What Happened to TerraUSD’s Bitcoin Reserves

The collapse of the cryptocurrency TerraUSD has traders wondering what happened to the $3 billion war chest meant to defend it. 

TerraUSD is a stablecoin, meaning that it is supposed to keep its value steady at $1. But after a crash earlier this month, the coin is worth only 6 cents.

In roughly two days earlier this month, a nonprofit foundation backing TerraUSD deployed nearly all of its bitcoin reserves in an effort to help it regain its typical level of $1, according to an analysis by Elliptic Enterprises Ltd., a cryptocurrency risk-management company. Despite the massive deployment, TerraUSD deviated further from its intended value. 

Stablecoins are a part of the cryptocurrency ecosystem that has grown sharply in recent years, making up about $160 billion of the $1.3 trillion crypto universe as of Monday. As the moniker implies, these assets are supposed to be the nonvolatile cousins of bitcoin, dogecoin and other digital assets that are prone to sharp swings. 

Crypto traders and market observers had warned in recent months on social media that TerraUSD could deviate from its $1 peg. As an algorithmic stablecoin, it relied on traders to act as a backstop to maintain the stablecoin’s value by giving them incentives. If traders’ desire to hold the coins waned, some warned, it could cause a wave of selling of both, called a death spiral.

To stave off those concerns,

Do Kwon,

a South Korean developer who created TerraUSD, co-founded the Luna Foundation Guard, a nonprofit in part charged with building a mass of reserves to act as a confidence backstop. Mr. Kwon said in March that the organization would purchase up to $10 billion in bitcoin and other digital assets. But the organization didn’t amass that much before the crash.

Mr. Kwon’s company Terraform Labs funded the foundation through a series of donations beginning in January. The foundation also raised $1 billion to start its bitcoin reserves by selling that amount of the sister token Luna to cryptocurrency investment firms including Jump Crypto and Three Arrows Capital, announcing the deal in February.

As of May 7, the foundation accumulated about 80,400 bitcoins, worth roughly $3.5 billion at the time. In addition, it had almost $50 million worth of two other stablecoins, tether and USD Coin. Issuers of both stablecoins have said their coins are backed by dollar assets that are easily sold to meet redemptions. The reserve also held cryptocurrencies Binance coin and Avalanche.

Traders’ desire to hold both assets waned following a series of large withdrawals of the stablecoin from Anchor Protocol, a kind of crypto bank where users parked money to earn interest. This wave of selling grew, causing TerraUSD to fall below $1 and Luna to spiral with it. 

The Luna Foundation Guard said that on May 8, as the price of TerraUSD began to drop, it began converting reserve assets into the stablecoin. In theory, selling bitcoin and other reserves could have helped stabilize TerraUSD by creating demand for the asset as a way to reinvigorate faith. This is similar to how central banks defend their falling local currency, by selling currencies issued by other countries and buying their own. 

The foundation said it transferred bitcoin reserves to another counterparty, enabling them to enter into large trades with the foundation. In total, it sent over 50,000 bitcoins, about 5,000 of which were returned, for about 1.5 billion of the TerraUSD stablecoins. It also sold all of its tether and USDC stablecoin reserves for 50 million TerraUSD.

When that failed to support the $1 peg, the foundation said that Terraform sold about 33,000 bitcoins on behalf of the foundation on May 10 in a last-ditch effort to bring the stablecoin back to $1. In return, it got about 1.1 billion TerraUSD. 

To execute these trades, the foundation moved funds to two cryptocurrency exchanges: Gemini and Binance, according to an analysis by Elliptic. 


Why do you think cryptocurrencies TerraUSD and Luna unraveled? Contribute to the conversation below.

While large cryptocurrency exchanges were likely the only institutions in the ecosystem that could process the large trades that the foundation needed to do quickly, it also caused concern among traders as both TerraUSD and Luna spiraled. Unlike with peer-to-peer transfers in crypto, specific trades executed within centralized exchanges aren’t visible on the public blockchain, the digital ledger that underlies crypto transactions. 

Despite the foundation’s timeline, the inherent lack of transparency has caused investor concerns about how the funds were used among some traders. 

“We can see the movements on the blockchain, we can see the funds move to these large centralized services. We don’t know the motivations behind these transfers and whether they were transferring them to another actor or whether they were transferring the funds to their own accounts on these exchanges,” said

Tom Robinson,

co-founder of Elliptic.  

The Luna Foundation Guard didn’t respond to The Wall Street Journal’s requests for an interview. Mr. Kwon didn’t respond to requests for comment. The foundation said earlier this month that it still had about $106 million in assets that it will use to compensate remaining holders of TerraUSD, beginning with the smallest holders. It didn’t provide specifics on how this compensation might work.

WSJ’s Dion Rabouin explains why Wall Street is now betting big on crypto and what that means for the new asset class and its future. Photo composite: Elizabeth Smelov

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