Michael Novogratz’s crypto investment firm Galaxy Digital agreed to pay $200 million in a settlement related to its alleged promotion of the now-collapsed cryptocurrency Terra (LUNA)
According to New York Attorney General’s Office documents filed on March 24, Galaxy Digital acquired 18.5 million LUNA tokens at a 30% discount, then promoted them before selling them without abiding by disclosure rules. The filing states:
“Ultimately, Galaxy helped a little-known token increase its market price from $0.31 in October 2020 to $119.18 in April 2022, while profiting in the hundreds of millions of dollars.“
As part of the settlement agreement, Galaxy will pay $200 million in monetary relief over three years: $40 million within 15 days, another $40 million within one year, and two additional payments of $60 million due within the second and third years, respectively.
Galaxy Digital reportedly spread fake news
The filing also accused Galaxy Digital and Novogratz of spreading false claims about Terra’s usage. In particular, the firm allegedly stated that the South Korean payments app Chai was built on the Terra blockchain, which was not accurate.
This claim was also included in a press release sent to Bloomberg highlighting that the app “hosts over 2 million users and generates $1.2 billion in annualized transaction volume.” The release reads:
“These statements were false. They were based on representations by Kwon and Terraform to Galaxy, but Galaxy failed to independently verify them.“
Terra’s collapse and market fallout
Terra and its algorithmic stablecoin, TerraUSD (UST), both experienced a dramatic collapse due to a breakdown in the mechanism designed to maintain UST’s peg to the US dollar back in May 2022. The event occurred when a large holder sold a substantial amount of UST.
The large sell-off triggered market panic, causing UST to deviate from its expected value. The mechanism intended to stabilize UST involved minting new LUNA tokens to buy back UST, resulting in massive LUNA supply inflation and creating intense downward pressure on LUNA’s price.
As Cointelegraph reported at the time, if the market cap of LUNA became lower than that of UST, there would not be enough funds to maintain the peg of the stablecoin. With the asset backing the stablecoin losing value as its supply continued to increase, the assets entered a self-reinforcing spiral, which caused both assets to lose nearly all their value within hours.
This wiped out billions in market capitalization and triggered a broader cryptocurrency market downturn. The memory of the event is still fresh, with the Sonic blockchain’s recent unveiling of a high-yield algorithmic stablecoin being met with fears due to perceived similarities.