Terraform Labs has accused U.S.-based American market-making firm, Citadel Securities LLC, of intentionally destabilizing TerraUSD (UST) stablecoin in May 2022. The accusation claimed that this was not the result of an algorithmic failure, but rather a concerted, intentional effort by the firm.
The purpose of UST stablecoin is to maintain its 1:1 peg to the U.S. dollar. To ensure this, the supply and demand for UST must be balanced via an arbitrage strategy. If UST trades higher than $1, users are incentivized to mint UST and burn its sister token LUNA (which is also the network’s staking and governance asset). This lowers the Terra price of UST by increasing the supply and, in turn, increases the LUNA price by reducing its supply.
As of now, the court in the Southern District of Florida, where Terraform filed the request on October 10, has not made a decision. Terraform has also requested the case to be transferred to the Southern District of New York, where the SEC’s lawsuit is based, for oversight by Judge Jed Rakoff, who is presiding over the SEC v. Terraform case.
Terraform believes Citadel Securities may have been involved in the depeg, despite Citadel’s denial of trading in Terra’s digital assets. Terraform pointed to online posts and a Discord chat conversation as evidence, suggesting Citadel’s potential involvement.
Terraform’s request focuses on obtaining documents describing trading strategies involving Terra’s tokens and financial instruments between March 1, 2022, and May 31, 2022. The company claims this data is essential for its defence and could influence the SEC’s case against them.
According to Terraform, the crash of the UST stablecoin in May 2022, from $1 to $0.02, was not caused by instability in its algorithm, but instead by certain third-party market participants who intentionally shorted the stablecoin. The statement read,
Movant [Terraform] contends that the market destabilization that occurred did not result from instability in the algorithm underlying the UST stablecoin,said the firm in its motion.
In its motion, Terraform argued that the market destabilization was not due to any flaw in the algorithm underlying the UST stablecoin. Rather, it resulted from a coordinated and deliberate effort by some market participants to “short” the stablecoin and cause it to depeg from its one-dollar price.
Terraform has filed the motion citing publicly available evidence that suggests Citadel head, Ken Griffin, had intended to short UST at or around the time of the May 2022 depeg. The motion also claimed that Citadel is withholding this information, which is crucial for Terraform’s defence in the lawsuit filed by the U.S. SEC in February.
The lawsuit alleged that Terraform Labs and its founder, Do Kwon, were involved in orchestrating a multi-billion dollar crypto asset securities fraud. Terraform argued that the defence will be substantially impaired if Citadel Securities withholds this limited information.
