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The ghost of Terra/Luna – the blockchain and algorithmic stablecoin pair that collapsed in spectacular fashion in mid 2022 – is back to haunt the news cycle.

Todd Snyder, who Delaware’s bankruptcy court appointed to oversee the wind-down of Terra/Luna parent company Terraform, has filed a lawsuit in New York against Jane Street, a quantitative trading firm with a seasoned record in cryptocurrency trading and whose alumni includes Sam Bankman Fried of FTX infamy.

The lawsuit specifically points fingers at Jane Street and one Bryce Pratt, a former Terraform intern and current Jane Street employee. The suit claims Pratt used insider information to make trades in the Terra/Luna market that ultimately led to the death of the UST stablecoin in May 2022.

On May 7, the UST stablecoin dropped below $1 and never fully recovered. Issued on the Terra blockchain, the stablecoin was algorithmic, meaning that it doesn’t have a 1-to-1 backing with dollar instruments like Tether’s USDT or Circle’s USDC. Instead, market incentives and a programmatic relationship with luna, UST’s companion token, attempted to maintain the peg: if UST traded above $1, traders could profit by burning $1 worth of Luna to mint one UST, increasing supply and pushing the price back down; if UST fell below $1, traders could burn one UST to receive $1 worth of Luna, reducing supply and pushing the price back up.

This arbitrage worked until it didn’t, and May 7’s de-pegging eventually shattered market confidence as traders sold UST and sent it into a death spiral.

Snyder’s lawsuit on behalf of Terraform and traders who lost money in the debacle alleges that Jane Street’s trading incited it, and the plaintiff is seeking damages as part of its efforts to recoup money for investors as Snyder liquidates Terraform’s assets.

Nearly four years after the failure of UST and luna, the lawsuit implicates Jane Street in yet another crypto blowup that singed investors. 

And bizarrely, this has led to a number of pet theories that, maybe, Jane Street has actually been behind the current drawdown in bitcoin’s price.

Pratt worked as an engineering intern at Terraform in the summer of 2021. While there, the lawsuit says, he developed close personal relationships with key Terraform personnel, including Terraform's Head of Research, and was subject to Terraform's Code of Ethics, which explicitly prohibited sharing material non-public information (MNPI) about Luna tokens with outsiders.

By September 2021, Pratt joined Jane Street, and in February 2022, he introduced two Jane Street DeFi trading leads to Terraform's Head of Business Development to “[open] up lines of communication regarding OTC and other forms of investment in Terra,” according to the suit. 

The lawsuit further alleges that Pratt received insider information from Terraform employees, particularly its Head of Research, who the suit claims applied for a job at Jane Street in late March 2022. 

In this heavily redacted section, the lawsuit claims that Pratt emphasized the need for secrecy over these conversations, texting “don’t share pls” to the Head of Research.

-CMH

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