manipulate the price of the UST stablecoin by purchasing millions of UST tokens.
In response to the SEC’s allegations, Terraform Labs is aggressively pursuing a defense that centers on refuting the fraud charges. The company’s legal team believes that obtaining access to FTX’s data can uncover evidence that may support their defense. The motion seeks to obtain information about wallets, accounts, and assets used in transactions on both FTX International and US exchanges, particularly focusing on sales and offers of large volumes of cryptocurrencies developed by Terraform Labs and possibly traded through FTX Trading and West Realm Shires Services Inc. d/b/a FTX US.
Coordination with Short Sellers
Terraform Labs contends that the failure of TerraUSD was not solely due to flaws in their algorithm but rather the result of a coordinated attack orchestrated by short sellers. The company alleges that short sellers may have collaborated with FTX’s sister company, Alameda Research, to destabilize TerraUSD and profit from its decline. By gaining access to FTX’s digital wallet information, Terraform aims to establish a link between short sellers’ activities and any potential involvement from Alameda Research, thereby bolstering their defense against the SEC’s claims.
The motion also seeks information about wallets used by Jump Trading, a firm accused by the SEC of participating in manipulating the UST stablecoin’s price. The SEC’s lawsuit suggests that Jump Trading colluded with Terraform to purchase substantial amounts of UST tokens to maintain the price peg artificially. By obtaining access to Jump Trading’s wallet data through FTX’s records, Terraform Labs hopes to challenge the SEC’s allegations and possibly weaken the case against them.
Terraform Labs is not only focusing on the SEC’s lawsuit but is also seeking to dismiss a parallel class-action lawsuit filed in California. The company argues that since it is based in Singapore, U.S. securities laws referenced in the class-action lawsuit are not applicable to its foreign-developed protocols. This defense strategy aims to prevent potential damages and further legal consequences that could arise from the class-action suit.