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Five questions Luna investors who want to seek recourse should ask

Five questions Luna investors who want to seek recourse should ask

Source: Straits Times
Article Date: 21 Jun 2022

When referring to "misrepresentations", it is important to understand how TerraUSD and Luna defined their products.

It has been described as the "Lehman Brothers" event of the crypto world and heralded to bring forth a cryptocurrency winter. The collapse of TerraUSD, one of the largest algorithmic stablecoins, has sent shockwaves across the world.

The stablecoin was not backed by fiat currency or financial assets, but by another token, Luna. Luna and TerraUSD are tokens that run on the Terra network, a blockchain-based project developed by start-up Terraform Labs, which is registered in Singapore.

TerraUSD was pegged to the US dollar such that if TerraUSD ever falls below US$1, an investor can trade the stablecoin for an amount of Luna tokens worth up to US$1. The Luna token, the market value of which dropped by over 98 per cent within one day was in turn backed up by reserve Bitcoin. However, only 0.039 per cent of the Bitcoin are left in the reserves as most had been sold since the start of the crisis, leaving many Luna investors seeking recourse.

Here are five questions Luna investors should ask.

1 DO I STILL HAVE THE RIGHT TO SUE?

To circumvent the problem of a worthless Luna, Terra created a new blockchain which 65 per cent of Luna holders voted in favour of on May 25. With the vote, users will be given new Luna tokens in place of their old ones on a new blockchain. Based on current distribution, users will receive a proportionate percentage of new tokens, with more tokens promised to be vested at a later time.

Given this, the first obstacle that Luna investors may face is a claim that they have as a whole waived their right to sue for losses. It would not be surprising to see challenges made to question the legal basis of the vote, although it would be impossible to reverse the creation of the new blockchain and its consequential effects given that the new tokens can be traded on exchanges.

An investor claiming losses would likely have to show that the present - and quite possibly the future - value of these newly issued tokens, including those that are not yet vested, are worth less than the old Luna tokens. Luna investors might face a complex battle over the valuation of the old and new Luna tokens.

2 DO WE HAVE STRENGTH IN NUMBERS?

A class action lawsuit has commenced in the South Korean courts against Terraform Labs, while another class action is reportedly brewing in the United States. However, the Terra user terms have a provision that states that investors have waived their right to participate in a class action suit.

It remains to be seen whether such clauses are enforceable under the relevant arbitration law.

Under the rules of the Singapore International Arbitration Centre (SIAC), it is possible to have a "class action" arbitration, even if a defendant does not agree to one, where the disputes arise out of the same transaction or where the claims are compatible and closely related to each other. This applies similarly to both Singapore-based and international investors.

3 WHERE CAN WE SEEK RECOURSE?

Luna investors would have to be strategic when selecting the forum to seek recourse.

The Terra user terms have an arbitration agreement that provides for disputes to be resolved by arbitration in Singapore.

An older version of the Terra user terms (dated July 12, 2018) prescribes that "Singapore will govern any dispute related to these terms or your use of the forum" with an American Arbitration Association's clause.

Where parties pursue claims that fall beyond the scope of the arbitration agreement, they may attempt to bring a class action suit in Singapore courts, referred to as "representative proceedings" under Singapore's rules of court.

In a recent landmark decision, Withers KhattarWong secured a worldwide proprietary injunction for the first time over a non-fungible token, and it can be seen from that case that the Singapore courts could decide matters over assets in the blockchain.

It would be interesting to consider how any Singapore proceedings would interact with the proceedings brought in South Korea and other countries.

4 WHAT EXACTLY WAS MISREPRESENTED?

While TerraUSD was not backed up by fiat currency but by the Luna token (which was in turn backed by another token effectively - Bitcoin), there does not appear to be any universal authority on what constitutes a "stablecoin" or at least a legal definition of a "stablecoin" that is widely applicable across different countries.

There are technical representations in the TerraUSD and Luna Whitepaper. When one refers to "misrepresentation", it is important to understand how TerraUSD and Luna defined their products, what was omitted and what were the reasons for incorrect details, if any at all, in their representations.

5 WHO ARE WE COMPETING WITH?

Luna investors would be considering how they could obtain compensation in the event of a successful claim, and in this regard, they could be competing amongst themselves in the light of proceedings and judgments that might be obtained by different groups of investors from legal proceedings in different countries.

It has been reported that the South Korean authorities are looking into alleged tax evasion penalties constituting about US$78 million (S$108 million) against Terraform Labs and related individuals. This gives rise to the question of how potentially competing claims between the South Korean authorities and different groups of investors can be managed.

  • Shaun Leong is a partner in the international arbitration and litigation team at Withers KhattarWong.

Source: Straits Times © SPH Media Limited. Permission required for reproduction.

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