Terra Says This Market Maker Was Behind Its $40 Billion Collapse

Terraform Labs has filed a lawsuit claiming Citadel Securities was behind its infamous collapse.

Terraform Labs, the company behind the collapsed Terra ecosystem, has filed a lawsuit against market-making firm Citadel Securities.

Terraform’s Allegations

The company alleges that the market-maker was behind a ploy that pushed the price of Terra’s UST stablecoin below its $1 peg. The de-peg kickstarted a set of cascading events that saw Terra’s $40 billion valued ecosystem wiped out in a crazy few weeks for the cryptocurrency market.

According to the lawsuit filed with the U.S. District Court for the Southern District of Florida, Terraform Labs argues that the collapse of its UST stablecoin was not the result of a failure of the algorithm for minting and distributing the token. 

Instead, Terra claimed that the UST market was destabilized by the “concerted, intentional effort of certain third-party market participants to ‘short’ and cause UST to depeg from its one-dollar price.” Terraform Labs called out Citadel Securities as the leading market maker behind the malicious move. 

To short an asset, an investor acquires and sells the asset at its current market with the hope that the price drops and they can buy it cheaper to repay the loan. A concerted effort by market participants with substantial holdings to short an asset often creates immense selling pressure, something Terra claims Citadel Securities did to the UST price.

Although the US-based market maker has previously denied the allegations, Terraform’s latest lawsuit presents evidence supporting Citadel’s involvement. Among other things, Terraform cites a Discord chat in which a pseudonymous individual known as GiganticRebirth purportedly disclosed to Citadel CEO Ken Griffin plans to short UST. 

Specifically, the Citadel CEO allegedly told the user that “they [Citadel] were going to Soros the f*** out of luna ust.”

The reference to Soros evidently alludes to the strategy used by famous fund manager George Soros, placing substantial one-sized bets against an asset using leverage. In essence, Citadel allegedly planned to use the same strategy to bring about Terra’s downfall.

Additionally, TerraForm Lab cites another popular Jacob Canfield, who added fuel to rumors that Citadel was the culprit behind Terra’s collapse. The trader mentioned a trade in which Citadel borrowed 100,000 BTC to open a short trade against UST.

Terra Seeks Relevant Trading Data

Terraform Labs’ lawsuit against Citadel seeks, among other things, to compel the market maker to produce relevant trading data relating to its activities en route to UST’s depeg. Terraform Labs said it has met with little success in acquiring such information. 

Citadel has only produced “just one document,” which does not contain the requested details, the lawsuit alleges. Efforts by Terraform Labs to narrow down the requested data to enhance ease of compliance for Citadel Securities have also proven abortive.

Terraform Labs hopes that acquiring the data and substantiating its case against Citadel Securities would also help in the separate lawsuit with the United States Securities and Exchange Commission (SEC). The regulatory agency had alleged in that case that Terraform Labs made false representations publicly about the stability of UST. 

For Terraform Labs, successfully tying the stablecoin’s collapse to Citadel Securities might ease the current legal pressure. Such an outcome might also lead to penalties for the market-making firm and the formulation of stronger regulations to prevent crypto market manipulation by large financial institutions.