Terraform Labs Alleges Citadel Securities Behind May 2022 UST Stablecoin Depeg Event

Terraform Labs has accused U.S.-based American market-making firm Citadel Securities LLC of intentionally destabilizing its TerraUSD (UST) stablecoin in May 2022, alleging that the firm was the result of a “concerted, intentional effort” rather than an algorithmic failure.

The UST stablecoin was designed to maintain its 1:1 peg to the U.S. dollar by ensuring that the supply and demand for it are always balanced via an arbitrage strategy. If it traded higher than $1, the protocol incentivized users to mint UST and burn its sister token LUNA (also the network’s staking and governance asset), aimed at lowering the Terra price of UST by increasing supply and increasing the LUNA price (by reducing its supply).

In a motion filed with the U.S. District Court for the Southern District of Florida earlier this week, Terraform requested Citadel Securities to produce certain documents related to its trading activities between March 1, 2022, and May 31, 2022.

According to Terraform, also referred to as Movant in the filing. obtaining this information is “vital” to its defense in a legal action brought by the U.S. Securities and Exchange (SEC) in February this year, accusing the company and its co-founder Do Kwon of misleading investors about the stability of TerraUSD, which at one point plummeted from $1 to $0.02.

“Movant strongly disputes the SEC’s allegations. Movant contends that the market destabilization that occurred did not result from instability in the algorithm underlying the UST stablecoin,” reads the filing. “Instead, Movant contends that the market was destabilized due to the concerted, intentional effort of certain third party market participants to ‘short’ and cause UST to depeg from its one dollar price.”

Last year’s collapse of the Terra ecosystem knocked more than $80 billion off the sector’s total value, sending shockwaves across the space and partially playing a role in the bankruptcy of several other prominent players, including Three Arrows Capital and Celsius Network.

Decrypt has reached out to Terraform and Citadel Securities for additional comments and will update this article correspondingly should we hear back.

Terraform cites ‘publicly available evidence’

The filing also points to “publicly available evidence” indicating that Citadel CEO Ken Griffin intended to short the stablecoin during the de-pegging event in May 2022.

It also cites a screenshot from a Discord chat suggesting that Griffin discussed the plan with a pseudonymous trader going by the moniker @GiganticRebirth, sharing his intention to “Soros the f*** out of Luna UST.”

The filing indicates that the screenshot was provided by Real Vision co-founder Remi Tetot. Tetot did not immediately respond to Decrypt’s request for comment.

Additionally, the motion cites a tweet by Jacob Canfield, a financial markets trader, who wrote in May 2022 that “rumor is citadel is the culprit.” Canfield did not immediately respond for comment.

Citadel Securities had previously denied any involvement in trading the UST stablecoin during the May 2022 de-pegging incident.

Furthermore, there have been reports suggesting that Terra’s founder, Do Kwon, may have had prior knowledge of the stablecoin’s collapse.