Yield generation app Stablegains could be subject to a class-action lawsuit after investing over $44 million of client cash in Terra’s now-collapsed UST stablecoin.
Stablegains Loses Customers’ Funds
The consequences of Terra’s meltdown continue to worsen.
Stablegains, an app that promised customers a 15% annual percentage yield (APY) in USD, is likely to face legal action after losing over $44 million of depositor’s funds. Erickson Kramer Osbourne, a San Francisco Bay Area law firm, requested Stablegains to provide records of its clients’ accounts, marketing and promotional materials, and other documents related to the UST stablecoin.
“You owe an ‘uncompromising duty to preserve’ any evidence you know or reasonably should know relevant in a pending lawsuit, even though no case has been filed.” The request letter hints that the law firm is prepared to file a lawsuit soon.
Then, it was uncertain how much exposure Stablegains had to UST, which catastrophically de-pegged less than a week ago. However, on May 15, the co-founder of Stablegains, Kamil Ryszkowski, disclosed the company’s investment losses in UST.
In a post to Terra’s research forum, the CEO said that his business held 47,611,058 UST from 4,878 depositors and requested that the Stablegains wallet had to be included in any future Terra user compensation package. At UST’s current market price of $0.07, it seems that Stablegains has lost nearly $44 million of its clients’ funds.
The Story of Stablegains
Stablegains is a member of Y Combinator’s W22 cohort and has garnered more than $3 million in funding from many venture capital firms, including Moonfire, Goodwater Capital, and SNO Ventures. The founders of Stablegains graduated from prestigious London colleges and were previously in executive positions at well-recognised firms.
Despite its solid backing, there were indications that Stablegains was not all that it was made up to be. It promotes itself as a “simple and safe” method for consumers to take advantage of “advances in financial technology.” The Stablegains’ website reassured consumers that the value of their deposited funds will stay steady “regardless if the crypto markets are soaring or crashing.”
Stablegains converted customers’ U.S. dollar deposits to UST and deposited them into Anchor Protocol. Before the stablecoin lost its peg and wrecked the Terra ecosystem, the Terra-based lending and borrowing Defi platform Anchor promised 18% APY on UST deposits. Stablegains deducted 3% from Anchor’s yields and returned 15% to consumers.
Stablegains could only have obtained such profitable returns on stablecoins by using Anchor. It’s worth noting that the company’s website previously misled clients. An article discussing the hazards of crypto stablecoins and how Stablegains mitigates them said that the company generated returns primarily via USDC, with lesser allocations to UST and DAI to diversify its holdings. However, in an update on the UST de-peg situation published on May 17, the company acknowledged keeping all customer assets in UST.
Related articles: Investor Loses $20M And Files Lawsuit Against The Olympus DAO’s Founder
Do the Plaintiffs Have a Case?
Many Stablegains’ depositors may have been misled about the risks involved and the firm’s use of their deposits. In addition to the inaccurate asset allocations and deceptive advertising, Stablegains seems to be aiming to fool its consumers into waiving their right to sue the firm. Investors are furious and have taken to Twitter to voice their anger given what has happened.
If you haven’t seen yet, we have enabled USDC withdrawals at the UST market rate. You can now withdraw USDC to e.g. Coinbase and trade for USD, that you can later withdraw to your bank account.
Read more here: https://t.co/AepQhv19EA
— Stablegains (YC W22) (@stablegains) May 15, 2022
After a week of uncertainty for Stablegains subscribers, the company stated that it would once again permit withdrawals in UST and USDC. However, USDC would only be issued at the value of UST on the market. Several discerning customers noted that Stablegains had included a clause in the terms and conditions for withdrawing USDC.
“Under no circumstances shall Stablegains be liable to losses due to the exchange rate of UST to USDC at the time of processing your USDC withdrawal request.”
This implies that Stablegains holds consumers’ funds until they agree not to sue the firm by inserting this clause.
Uncertainty exists as to whether the upcoming class-action lawsuit against Stablegains will proceed. However, evidence of fraudulent advertising and deposit misrepresentation is evident. The company’s efforts to dissuade consumers from pursuing legal action may imply that Stablegains anticipates an impending lawsuit and is desperate to quash potential plaintiffs.
Even if the full effect of Terra’s failure is yet unclear, the Stablegains story demonstrates that the damage has been tremendous across the industry.