• Federal prosecutors are investigating the role that FTX and Alameda may have played in the fall of Terra LUNA.
• It is illegal for an individual to knowingly stage market activity designed to move the price of an asset up or down.

FTX’s former CEO and founder of the Alameda hedge fund, Sam-Bankman-Fried is under investigation by US prosecutors. The once-crypto prince is accused of having manipulated the market for two cryptocurrencies Terra USD and Luna which may have led to the collapse of both coins and hence the implosion of his own crypto exchange empire.

The crypto exchange filed for bankruptcy last month after a liquidity crisis that saw at least $1 billion of customer funds vanish.

Related: FTX DEBACLE IN A NUTSHELL

Sam-Bankman allegedly steered the prices of the above-mentioned interlinked currencies to the advantage of his companies, FTX and Alameda, the affiliated hedge fund he co-founded and owned.

The prosecutors are yet to find any wrongdoing by SBF, as the investigation was just recently launched.

The US federal prosecutors aren’t the only ones on sam-Bankman’s toes but also regulators in the Bahamas where the multi-billion dollar exchange is based are looking into the role of FTX’s top executives including Bankman-Fried in the firm’s stunning collapse.

The Securities and Exchange Commission(SEC) alongside federal prosecutors has been examining whether FTX broke the law by transferring its customer funds to Alameda.

A run on the FTX deposits was done last month exposing an $8 billion hole in the exchange’s accounts, this gaslighted the fallout. Billionaire until Tuesday,11th November when SBF resigned from his role as chief executive of FTX, and the exchange said it would initiate bankruptcy on the same date.

FTX has also been under investigation for several months, the exchange allegedly violated U.S. money-laundering laws that require money transfer businesses to know who their customers are and flag any potentially illegal activity to law enforcement authorities, three people familiar with the investigation said.

I am not aware of any market manipulation and certainly never intended to engage in market manipulation. To the best of my knowledge, all transactions were for investment or for hedging.

Bankman-Fried said in a statement.

Rant Alert – SBF Will Not Be Subpoenaed To Testify Regarding FTX Collapse? @elonmusk pic.twitter.com/QypHtABXXm

— Dave Portnoy (@stoolpresidente) December 8, 2022

The connection between TerraUSD, Luna, and FTX

TerraUSD was a so-called algorithmic stablecoin of the Terra blockchain, but unlike other stablecoins, its value wasn’t backed directly by the U.S. dollar nor does it have any technical support. Rather, it maintained its value from a second coin called Luna through a complex set of linked algorithms.

Crypto traders could mint these coins, the prices of which would fluctuate based on how many were in circulation. Anytime the price of TerraUSD fell, the supply of Luna would increase, as traders created more Luna to try to capitalize on the difference.

The sudden increase in sell orders for TerraUSD overwhelmed the system, making it hard to match them with corresponding “buy” orders.

Under normal market conditions, sell orders that remained unfulfilled for too long would be matched with buy orders at a lower price. The longer the orders lingered without being matched, the more they forced down the price of TerraUSD and caused a corresponding drop in Luna prices because of the way the two coins were linked.

No one has been able to precisely determine the root cause behind the collapse of LUNC and USTC in May this year. However, the bulk of the sell orders for TerraUSD appeared to be coming from Bankman-Fried’s cryptocurrency trading firm. According to an individual familiar with the exchange, FTX placed a big bet on the price of Luna falling, according to the person with knowledge of the market activity.