The focus on possible market manipulation adds to the legal storm brewing around Bankman-Fried. It is illegal for an individual to knowingly stage market activity designed to move the price of an asset up or down.

TerraUSD was a so-called stablecoin, but unlike other stablecoins, its value wasn’t backed directly by the US dollar. Rather, it maintained its value from a second coin called luna through a complex set of algorithms. Traders within the digital ecosystem could mint these coins, the prices of which would fluctuate based on how many were in circulation. Anytime the price of terraUSD fell, the supply of luna would increase, as traders created more luna to try to capitalise on the difference.

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In May, major cryptocurrency market makers — exchanges or individuals who arrange for buyers and sellers to be matched — noticed a flood of “sell” orders coming in for terraUSD, said one person with knowledge of the market activity. The orders were in small denominations, but they were placed very quickly, the person said.

The sudden jump in sell orders for terraUSD overwhelmed the system, making it hard to find matching “buy” orders for them. Under normal conditions, any sell orders that remained unfulfilled for too long would be matched with buy orders at a lower price. The longer the orders lingered without being matched, the more they forced down the price of terraUSD and caused a corresponding drop in Luna prices because of the way the two coins were linked.

The exact causes of the collapse of the two cryptocurrencies remain unclear. However, the bulk of the sell orders for terraUSD appeared to be coming from one place: Bankman-Fried’s cryptocurrency trading firm, which also placed a big bet on the price of luna falling, according to the person with knowledge of the market activity.

Had the trade gone as expected, the price declines in luna could have yielded a fat profit. Instead, the bottom fell out of the entire terraUSD-luna ecosystem. The collapse caused more trouble in the cryptocurrency industry, sending several prominent companies into bankruptcy and erasing about $US1 trillion in value from the crypto market.

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The ripple effects from the luna crash ultimately contributed to the collapse of Bankman-Fried’s business empire. In November, Caroline Ellison, chief executive of Alameda, told staff members that loans to Alameda were recalled as a result of the market chaos unleashed by the crash, according to a person familiar with the matter. But the funds that Alameda had borrowed were no longer easily available, Ellison told the staff, so the company used FTX customer funds to make the payments.

An attorney for Ellison did not return requests for comment.