Two SEC lawyers sat down with the Block and gave them first account knowledge of the investigation.
“The SEC is already on the scene as they are investigating the Mirror protocol”, said Philip Moustakis.
UST is backed by another cryptocurrency called LUNA. The supply of UST and LUNA is dynamically controlled by an algorithm that’s designed to work like a central bank, with the goal of keeping the UST’s price steady at one dollar. This is the premise for all algorithmic stablecoins.
Here is how it is supposed to work: Each time a UST is exchanged for LUNA, the UST is burned or removed from circulation and vice versa. If UST falls below a dollar, holders are incentivized to make a profit by exchanging UST for a dollar’s worth of LUNA, and because the UST is burned, supply is reduced until UST’s value reaches a dollar again. Another tool Terra uses to help boost UST is the decentralized lending protocol Anchor, which is built on the Terra blockchain. Anchor recently offered a 20% return on UST deposits raising even deeper concerns for the SEC.
Do Kwon, the founder of the Terra Luna ecosystem, purchased 3.5 billion$ BTC via a nonprofit called the Luna Foundation Guard (LFG) to help back the stablecoin.
UST became untethered from the dollar last Saturday as hundreds of millions of dollars worth of both UST and LUNA were rapidly sold across exchanges pushing UST below $1.00 to .98 cents. Although it rebounded within hours a panic set in and many more rushed to exit and found themselves unable to redeem their UST for the promised $1.00 in LUNA. Binance halted trading (selling) of either UST or LUNA.
The status of stablecoins in the US regulatory framework is the debate everyone is talking about.
Even Do Kwon himself tweeted:
Former SEC attorney, Moustakis stated that “even if there’s a question as to whether UST is a security or not; even if the stablecoin as designed may have eluded the application of the federal securities laws, the subsequent transactions of Anchor and the Mirror protocol could drive it back into the purview of the SEC”.
A stablecoin that loses its stability may well lose its claims not to be based on an expectation of a third party acting to create profit for investors. Changing facts and circumstances surrounding an asset can change the SEC’s approach to it as a security or not.
This brings us back to the Anchor protocol that promised 20% returns on staked UST. Drawing attention of the SEC as well as the LFG’s efforts to inject the sell off of BTC to inject new capital in order to preserve the peg.
The SEC has the burden to investigate if stablecoins are securities or not, but even more complex is the ability to have any influence internationally.
Members of the crypto world deny that Do Kwon, A South Korean national, will face repercussions from US regulators, however the SEC has subpoenaed Kwon in relation to his activities at Terraform Labs and Mirror, a protocol for synthetic assets. The SEC served Kwon successfully in September 2021 at the Messari Mainnet Conference in NYC. He disputed the SEC’s right to regulate him and lost in Feb 2022 giving the SEC the right to continue its investigation into Terraform Labs.
Whether the SEC has international influence will be determined because whatever narrative you choose to use, the bottom line is TerraUSD was pegged to the US dollar and Mirror Protocol allowed trading of synthesized or “mirrored” versions of US stocks like Tesla and Apple in exchange for the Terra blockchain-based UST.
At the time of this article UST lost 63%% and has recovered to .37 cents and LUNA lost 99% and went to .01 cents and is now trading at .01 cents.
The stablecoin wars are in their infancy and with regulators added to the mix, we will be sure to give you the latest updates.
