A South Korean law firm is representing investors who lost millions of dollars due to last month’s $40 billion crash of the algorithmic stablecoin TerraUSD and its sister token Luna.
Terraform Labs founders Do Kwon and Daniel Shin, who created Luna, became the target of the crypto industry’s ire after the stablecoin lost its peg to the dollar. Its stabilization mechanism failed and caused Luna to hyperinflate, reducing its value to virtually zero.
Seoul-based LKB & Partners told local media it would file a lawsuit against the founders of Terraform, bringing two charges, including fraud. The company also told local newspaper Munhwa Ilbo that it had filed a seizure order with the Seoul Southern District Procuratorate to seize Kwon’s property.
The plaintiffs themselves are believed to include lawyers for LKB & Partners. The firm did not respond to a request for comment.
Other potential lawsuits may be pending. Investors who suffered losses from the Luna crash joined the moves against Kwon and Shin. A community called LUNAscam, hosted on South Korea’s online platform Naver, has amassed more than 1,700 members since its inception in mid-May.
It is unclear whether Terraform has engaged an outside attorney for legal advice. Last year, Kwon was represented by Dentons when the U.S. Securities and Exchange Commission charged him with violating its own rules and the Due Process Clause of the U.S. Constitution.
Luna’s crash also caused an implosion within Terraform. The company’s legal team, including Chief Counsel Lawrence Florio, General Counsel Marc Goldich, and Regulatory Counsel Noah Axler, resigned shortly after the stablecoin’s colossal collapse.
According to South Korean media, Kwon could be summoned to testify before the local government. National politician Yun Chang-Hyun asked Kwon and other local crypto exchange executives to explain their actions during the secondment. The local police also launched a criminal action investigation against Do Kwon.
The lawyers point out that any lawsuit against Kwon and his companies will be significantly impacted by the conclusion of the police investigations.
“If the police investigation is successful, the civil lawsuits could likely proceed on a much better evidence base,” said Daniel Lai, former in-house counsel at Uber, Crypto.com and Airwallex. “If the investigation is unsuccessful, I expect there will be a private and confidential settlement.”
Until then, Luna investors don’t have much to fall back on. In fact, it’s not even clear at this point who, or who, would be the right entity to sue, the lawyers say.
A potential lawsuit against Kwon or his companies has been likened to securities class action lawsuits in the United States: Most do not go to trial or settle out of court. Especially for crypto investments, investor protection is thin on paper.
“Generally speaking, in many countries, crypto-assets do not yet have the status of financial products or securities. It is therefore unlikely that victimized investors can claim securities fraud,” Lai said.
South Korean regulators said they were watching closely for any fallout from Luna’s collapse, but also added there was little they could do about it.
“It’s difficult to take specific action because there are no investor protection laws” in cryptocurrencies, said Koh Seung-beom, chairman of South Korea’s top regulator, the Financial Services Commission. , to local media, adding that regulators are closely monitoring changes in the price and trading volume.
Misrepresentation, fraud and embezzlement were listed as possible charges against Do Kwon. The possibility that the setup could have been a Ponzi scheme has also been suggested, but this is difficult to prove, especially since Luna’s coding was transparent to the public and its investors, even though the coding ultimately failed.
“The stablecoin, in its ‘death spiral’, appears to have worked exactly as the coding intended, given that there were articles and warnings that have already been articulated online about these issues; and there does not appear to be any specific ‘user protection’ regime applicable to stablecoins in relevant jurisdictions,” said Hoi Tak Leung, a Hong Kong-based attorney at Ashurst.
“Miscoding” issues are unlikely to be the basis of a fraud or misrepresentation claim, without additional factors involved, he explained.
“Often businessmen are just bad businessmen. They are guilty of being overly optimistic about their own business and tend to ignore or overlook risks, even when they are aware of the risks” “Drinking your own Kool-Aid doesn’t necessarily equate to cheating,” Lai said.
One possible remedy would be for plaintiffs to argue that Terra’s latest Luna whitepaper did not specify a threshold for issuing new coins. The whitepaper is a comprehensive document that discusses the theory and blueprint of cryptocurrencies, including the technology behind them. Initial Luna drafts capped the distribution of Luna coins at 800 million, but over 6 trillion Luna tokens were issued in May alone.
During a speech at the Asia Tech x Singapore Summit earlier this week, Singapore’s Deputy Prime Minister Heng Swee Keat used the collapse of stablecoins to warn retail investors against investing in the cryptocurrency. But he also admitted that digital dollars could transform finance.
The conundrum is part of the crypto’s growing pains, some advocates say.
Regulators are now facing increased pressure to impose strong rules and frameworks for trading digital assets and crypto.
“On a broader level, the failure of Luna and subsequent fallout illustrates the difficult balance between innovation and decentralization, and regulation and consumer protection,” Leung said.
But he added that regulators are unlikely to look favorably on projects and technologies that result in the loss of such massive sums of money that can then be “relaunched” without consequences for founders or compensation for impacted users.
On the other hand, this is good news for lawyers, as investors are now more likely to hire legal advisors to help them assess the risks of their crypto investments.
“Regardless of the outcome of these actions, business promoters should always exercise caution and balance in disclosing risk to their investors, and this should be done with the advice of attorneys,” Lai said.
These complex legal risks and ramifications could emerge sooner than expected. On May 16, Kwon offered stimulus plans that included creating a new blockchain and issuing new LUNA tokens. According to data from Terra Station, the official Terra blockchain wallet, 65% of all voters support the proposal. But impending legal action will inevitably complicate the response and reception of Terra 2.0.
“The fact that Luna holders will likely receive and accept Terra 2.0 tokens, what does this mean for the legal position of Terra 1.0 holders?” asked Lai.
An investment in Terra 2.0 may mean Luna investors have unknowingly waived their rights to any potential claims from the financial meltdown that took place in May.
Lawyers Still Bullish on Stablecoin
Nevertheless, some strongly believe in the resurrection of the algorithmic stablecoin. Even lawyers are optimistic about this revolutionary but risky form of financing.
Benjamin Bai, chief legal counsel at digital asset trading firm Amber Group, was an investor in Luna. Bai was until recently vice president and chief intellectual property counsel at Ant Group, which operates China’s largest digital payments platform.
“I really enjoyed the algorithmic stablecoin,” Bai said. “They had a unique product that failed, but that still doesn’t change the fact that it was a great idea.”
“Luna has been used in some e-commerce platforms, so it has a use case,” Bai added. “It’s a great experiment that failed. But that’s innovation.