NYT Full Article: Is SBF the Mastermind Behind the Collapse of LUNA?

The New York Times

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Will SBF be Charged with First-Degree Market Manipulation?

Original Title: "FTX Founder Sam Bankman-Fried Is Said to Face Market Manipulation Inquiry"

Original Authors: Emily Flitter, David Yaffe-Bellany, and Matthew Goldstein

Original Translation: Jordan, PANews

On November 11, FTX announced bankruptcy, after which SBF announced his resignation as CEO of FTX.

However, now SBF's charges may be adding up—a new one of market manipulation! According to two sources familiar with the matter, the U.S. federal prosecutor in Manhattan has begun investigating former FTX CEO Sam Bankman-Fried (SBF) and his hedge fund Alameda Research for allegedly using market manipulation tactics in May this year to cause the collapse of TerraUSD and LUNA, triggering a domino effect and ultimately leading to FTX's bankruptcy.

Is SBF in Hot Water?

The current investigation is still in its early stages, so it is unclear whether the prosecutor has established SBF's involvement in any misconduct and the timing of the prosecutor's review of TerraUSD and LUNA transactions. It is reported that this investigation will be part of the broader scrutiny by regulatory and law enforcement agencies into SBF's and FTX's diversion of billions of dollars in client funds, with U.S. federal prosecutors and the U.S. Securities and Exchange Commission previously reviewing whether FTX's transfer of client funds to Alameda Research violated the law.

Three other sources said that U.S. law enforcement agencies actually initiated an anti-money laundering investigation into FTX several months before its bankruptcy, a development first reported by Bloomberg. The report stated that authorities were looking to find out who FTX's clients are, whether they have reported any potential illicit activities to law enforcement, and other offshore cryptocurrency trading activities.

In a statement, SBF said he was unaware of "any market manipulation and never intended to engage in market manipulation" and added, "to the best of my knowledge, all trades were for investment or hedging purposes." As of now, a representative for the U.S. Southern District of New York prosecutor declined to comment on the investigation, and a representative for FTX did not immediately respond to a request for comment.

In the United States, intentionally engaging in market activities aimed at causing an asset's price to rise or fall — market manipulation — is a very serious illegal criminal act, which means SBF will face an even more intense legal storm.

Alameda Research, the Mastermind Behind TerraUSD's Massive Sell-off

TerraUSD is a new type of stablecoin that, unlike other stablecoins, is not directly backed by the US dollar but instead maintains its value anchor from another token, LUNA, through a set of complex algorithms. Traders within the digital ecosystem can mint LUNA, whose price adjusts flexibly based on an automated market-making mechanism. Terra mitigates TerraUSD's volatility by issuing the LUNA token. If TerraUSD is above one dollar, there is an arbitrage opportunity to burn LUNA and create more TerraUSD. If TerraUSD is below one dollar, there is also an arbitrage opportunity to create LUNA and burn TerraUSD.

An individual familiar with market activities stated that in May of this year, some major cryptocurrency market makers, including exchanges and individual traders facilitating buy-sell-side matches, noticed a large influx of "sell" orders in TerraUSD. These orders had relatively small transaction amounts but were placed rapidly.

As a result, the sudden surge in TerraUSD sell orders overwhelmed the system as it was challenging to quickly find matching "buy" orders in the market. Typically, any long-unfulfilled sell order would match with a lower-priced buy order. However, the longer the orders lingered without a match, the more they could drive down the price of TerraUSD. Due to the anchoring relationship between TerraUSD and LUNA, this resulted in a substantial drop in the price of LUNA.

So far, the exact reason for the previous crashes in the prices of TerraUSD and LUNA cryptocurrencies remains unknown. However, according to individuals familiar with the market activities, most of TerraUSD's sell orders originated from one source — SBF's cryptocurrency trading firm Alameda Research, as the company was betting on a drop in LUNA's price.

If Alameda Research's short selling goes as planned, a sharp drop in the LUNA price could bring them significant profits. But what Alameda Research might not have anticipated is the complete collapse of the TerraUSD-Luna ecosystem, causing a domino effect that troubles the entire crypto industry, leading to several well-known crypto companies going bankrupt, and a trillion dollars being wiped off the cryptocurrency market cap.

The so-called tactic of "cutting off one's nose to spite one's face" resulted in a chain reaction that ultimately led to the collapse of the SBF business empire following the LUNA crash. According to a source familiar with the matter, in November 2021, Alameda Research CEO Caroline Ellison told her staff that although the LUNA incident caused market turmoil, the loan provided to Alameda Research had been recovered. At the time, Caroline Ellison also mentioned that Alameda Research had used FTX client funds to make the payment, but in the future, it might not be as easy for them to lend out funds again (possibly hinting at encountering a liquidity crisis).

Was Alameda Research truly behind the TerraUSD and LUNA crash? Will SBF face severe punishment for market manipulation? Let's wait and see.