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NYT reports that federal prosecutors are investigating whether FTX founder Sam Bankman-Fried and his hedge fund orchestrated trades in a way that led to the collapse of two cryptocurrencies in May – TerraUSD and Luna.
Specifically, Manhattan prosecutors (US attorney for the Southern District of New York) are examining the possibility that Bankman-Fried steered the prices of two algorithmically-interlinked currencies to benefit entities he controlled, including FTX and Alameda Research.
According to two people with knowledge of the matter, NYT reports that the focus on possible market manipulation adds to the legal storm brewing around Mr. Bankman-Fried.
It is illegal for an individual to knowingly stage market activity designed to move the price of an asset up or down.
TerraUSD was a so-called stablecoin, but unlike other stablecoins, its value wasn’t backed directly by the U.S. dollar.
Rather, it maintained its value from a second coin called Luna through a complex set of algorithms. Traders within the digital ecosystem could mint these coins, the prices of which would fluctuate based on how many were in circulation. Anytime the price of TerraUSD fell, the supply of Luna would increase, as traders created more Luna to try to capitalize on the difference.
In May, major cryptocurrency market makers — exchanges or individuals who arrange for buyers and sellers to be matched — noticed a flood of “sell” orders coming in for TerraUSD, said one person with knowledge of the market activity.
The orders were in small denominations, but they were placed very quickly, the person said.
The sudden jump in sell orders for TerraUSD overwhelmed the system, making it hard to find matching “buy” orders for them. Under normal conditions, any sell orders that remained unfulfilled for too long would be matched with buy orders at a lower price.
The longer the orders lingered without being matched, the more they forced down the price of TerraUSD and caused a corresponding drop in Luna prices because of the way the two coins were linked.
The ripple effects from the Luna crash ultimately contributed to the collapse of Mr. Bankman-Fried’s business empire.
NYT does note that the investigation in early stages and that it is unclear if prosecutors have determined any wrongdoing by Bankman-Fried.