Full Story: SBF or LUNA Behind the Crash?

2022-12-08 16:11

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FTX Founder Sam Bankman-Fried Is Said to Face Market Manipulation Inquiry

Original article by Emily Flitter, David Yaffe-Bellany and Matthew Goldstein

Jordan, PANews

On November 11, FTX announced that it had filed for bankruptcy, after which SBF announced his resignation as CEO of FTX.

But now the SBF may have to add market manipulation to its list. According to two people familiar with the matter, U.S. prosecutors in Manhattan have opened an investigation into whether former FTX CEO Sam Bankman-Fried and his hedge fund Alameda Research used market manipulation to cause the collapse of TerraUSD and LUNA in May, This led to a domino effect, which led to the collapse of FTX.

SBF more guilty?

The investigation is in its early stages, so it is unclear whether prosecutors have determined wrongdoing at SBF or when they will begin reviewing the TerraUSD/LUNA deal. The investigation is understood to be part of a wider regulatory and law enforcement probe into the alleged misappropriation of billions of dollars in customer funds by SBF and FTX, which US federal prosecutors and the Securities and Exchange Commission have also been examining whether FTX broke any laws by transferring customer funds to AlamedaResearch.

Three other people familiar with the matter said U.S. law enforcement agencies had launched an anti-money laundering investigation into FTX months before its collapse, which was first reported by Bloomberg, which reported that law enforcement wanted to know who FTX's clients were, whether they had reported any potential illegal activity to law enforcement, and other offshore cryptocurrency trading activity.

In a statement, SBF said it was not aware of "any market manipulation and never intended to engage in market manipulation personally", adding: "To my knowledge, all trades were for investment or hedging purposes". So far, representatives for the U.S. attorney for the Southern District of New York have declined to comment on the status of the investigation, and FTX representatives didn't immediately respond to requests for comment.

In the US, it is a very serious offence for individuals to knowingly engage in market activities designed to drive asset prices up or down - that is, market manipulation - which means that the SBF will face even more intense legal storms.

Alameda Research, or TerraUSD, is behind the massive sales order

TerraUSD is a new type of stablecoin. Unlike other stablecoins, TerraUSD's value is not directly backed by the US dollar, but rather maintains value anchoring from another token, LUNA, through a complex set of algorithms. LUNA can be minted by traders within the digital ecosystem, and its price can be adjusted flexibly according to the automatic market-making mechanism of the amount in circulation. Terra offset TerraUSD's volatility by issuing LUNA tokens. If TerraUSD is above a dollar, there is an arbitrage opportunity to burn LUNA and create more TerraUSD. If TerraUSD is below one, there is also an arbitrage opportunity to create LUNA and burn TerraUSD.

In May, some major cryptocurrency market makers -- including exchanges and individual traders who match buyers and sellers -- saw a flood of "sell" orders, which trade relatively small amounts but are placed quickly, flooding TerraUSD, according to a person familiar with market activity.

As a result, TerraUSD's short-term surge in sell orders overwhelmed the system because it was difficult to find a "pay" to match quickly. Under normal circumstances, any long-term outstanding sell orders will match the purchase price at the lower price, but the longer orders linger without matching, the more they will drive down the price of TerraUSD. Due to the anchored correlation between TerraUSD and LUNA tokens, The result was a sharp drop in LUNA prices.

So far, it's unclear exactly why TerraUSD and LUNA have collapsed, but according to people familiar with the market activity, most of TerraUSD's sell orders are coming from one place: Alameda Research, a crypto trading firm affiliated with SBF, Because the company is betting on LUNA prices falling.

If Alameda Research's short trade goes through as expected, the LUNA price plunge could be lucrative for them. But what Alameda Research probably didn't realize was that the TerraUSD-Luna ecosystem completely collapsed, and the domino effect of that collapse caused trouble for the entire crypto industry, with several well-known crypto companies going bankrupt and wiping $1 trillion off the market value of crypto.

The chain reaction of LUNA's collapse led to the collapse of SBF's business empire. In November 2021, Caroline Ellison, AlamedaResearch's chief executive, told her employees that loans to AlamedaResearch had been called in despite the market turmoil caused by LUNA, according to a person familiar with the matter, At the time, Caroline Ellison also said that AlamedaResearch used FTX client funds to make payments, but that it might not be so easy for them to lend money in the future (possibly hinting at a liquidity crisis).

Is Alameda Research really behind the collapse of TerraUSD and LUNA? Will SBF be punished for market manipulation? Let's wait and see.