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How Stablegains Customers Lost Everything – Business Insider

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    • Stablegains customers were promised 15% annual returns on their stablecoin investments. 
    • They didn’t know that their money was invested in terra (UST), the now defunct, cryptocurrency. 
    • Now customers are saying they were misled by the Y-combinator backed startup. 

This past April, Jonah began to fear the stock market’s decline would erase his family’s life savings. The Nasdaq had fallen 13.3% — its worst performance since October 2008 during the financial crisis. 

Jonah remembered 2008 well. That year, when he was 30, the tech startup he worked at in San Francisco shuttered. Having lost his job, he moved back to his native Australia, where the economy was better. As the


recession

destroyed his friends’ and family’s livelihoods in the US, he began to rethink investing in the stock market. Instead, Jonah kept most of his money in savings accounts.

But a few months ago, Jonah, who was back in San Francisco and working in financial services, worried that rising inflation was eating into his bank savings. So when he came across a new platform that offered an interest rate better than that of any traditional savings account, he was intrigued.

The platform, Stablegains, backed by the prestigious startup accelerator Y Combinator, advertised accounts that would hold a diversified set of cryptocurrencies pegged to the US dollar. Known as stablecoins, the digital currencies were meant to be less volatile than traditional cryptocurrencies. It also promised a 15% annual return, far higher than the national average interest rate of .07% for savings accounts.

Jonah, who wished to be identified by only his first name to preserve his privacy, said he transferred all of his life savings — $125,000 in total — to his Stablegains account. His aunt-in-law also asked him to transfer $40,000 of her savings into an account with the company.

Three weeks later, he had lost it all.

What Jonah didn’t know was that Stablegains had put nearly all of its customers’ money into a single stablecoin: terra (UST). That cryptocurrency lost billions in market capitalization during the crypto crash in May, and one terra is now worth less than a tenth of a cent. 

“I’ve been dealing with some loss in the last two years,” Jonah told Insider. “I lost my mom, I lost my grandmother. I lost my other grandmother. Now I’ve lost all my life savings. In this last week, like every 10 seconds, I think about what an idiot I’ve been and what a horrible situation I’ve put myself in.”

Jonah is one of more than 4,500 Stablegains customers who together lost upward of $40 million during last month’s crash without realizing they had invested primarily in terra. Insider spoke with 13 Stablegains customers, many of whom said they lost their life savings. Others said they were struggling to afford childcare or car payments. Several customers said they were prevented from withdrawing their money as the value of their holdings plummeted. All were shocked that what they thought of as a high-yield savings account had vanished, seemingly overnight. 

Then, at the end of last month, Stablegains announced it was shutting down altogether, leaving customers in the dark about how, if ever, they might recuperate their funds.

“We’re discontinuing the Stablegains service,” says a note on the company’s website. “Please withdraw your remaining funds.”

The company raised $3 million after Y Combinator

Founded in June 2021 by Kamil Ryzkowski and Emil Dalgård, both techies who had worked on a series of startups in Europe, the company promoted itself as a cryptocurrency alternative to a high-yield savings account.

In one online forum Ryzkowski wrote in April of last year that he wanted to provide everyday people with access to a blockchain lending platform called Anchor, which offered a 20% interest rate, without customers needing to know anything about Terra, the cryptocurrency platform the company used to transact. 

Because terra was a stablecoin algorithmically pegged to the US dollar, Ryzkowski reasoned in the post, his app could serve as a high-yield savings account and offer an assured 15% annual return. 

On the company’s website, however, he provided a different explanation of Stablegains’s services. In posts that have since been taken down or modified, Stablegains told users it invested in a diverse range of cryptocurrency assets — primarily, USDC, another stablecoin pegged to the dollar, that unlike terra, was backed by actual US currency.

FAQ from Stablegains website

Stablegains promised customers it was not fully exposed to the potential instability of one stablecoin.

Screenshot


“We allocate funds across a number of stablecoins to not be fully exposed to the potential instability of one stablecoin,” the founders wrote, in a since-edited Q&A post. “The main stable coin we use is USDC. The other stable coins we may also use are UST (Terra USD) and DAI.”

By December, the idea had caught on and the pair had secured a prestigious seat at last year’s Y Combinator program, raising over $3 million over two funding rounds. Ryzkowski and Dalgård declined Insider’s request to comment.

Customers unwittingly lost their life savings

Had Stablegains actually invested their customers’ money in USDC, most would have fared well through last month’s cryptocurrency meltdown. The aforementioned token rarely fell below 99 cents to the dollar.

But on May 9, as terra lost as much as 65% of its value, Stablegains informed customers through Twitter that the “depegging event” may affect peoples’ funds. The next day, the company sent an email telling customers that should terra continue to fall, their deposits could be at risk. 

Email regarding instability

An email from the company told customers their funds could be at risk.

Screenshot


At first, Keith Baldwin, a 44-year-old general surgeon who invested $177,000 into Stablegains, was confused. Baldwin said that after reading the website he was convinced Stablegains had promised it held a variety of cryptocurrencies.

The company even made guarantees about the safety of customers’ funds. “You will not lose your funds because all loans are 100% asset-backed,” read a post that has since been deleted from Stablegains’s website. 

All loans are 100% asset backed.

A since deleted post told customers they would not lose their funds.

Screenshot


“I was just kind of in disbelief to think that like literally within like a 12- or 18-hour period, our savings could just, poof, go up in smoke and be gone,” said Baldwin.

Baldwin’s experience was similar to those of many customers. Most were men, had never invested in cryptocurrency before but feared rising inflation, and ultimately felt that the company had assured them in numerous ways that their principal investment was safe. 

Dan Zuccari, a 33-year-old insurance account executive, said he had earmarked his $11,000 investment for the cost of childcare for his newborn son. “I have to build in daycare costs into my budget, which just makes things really tight in a time where everything’s getting more expensive,” he said. He also said the losses had caused a strain on his marriage.

That week, Stablegains also notified customers that it was disabling withdrawals due to market


volatility

. “I started checking the market and I tried to withdraw and I was not able to,”Anton Gorodniuk, a 34-year-old investment professional, told Insider. While Stablegains used to display customer funds in US dollars, that day Gorodniuk noticed that his balance was showing in UST. “I don’t need UST, I don’t have a UST wallet. I don’t know what this is; I need my dollar amount or USDC back because that’s what I put in there,” he said. 

Some customers said they had trouble withdrawing their money from Stablegains because of how quickly the currency crashed. Baldwin was scheduled to perform surgeries on May 12, when Stablegains reenabled withdrawals. He thought he would withdraw his funds after he finished, but he estimates that by the time he got home had lost another 70% of his investment.

​​Surprised by Stablegains admission that it had invested customers’ money in terra, another customer, Colin Tindall, decided to have a close read of the company’s terms of service. Buried deep into the 14 page document he found out that by using the firm’s services, Stablegains customers had agreed to allow the company to put their money in Anchor, the terra-based lending platform. 

At the same time, he said the terms were seemingly contradictory: it also implied customers had access to multiple cryptocurrency lending platforms and could choose where to put their money — a feature Tindall and others said they didn’t actually have access to.

“I never, ever, ever wanted terra,” Tindall said. “There’s a lot of things that say that their main stable coin is USDC, that they’re not fully exposed to the instability of any one coin.”  

Tindall, who is unemployed due to a car accident, said he lost $8,600 investing in Stablegains. 

“I feel like I was taken advantage of,” Murray Soland, a 61-year-old furniture refinisher, who invested $15,000 into Stablegains, told Insider, adding: “I remember when my mom was my age, she got ripped off by people in a different way. It’s the same thing. I felt I was targeted because, you know, I was uninformed and uneducated and, you know, weaker.”

Others lay the blame on Y Combinator for lending the platform an air of credibility. In a world in which US regulators have yet to lay out clear guidelines on what is and isn’t okay for crypto businesses, the company’s association with the accelerator assuaged many customers’ fears. “Personally, I am of the camp that I really don’t trust crypto and I don’t trust their valuations,” another tech worker in his early 30s, who wished to remain anonymous, said. “It really was the backing of Y Combinator that sealed the deal. It seemed suspicious, but it’s backed by Y Combinator, so I feel like we can trust what they’re claiming.”

Stablegains has since removed its Y Combinator badge from its website. Y combinator didn’t respond to a request for comment from Insider.

Now they’re struggling to recover their funds

Shortly after the crash last month, the law firm Erickson Kramer Osborne announced it was looking into a class-action lawsuit against Stablegains. But Kevin Osborne, a partner at the firm, recently told customers that ultimately the firm decided not to pursue actions against the company.

“We have learned that Stablegains carried no insurance to cover this event and has little in the way of liquid assets,” Osborne told Insider.

Other customers are holding out hope that the broader Terra ecosystem can be salvaged. The CEO of Terraform Labs, the company that created terra, proposed handing out a new token to holders of the old ones. On Friday, Stablegains distributed these new tokens, known as luna2, to its customers. But the tokens customers received are worth a fraction of what they previously invested. 

While Terraform Labs plans on distributing more tokens in the coming year, it’s unlikely it will restitute most Stablegains customers. It’s also unclear how Stablegains might distribute these new tokens, as it plans to shut down at the end of June. Stablegains did not respond to Insider’s request for comment on how it plans to distribute these new tokens after it shuts down. 

Politicians want to regulate cryptocurrencies — but it may be too late for Stablegains customers

Several regulators and politicians have also recently pushed for regulations on cryptocurrency investments.

On Tuesday, Sens. Kirsten Gillibrand and Cynthia Lummis introduced new legislation that would give the Commodity Futures Trading Commission oversight over cryptocurrencies. And last month, the Securities and Exchange Commission doubled the size of its unit focusing on crypto firms after the agency’s chair, Gary Gensler, announced plans to register and regulate cryptocurrency platforms. 

Lawyers for the law firm Eversheds Sutherland LLP who specialize in cryptocurrency compliance told Insider that cryptocurrency firms were still unclear about the government agency that has jurisdictional authority over the industry. 

While the SEC has enforced its securities rules against some crypto firms, Andrea Gordon, a lawyer with Evershed Sutherland, told Insider the agency had been inconsistent about how or against which companies it enforced its rules. 

“I think many in the crypto industry would like some additional guidance in this space,” Gordon said.

Gordon mentioned the case of a similar crypto lending platform called BlockFi, which the SEC fined $50 million for failing to register under the Securities Act and making misleading statements on its website regarding the level of risk in its loan portfolio. The platform agreed to pay an additional $50 million to settle similar charges in 32 states.

While she said Stablegains’ business practices might follow a similar pattern, the commission has not pursued any enforcement actions against the company. The SEC declined a request for comment from Insider on the issue.

Another lawyer from Eversheds Sutherland, Sarah Paul, told Insider the draft legislation announced by the Senate contradicts the SEC’s plans to regulate cryptocurrency firms. “Gensler has actually said he thinks most crypto tokens are securities under the Howey test,” Paul said, referring to the Supreme Court case the agency uses to determine whether it has jurisdiction over a transaction. “So this bill just flatly disagrees with that analysis.” 

While Paul said the bill might help clarify which agency actually has jurisdiction over cryptocurrencies, she also expressed reservations that the Commodity Futures Trading Commission, with one-sixth the budget of the SEC, is equipped to handle the task of regulating the industry.

But Paul is unsure whether the draft legislation, if passed, could help customers like those affected by Stablegains’ downfall. “I don’t know yet — I don’t think anybody knows,” she said. 

In the meantime, Murray, the furniture refinisher, has made his peace with the loss — sort of. 

In the next few months, he plans on retiring in the Dominican Republic. “There’s no way I’m ever going to get any money back, so all you can do is throw insults at him,” he said, referring to Stablegains’ CEO, Emil Dalgård.

“And not only that, it’s the Dominican Republic,” he added. “I can buy a couple of large beers for $5 and have everybody at the table do the same thing. And that’s what I’ll do. I’ve got nothing better to do.”

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