Crypto investors threaten Terraform founders with class-action lawsuit

Cryptocurrency investors in South Korea have threatened to file a class action lawsuit against co-founders of the disgraced blockchain platform operator Terraform Labs. 

The 31-year-old Terraform Labs CEO Do Kwon founded the company with Ticket Monster founder Shin Hyun-sung back in 2018.

Managers of the newly formed online community “Victims of Terra-Luna coin” wrote they are suing Kwon and Shin for what they claim as “the violation of anti-fraud regulations and similar activities.” 

The price of UST and Luna stood at $0.14 and $0.0002, respectively, on Friday. Both are supposed to be pegged to $1.

They posit that Terraform Labs engaged in fraudulent activity by introducing an unsustainably high-yield staking product early last year. 

To understand this claim, here is a crash course on the Terra ecosystem. 

UST is a stablecoin; and its value is pegged to the greenback. Luna is the native token for the Terra ecosystem and the reserve currency for UST.

UST differs from other stablecoins like Tether and USD Coin in that it is not backed by any real-world assets such as bonds. In this sense, the success of the Terra ecosystem is dependent on investors' confidence that the Luna in circulation will not decrease in value. 

What the online community managers are pointing at is the decentralized finance (DeFi) protocol Anchor, which the company used to support the price of Luna. 

Anchor is a savings, lending and borrowing platform built on the Terra platform, which allows users to earn up to 19.5% in yields on UST deposits and take out loans against holdings. Critics have previously pointed out that high-interest rates are unsustainable given how expensive it would be to maintain those rates.

At one point, a whopping 70% of all UST liquidity was deposited into Anchor.

In addition to the lawsuit, the online community managers also plan to file a police complaint after getting some 20 investors together.

FINANCIAL WATCHDOGS 

The sudden demise of homegrown cryptocurrency has prompted Seoul to embark on an emergency assessment of digital assets.

The country’s top financial watchdogs have asked major cryptocurrency exchanges such as Upbit and Bithumb to submit information regarding Luna and UST trade including, but not limited to trade volume; number of investors; and the breakdown of investors by holding size. 

Even though the Financial Services Commission and the Financial Supervisory Service do not have jurisdiction over Singapore-based Terraform Labs, the organizations are compiling such information in an effort to minimize damage to investors at home.

The FSC estimates some 280,000 investors possess around 70 billion Luna or UST in the world’s tenth-largest economy.

The regulators are already in the process of establishing the “Digital Asset Basic Act” — the country’s upcoming regulation on cryptocurrencies. 

The act is slated to be legislated next year and to go into effect by 2024.

TWO-PART RECONSTITUTION PLAN

In the midst of such a debacle, Kwon announced the company’s latest plan to revive the Terra ecosystem Tuesday. 

The CEO began by tweeting that Terra is more than just its stablecoin.

His first proposal involves redistributing Luna tokens and abandoning UST. In turn, the second proposal involves forking or splitting the existing blockchain – but with a few tweaks. 

The troubled company will put forth a new governance proposal Wednesday to fork the existing blockchain. It involves creating a new chain from the fork without the algorithmic stablecoin. 

The old chain would be called Terra Classic with the token Luna Classic (LUNC,) and the new chain will be called Terra with the LUNA token.

The CEO of Binance, Changpeng Zhao or CZ, criticized the plan by saying it doesn't add any value. 

The world’s largest cryptocurrency exchange announced Friday it will remove Luna and UST from its platform.

Binance had previously injected capital into Terraform as a seed investor. 

In related news, the South Korean police identified the intruder of Kwon's Seoul residence as an AfreecaTV streamer called Chancer.

The crypto influencer claims he has lost $2 million from investment into the Terraform ecosystem and is demanding a public apology from Kwon. 

Write to Jee Abbey Lee, Bo-Hyung Kim, Jin-Woo Park, Nan-Sae Bin at jal@hankyung.com
Jee Abbey Lee edited this article.