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Terra's LFG to deploy $1.5B to protect UST Peg

publishedabout 2 months ago
4 min read

Good Morning!

In today's dispatch we report:

  • Terra's LFG to deploy $1.5B to protect UST Peg
  • Crypto CEO CEO accused of $62M investment fraud scheme
  • Coinbase Faces Q1 Earnings Challenge

Last week has been a tough one for crypto traders. In the latter half of last week, cryptocurrency markets tumbled. Following highs of more than $1.8 trillion on Wednesday and Thursday, the total market capitalization of major cryptocurrencies has dropped to around $1.5 trillion as of Monday, a more than 15% drop in just five days.

Terra (LUNA) has plummeted following a FUD attack on its native stablecoin TerraUSD (UST). The LUNA/USD pair fell 20% between May 7 and May 8, reaching $61, its lowest level in three months, after a whale dumped $285 million in UST. Because of this downturn, UST briefly lost its peg to the US dollar, falling as low as $0.98 on Saturday.

That is not all, but the Terra ecosystem had some other things to worry about this week. The Anchor Protocol, Terra's largest decentralized finance (DeFi) protocol that provides UST depositors with an attractive yield, saw large withdrawals over the weekend. Last Friday, deposits reached $14.09 billion, and As of Monday, that figure had fallen below $12 billion.

Significant withdrawals from UST liquidity pools on the popular decentralized exchange Curve were also reported, as well as some wallets dumping large amounts of UST.

Amid this extreme pullback across the broader cryptocurrency market, as well as unfavorable money flows within the Terra ecosystem, the Luna Foundation Guard (LFG), a non-profit supporting all things Terra (LUNA), is set to deploy $1.5 billion in capital to "help protect" Terra USD's (UST) peg to the US dollar.

According to Do Kwon, the founder and CEO of Terraform Labs, the organization made the loan to an unnamed "professional market maker."

While details are limited at this moment, the LFG stated earlier today on Twitter that it will first lend $750 million in BTC to over-the-counter (OTC) trading firms to manage and trade the capital. Following that, once the market has stabilized, the LFG will seek a 750 million UST loan, most likely from Terraform Labs, in order to rebalance its reserves.

The lent capital would be used to buy UST if the asset continues to fall below its peg and sell UST (and buy BTC) if the asset is greater than or equal to its peg. The resulting UST buy pressure is anticipated to drive the stablecoin further back towards $1. If the token is trading above $1, the resulting sell pressure would have the opposite effect.

The LFG confirmed that the council voted to carry out the plan after observing significant market volatility in BTC, UST, and Terra (LUNA) in recent days.

Because BTC backs the LFG's $2.91 billion reserves by 91%, or approximately $2.7 billion, the entity is being pressured to readjust its balance sheet in order to maintain UST's peg.

Terra's development company, Terraform Labs, formed LFG back in January in a bid to support the Terra ecosystem. LFG is in charge of collateralizing the network's algorithmic stablecoin UST to maintain its USD peg intact while also managing its reserves.

LFG's governing council includes Kwon, Terraform Labs head of research Nicholas Platias, and Jump Crypto president Kanav Kariya. In February, it was reported that LFG had raised $1 billion to build a bitcoin-based reserve to serve as a support mechanism for UST's peg. LFG had more than $3 billion in bitcoin in reserve earlier this week.

Department of Justice Indicts Crypto CEO for Alleged $62M Fraud Scheme.

Luiz Capuci Jr., the CEO of mining and investment platform Mining Capital Coin (MCC), has been charged with perpetrating a $62 million fraud that reportedly harmed thousands of investors. Capuci claimed to utilise investments to generate new cryptocurrency but instead moved funds to wallets under his control, according to a news release from the US Department of Justice (DoJ) on Friday.

Capuci is also accused of deceptively marketing MCC's "Trading Bots," saying they could execute "thousands of deals per second" and profit investors. According to the DOJ, he instead diverted monies to himself and his co-conspirators.

According to the indictment, he allegedly ran a pyramid scam, providing rewards to a network of promoters if they successfully recruited new investors. iPads, Apple Watches, and even Capuci's own personal Ferrari were reportedly among the prizes.

If convicted of all charges, Florida-based Capuci faces a maximum sentence of 45 years in jail. Wire fraud, securities fraud, and international money laundering are among the allegations he faces.

According to a complaint filed last month with the Securities and Exchange Commission (SEC), Capuci and his co-founder, Emerson Souza Pires, sold mining packages to over 65,000 investors with the promise of daily profits of 1%, paid monthly. A Florida judge issued a temporary restraining order against Capuci and his alleged co-conspirators and an order freezing their assets.

"Cryptocurrency-based fraud undermines financial markets worldwide as bad actors defraud investors and limit the ability of legitimate entrepreneurs to innovate within this emerging space," said Assistant Attorney General Kenneth A. Polite, Jr. of the DoJ's Criminal Division.

Coinbase Faces Q1 Earnings Challenge as Crypto Markets Weaken

Coinbase Global, Inc. (COIN), a cryptocurrency exchange, will continue to suffer headwinds when it reports first-quarter earnings after the market closes on Tuesday. Coinbase already told investors that it expects fewer trading volumes and monthly transacting customers in its fourth-quarter earnings report due to a decline in crypto asset volatility and macroeconomic reasons.

As a result, experts on Wall Street have lowered their earnings and volume forecasts for Tuesday's report. According to FactSet, the consensus analyst forecast for Coinbase's first quarter is $1.5 billion in revenue and a one-cent loss per share in adjusted earnings.

"Average daily trading volumes on COIN have averaged $2.3 billion thus far in 2Q, approximately 30% below 1Q levels," Dan Dolev, an equity research analyst at Mizuho, told clients. "On a full-quarter basis, this would imply about $210-215 billion of volumes for 2Q."

Coinbase's non-fungible token (NFT) segment will garner some attention as investors will get a look at its early days and engagement with users. The company recently launched its beta version, which showed low usage stats.

Nonetheless, others believe Coinbase's NFT division may help the company become a one-stop-shop for mainstream crypto acceptance. Coinbase's stock has dropped about 60% this year, while the broader equities markets and the Nasdaq have continued to tumble, with the Nasdaq down roughly 22%. The bitcoin (BTC) price dropped by about 26% during the same period.