Do Kwon’s SEC Case May Hinge on Role of Jump Trading, Court Documents Show

Kwon has been accused of misleading investors about the terraUSD stablecoin, whose 2022 collapse ricocheted around the crypto world.

AccessTimeIconOct 19, 2023 at 8:53 a.m. UTC
10 Years of Decentralizing the Future
May 29-31, 2024 - Austin, TexasThe biggest and most established global hub for everything crypto, blockchain and Web3.Register Now
  • Do Kwon's Terraform Labs denies that market maker Jump Trading restored terraUSD to its $1 peg in 2021.
  • Kwon has been sued for misleading investors after the stablecoin's 2022 collapse sent shockwaves across the ecosystem.

A legal case against Do Kwon and his company, Terraform Labs, could hinge on the role of market maker Jump Trading, according to filings made in a New York court on Wednesday.

The collapse of Kwon’s terraUSD stablecoin (UST) in May 2022 sent a shockwave across the cryptocurrency market, heralding a crypto winter. Kwon was subsequently sued by the U.S. Securities and Exchange Commission for misleading investors.

New documents in the case show a focus on the role of Jump – a market maker that appears to have made $1.28 billion in profits as the doomed ecosystem fell apart.

Jump’s involvement may matter due to an incident a year earlier, in which UST temporarily lost its peg to the dollar. While Kwon told investors the coin maintained its $1 value because of its automated algorithm, SEC experts say that it was, rather, due to Jump intervening in the market at Terraform’s behest.

“Defendants deny these allegations and assert that Jump’s trades in UST were not the cause of the peg restoration in May 2021,” according to a letter from Kwon’s team to the Singapore Supreme Court, which had sought further details in connection with the case, included in the New York filing.

“The May 2022 depeg was the result of an intentional effort by third parties to ‘short’ UST causing it to depeg from its price and involved a direct, public intervention in an effort to combat the short,” the letter added.

Shorting is a way of betting that a price will decline. Generally, an investor borrows a financial instrument and sells it in the hope the price will have dropped by the time they have to repurchase it and return it to the lender. The borrower can then pocket the difference.

After apparently fleeing following the crisis, Kwon was arrested for possessing false ID documents in March and is currently in a Montenegro jail.

His defense team has also argued the SEC doesn’t have jurisdiction because the assets involved are currencies, not securities, highlighting a legal gray area that’s also been taken up in the regulator’s case against exchanges such as Binance and Coinbase.

A recent biography of Sam Bankman-Fried said that Jump lost nearly $300 million when his FTX exchange went bust in November 2022.

A spokesperson for Jump did not immediately respond to a request for comment.

Edited by Sheldon Reback.

Disclosure

Please note that our privacy policy, terms of use, cookies, and do not sell my personal information has been updated.

The leader in news and information on cryptocurrency, digital assets and the future of money, CoinDesk is an award-winning media outlet that strives for the highest journalistic standards and abides by a strict set of editorial policies. In November 2023, CoinDesk was acquired by Bullish group, owner of Bullish, a regulated, institutional digital assets exchange. Bullish group is majority owned by Block.one; both groups have interests in a variety of blockchain and digital asset businesses and significant holdings of digital assets, including bitcoin. CoinDesk operates as an independent subsidiary, and an editorial committee, chaired by a former editor-in-chief of The Wall Street Journal, is being formed to support journalistic integrity.

Jack Schickler

Jack Schickler was a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He doesn’t own any crypto.


Learn more about Consensus 2024, CoinDesk's longest-running and most influential event that brings together all sides of crypto, blockchain and Web3. Head to consensus.coindesk.com to register and buy your pass now.