A reckoning in the crypto industry appears to be on the way.
Nearly four months after the collapse of Luna and UST, or TerraUSD, two sister tokens issued by the Terraform Labs platform, the authorities seem ready to shed light on the reasons and those responsible for this rout
The collapse wiped out at least $55 billion, contributed to the bankruptcy of prominent crypto lenders and the ruin of a star hedge fund, and swallowed the savings of many retail investors.
A court in South Korea has just issued an arrest warrant for Do Kwon, the co-founder of Terraform Labs, and five other people, media reports say. They are accused of violating local market laws.
These six people live in Singapore, says Bloomberg, which cites a text message with the prosecutorial teams who issued the arrest warrant.
First Dominoes to Fall
Luna and UST were the first dominoes to crumble in what would later turn into a liquidity crunch for the crypto sector.
The two tokens crashed after UST lost its peg to the dollar, the foundation of it qualifying as a stablecoin. Such cryptocurrencies are tied to more stable assets, like the U.S. dollar or gold. From May 9 to May 13, at least $55 billion of market cap disappeared, causing many investors to sustain colossal losses.
UST was an algorithmic stablecoin, which was backed not by dollar reserves but rather by its sister asset, Luna. Algorithmic stablecoins are different from centralized alternatives like tether or USD coin, which are backed by actual dollars or equivalent assets stored in a bank.
The fall of these two tokens hit the hedge fund Three Arrows Capital, also known as 3AC, which found itself unable to honor its payments to crypto lenders, including Voyager Digital and Celsius.
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Voyager and Celsius filed for bankruptcy, while 3AC was forced into liquidation.
TerraUSD’s fall sparked investigations in the U.S. and South Korea and revived calls for stricter supervision of stablecoins. Institutional investors prize these cryptos because they are designed to be less volatile than other coins and to enable funds to move easily within the crypto ecosystem.
Last June, employees of Terraform Labs reportedly told the U.S. Securities and Exchange Commission that Do Kwon was cashing out $80 million a month before the UST and Luna tokens crashed.
According to the reports, the employees said they predicted the collapse of Terra and Luna and pointed out the danger to Do Kwon several times, but they were ignored.
The SEC reportedly found that a few months before Terra collapsed, about 100 billion won, or $78.1 million, of company funds went out every month for operating expenses.
The federal agency is investigating whether the marketing of UST before it crashed violated federal investor protection regulations.
In his first interview after the collapse of Luna and UST, Do Kwon last month said he was cooperating with the authorities on their investigations. In May, he proposed a new chain to replace the existing Terra network. Luna 2.0 would replace the existing Luna, which would be renamed Luna Classic.
A majority of voters approved co-founder Do Kwon’s plans to revive the battered ecosystem. The new system “will effectively create a new Terra chain without the algorithmic stablecoin.”
“The old chain will be called Terra Classic (token: $LUNC), and the new chain will be called Terra (token: $LUNA). The chain upgrade will commence a few hours after the Launch snapshot,” the company tweeted at the time.
“Terra 2.0 is coming,” the company tweeted. “With overwhelming support, the Terra ecosystem has voted to pass Proposal 1623, calling for the genesis of a new blockchain and the preservation of our community.”
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