The most recent crash of Terra was one of the most significant cryptocurrency catastrophes in history, taking out billions of dollars in value (approximately $45billion). The downfall of UST, which happened majorly between May 7- May 10, sent tremors through the cryptocurrency markets. Janet Yellen (an American economist serving as the 78th United States secretary of the treasury since January 26, 2021) stated the incident demonstrated the dangers of tokens ostensibly pegged to the US dollar, and Acting US Comptroller of the Currency Michael Hsu termed it a “wake-up call” in the aftermath.
According to a source familiar with the situation, the US Securities and Exchange Commission (SEC) is looking into whether the promotion of the TerraUSD stable coin before it fell last month violated federal investor protection requirements.
It was also gathered from a source familiar with the investigation that SEC enforcement attorneys are looking into whether Terraform Labs, the company behind the coin known as UST, violated securities and investment product rules. The stable coin was planned to trade in a related token called Luna and maintain a 1-to-1 peg to the US dollar through an algorithm.
Stablecoins are important in the cryptocurrency space because their generally stable value might provide a safe harbor for many investors in an unstable market. Unlike others who claim to be backed by cash and other assets, UST relied on algorithms and trading incentives to keep its price stable.
Every time a UST token was created, a dollar’s worth of Luna was destroyed (the value of which was set by the market), and vice versa. Traders were enticed to swap UST for Luna if the price fell below $1, reducing the amount of the former in circulation and driving up its price. To achieve the same result, a computer program would be used in conjunction. If the value of UST rose beyond $1, the opposite happened.
By the SEC rules, If Americans buy a virtual currency to fund a firm or project with the aim of benefitting from the efforts of the people involved, the virtual currency may fall under the SEC’s jurisdiction. This conclusion is based on a 1946 US Supreme Court ruling that defined investment contracts. The government has also said that if a crypto corporation owns assets, it may be subject to investment-company regulations.
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