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

• 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.