TerraUSD (UST) is a cryptocurrency that is supposed to track the value of the US dollar, but it has no cash backing. It uses a unique dual token system praised as an engineering marvel in the blockchain industry. However, recent revelations have shown that the stablecoin is not as reliable as previously thought.
Stricter Standards and Harsher Penalties by SEC
The Securities and Exchange Commission (SEC) has filed a complaint claiming that UST was propped up by a third party in May 2021 to restore its $1 value. The third-party, allegedly Jump Trading, committed to buying large amounts of UST. Terraform Labs, the creators of UST, did not use the software algorithm that claimed to back the stablecoin but instead relied on ‘Jump Trading’ to maintain its value.
The SEC has not filed any charges against Jump Trading as of this writing. However, Terraform Labs promised to repay Jump Trading with LUNA tokens in exchange for buying more than 62 million UST. The trading company reportedly purchased tokens at a low LUNC price to help maintain UST’s value.
About a year later, when the stablecoin lost its link to the US dollar and investors in UST and its sister altcoin LUNA lost money, it became clear that the algorithm behind UST wasn’t very good. The SEC says that Terraform Labs lied to the public about UST’s value when it said that its algorithm had re-pegged the stablecoin to the dollar.
Why are stablecoins so essential to the world of cryptocurrency?
Stablecoins don’t fluctuate like Bitcoin and Ethereum. Its pricing stability makes them ideal for daily transactions. Decentralized finance (DeFi) uses stablecoins for collateral, trading, and transaction fees.
Manipulating stablecoin values can generate price volatility and forced liquidations, tarnishing the crypto ecosystem. The cryptocurrency market relies on stablecoin pricing.
The impact on the crypto industry
The SEC’s complaint exposed the once-celebrated TerraUSD (UST) stablecoin’s weaknesses, which alleged that Terraform Labs and Jump Trading manipulated its value to maintain its value at its $1 peg. This incident has highlighted the need for transparency and accountability in the cryptocurrency industry, and regulators may impose stricter regulations on stablecoins to protect investors.
Source: https://coinpedia.org/news/terrausd-ust-under-fire-as-sec-uncovers-shocking-revelation-of-market-manipulation/