Michael Novogratz’s cryptocurrency investment company has agreed to a $200 million settlement connected to its alleged promotion of the now-defunct cryptocurrency Terra (LUNA).
Documents submitted by the New York Attorney General’s office on March 24 indicate that the firm purchased 18.5 million LUNA tokens at a 30% discount and subsequently promoted them before selling without following required disclosure protocols. The documents explain:
“Ultimately, Galaxy contributed to the rise in market price of a relatively obscure token from $0.31 in October 2020 to $119.18 in April 2022, while realizing profits amounting to hundreds of millions of dollars.”
As part of the settlement, the firm will provide $200 million in financial restitution over three years, which includes an initial payment of $40 million within 15 days, another $40 million within one year, and two further payments of $60 million due in the second and third years, respectively.
### Allegations of Misinformation
The official filing also accused the company and its CEO of disseminating inaccurate information regarding Terra’s usage. Specifically, it was claimed that the firm asserted the South Korean payments app Chai was operating on the Terra blockchain, which was not true.
This statement was included in a press release sent to a major news outlet, claiming that the app “has over 2 million users and achieves an annual transaction volume of $1.2 billion.” The release states:
“These claims were misleading. They were based on remarks made by Kwon and Terraform to the firm, yet the company failed to validate them independently.”
### The Downfall of Terra and Its Market Impact
Both Terra and its algorithmic stablecoin, TerraUSD (UST), faced a severe collapse due to a failure in the mechanism intended to keep UST pegged to the US dollar in May 2022. This breakdown was triggered when a significant holder sold a large quantity of UST.
This major sell-off sparked panic in the market, causing UST to stray from its expected value. The mechanism designed to stabilize UST relied on generating new LUNA tokens to repurchase UST, which led to significant inflation in LUNA’s supply and intense downward pressure on its price.
Reports during the event highlighted that if LUNA’s market cap dropped below that of UST, there wouldn’t be sufficient resources to uphold the stablecoin’s peg. As the asset backing the stablecoin depreciated alongside its increasing supply, a self-reinforcing spiral emerged, causing both assets to plummet in value within hours.
This resulted in billions being wiped from market capitalization, triggering a broader downturn across the cryptocurrency market. The reverberations from this incident remain vivid, with recent introductions of high-yield algorithmic stablecoins facing skepticism due to perceived parallels.