Details of SEC allegations against former TUSD operators: Sun Yuchen's team holds over 80% of the positions, with 99% of reserves invested in offshore funds

Author: Nancy, PANews

On September 25, the U.S. SEC announced on its official website that it has filed charges against TrueCoin LLC and TrustToken Inc. for the alleged fraudulent and unregistered sale of investment contracts related to TrueUSD (TUSD).

In the face of the SEC's regulatory crackdown, former stablecoin TUSD operators TrustToken and TrueCoin did not respond directly but quickly agreed to pay fines to resolve the crisis. Meanwhile, SEC documents revealed risks such as redemption difficulties associated with TUSD, and on-chain data indicated that TUSD is highly controlled. Whether TUSD's regulatory crisis can be safely resolved still awaits the approval of a settlement agreement, but its market confidence has already been challenged.

Over 99% of Asset Reserves in First Digital, Justin Sun's Team Holds Over 80%

According to the complaint submitted by the SEC to the U.S. District Court for the Northern District of California, TrueCoin is the issuer of TUSD, and TrustToken is the developer and operator of TrueFi. TrueCoin and TrustToken engaged in the unregistered sale of investment contracts from November 2020 to April 2023, promoting TUSD and its lending protocol TrueFi's profit opportunities to guide investor expectations. For instance, according to an article released by TrueFi in 2021, the annualized yield (APY) for TUSD lending was approximately 21.37%, and by the end of 2021, over 78 million TUSD (about 6% of the circulating supply at that time) had been lent out on the TrueFi protocol.

The documents also pointed out that TrueCoin and TrustToken made false statements regarding asset reserve support. Although these companies claimed that TUSD was pegged to the U.S. dollar at a 1:1 ratio, they invested "a significant portion" of TUSD-backed assets in a speculative and high-risk offshore investment fund to seek additional returns. For example, by March 2022, reserves worth $565 million in TUSD were invested in this fund, accounting for about 37% of TUSD's circulating supply.

The documents disclosed that this transfer behavior was particularly evident from the end of 2020 to mid-2023. During this period, TrueCoin sold the TUSD operation to an unrelated offshore entity in December 2020, while TrueCoin remained deeply involved in TUSD operations until at least July 2023. It was not until the fall of 2022 that TrueCoin and TrustToken attempted to redeem after realizing liquidity issues with the offshore investment fund, but their requests were delayed. After July 2023, multiple large-scale TUSD redemptions occurred after TrueCoin and TrustToken ceased their involvement in TUSD operations. However, as of September 2024, over 99% of the assets supporting TUSD were still invested in that offshore investment fund.

TUSD Asset Reserves Source: Moore Hong Kong

According to the reserve transparency report released by TUSD's Hong Kong auditing firm Moore Hong Kong on September 25, the total amount of TUSD is 495 million, with collateral valued at nearly $503 million. The collateral includes zero U.S. Treasury bonds, $1.092 million in cash, and nearly $502 million in First Digital Trust Limited, accounting for about 99.8%. From this data, it appears that the offshore investment fund mentioned by the SEC may be First Digital, and the increase in the fund's reserve from the original 37% of circulating supply to now 101.4%, along with the small proportion of other collateral, suggests that TUSD's redemptions during this period were completed through U.S. Treasury bonds and cash reserves.

"The $500 million reserve corresponds to the funds held in First Digital as stated in the Moore report. There are reports that First Digital is experiencing some issues and may not be able to retrieve the funds. The amount of $500 million held in First Digital has not changed in the Moore transparency report, which seems to corroborate this. If the funds in First Digital are difficult to redeem, then TUSD is essentially worthless," said blockchain analyst @defioasis. On-chain data shows that over 80% of TUSD is now controlled by Justin Sun's team, with an address suspected to belong to Justin Sun (0x9F…19Fe) accounting for 50% of the total; JustLend holds 146 million TUSD, accounting for 30%; the SUN io pool has 6.5 million TUSD, accounting for 1.3%; the remaining amount is distributed among exchanges like Binance and unmarked addresses.

@defioasis further pointed out that the largest use case for TUSD is currently in JustLend, where TUSD can be staked to obtain other assets like USDT. Currently, the largest lent asset in JustLend is USDT, with a loan amount of $63.44 million. Additionally, Justin Sun's team uses the stablecoin stUSDT for RWA, which can be minted using USDT and TUSD on the Tron network. The total amount of stUSDT is 225 million, with 72% of the total held in HTX and 8.24% held by Justin Sun (0x17…a132). He believes that TUSD may already be a shell, and its total amount has significantly reduced, primarily controlled by Justin Sun's team, indicating that the issue of empty circulation may not be significant.

"TrueCoin and TrustToken sought their own profits through false statements regarding investment security, exposing investors to a large number of undisclosed risks. This case is a typical demonstration of the importance of registration, where investors were deprived of the key information necessary to make fully informed decisions regarding such products," stated Jorge G. Tenreiro, acting head of the SEC's Crypto Assets and Cyber Unit, in a statement.

Settlement Agreement Still Needs Approval, Large Movements After Charges Filed

In the past, most crypto projects sued by the SEC often opted to pay settlement fees to resolve the charges.

According to the SEC's disclosure, TrueCoin and TrustToken agreed to accept a final judgment prohibiting them from violating relevant provisions of federal securities laws without admitting or denying the charges, and each will pay nearly $164,000 in civil penalties. TrueCoin also agreed to return approximately $656,000 in profits and interest.

However, it is important to note that this settlement agreement still requires court approval, and the SEC's investigation is ongoing. According to the SEC's litigation procedures for settlements, after law enforcement and the parties reach an agreement on the settlement terms, the settlement documents must be submitted to a judge for approval.

After TUSD was charged, Justin Sun's on-chain address exhibited significant movements of TUSD. According to Arkham data monitoring, the suspected Justin Sun address 0x9FCc transferred 72 million TUSD to HTX in the past 12 hours, and this address currently holds nearly 170 million TUSD. Additionally, on-chain analyst Yu Jin pointed out that related addresses of Sun's team transferred a total of 216.6 million TUSD from the Tron and Ethereum chains to HTX last night. With TUSD's total supply being only 495.5 million, Justin Sun's team-related addresses hold 390 million.

Moreover, due to the SEC's charges, DEX Curve is considering removing TUSD from its collateral list for the stablecoin crvUSD. The proposal states, "crvUSD is overly reliant on small stablecoins, especially TUSD, which has shown questionable performance in the past and has recently been charged by the SEC for defrauding investors. LlamaRisk (Curve's lending platform) has always been skeptical of TUSD and recommends stakeholders review the public evidence provided by TUSD. These evidences show that nearly 100% of the reserves are related to a Hong Kong custodian: the Hong Kong custodian also invests in other financial instruments to generate returns, which may not be quickly convertible to cash and are subject to market conditions or fund performance. Based on publicly available information, we cannot determine whether the asset reserves supporting TUSD are liquid or whether the stablecoin is solvent. What we do know is that TUSD experienced a long period of decoupling after being delisted from Binance in February, with its supply dropping from $3.3 billion in November 2023 to $500 million in April 2024, and since then, the supply has remained significantly stable, indicating that public interest in the stablecoin is low and may primarily be held by insiders. In fact, 78% of the Ethereum supply (about 50% of the total supply) is held by EOA (Externally Owned Accounts) related to Justin Sun. Therefore, completely removing crvUSD's exposure to TUSD may be a wise move."