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Explainer: Crypto crash — why it's difficult for burned Luna, TerraUSD investors to seek financial recourse

SINGAPORE — Many young investors here lost significant chunks of their life savings in a span of days when a popular cryptocurrency went into meltdown. They were left wondering if they could recover the money, or if the authorities could help.

Explainer: Crypto crash — why it's difficult for burned Luna, TerraUSD investors to seek financial recourse
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  • Some lawyers said that there is typically little recourse for investors in unregulated products such as cryptocurrencies
  • Others believe that this may depend on whether there has been wrongdoing by stakeholders
  • One example would be a misrepresentation of what a "stablecoin" is
  • A managing director of a law firm said that the crash has called to question the "classical notion of a stablecoin"
  • Given the nature of cryptocurrencies, it is hard for regulators to devise policies to help protect investors, lawyers said

SINGAPORE — Many young investors here lost significant chunks of their life savings in a span of days when a popular cryptocurrency went into meltdown. They were left wondering if they could recover the money, or if the authorities could help.

Some were left puzzled at the description of TerraUSD, better known as UST and its affiliated cryptocurrency Luna, as a "stablecoin", which gave them the impression it was perhaps safer than other cryptocurrencies. 

One person filed a police report, though TODAY understands that the police are not investigating the matter.

The “concerned citizen”, who wrote on Twitter that the police report was filed, also called the coin a "Ponzi scam" that "became worthless overnight". 

This all happened after TerraUSD broke its 1:1 peg to the United States dollar and crashed in value. While "stablecoins" have no real legal status, they are linked to the value of assets such as the US dollar.

Luna, once ranked among the top 10 most valuable cryptocurrencies, has since plunged to virtually zero from an all-time high of US$119.18 set on April 5 this year.

Luna and TerraUSD (UST) are tokens that run on the Terra network, a blockchain-based project developed by start-up Terraform Labs, which is registered in Singapore.

In response to queries on possible recourse for investors, a Monetary Authority Singapore (MAS) spokesperson reiterated its stance on cryptocurrencies — that they are "highly volatile and often not anchored on economic fundamentals", which means that they are "highly risky and not suitable for retail investors". 

"Certain cryptocurrencies are promoted as having a stable value, commonly known as 'stablecoins'. However, even such stablecoins have experienced fluctuations in market price. 

"MAS has consistently warned the public on the risk of trading in cryptocurrencies," the spokesperson said. 

So, do investors have no means of recourse?  

TODAY spoke to lawyers to find out if there is anything that can be done, what distinguishes promotions and marketing tactics from scams and whether the authorities can do anything to help investors who have lost money.

WHAT RECOURSE IS THERE FOR INVESTORS? 

Although some lawyers said that there is typically little recourse for investors in these kinds of products, some believe that it depends on whether there has been wrongdoing by stakeholders or a counter-party. This could involve, for example, any misrepresentation of what a "stablecoin" is.  

Mr Shaun Leong, partner in the international arbitration and litigation team at law firm Withers KhattarWong, said that investors may consider a class action proceeding through either arbitration, mediation or court.

"But, it really depends on what their contractual rights are. It really depends on what was represented in the White Paper, whether there are any expressly selected choice of dispute resolution options there." 

A White Paper refers to a document that explains the technology and purpose of the project, aimed at informing prospective investors how the cryptocurrency was conceived and its purpose. 

Mr David Chan, a partner at law firm Shooklin and Bok, told TODAY in an email interview on Thursday that it may be too early to tell if there is any possible wrongdoing by stakeholders such as TerraForm Labs or its co-founder and chief executive officer Do Kwon at this point. 

"There is currently fact-finding going on by interested stakeholders as to whether Luna Foundation Guard properly deployed its bitcoin reserves to defend UST’s peg.

"If evidence of wrongdoing emerges, there may be civil causes of action available to certain investors given that TerraForm Labs is incorporated in Singapore," Mr Chan said. 

Mr Koh Chia Ling, managing director of law practice Osborne Clarke, said though, that there may be little recourse for these investors since the terms and conditions for the sale of a coin have been set out to protect the creators and founders.

He added: "A possibility is misrepresentation, fraud or deceit, but all that will depend on what creators and founders say or do to induce investments." 

BUT WAIT, WHAT IS A STABLECOIN?

Stablecoins are digital tokens pegged to the value of traditional assets such as the US dollar. Often promoted as a stable means of exchange, these coins are often used by traders to move funds around when speculating on other cryptocurrencies.

However, "stablecoin" is not a legal term under Singapore law.

Mr Adrian Ang, partner and co-head of fintech practice at Allen & Gledhill LLP, said: "In common parlance, the term is often used to refer to a digital token that does not fluctuate in value (as compared to cryptocurrencies such as bitcoin) and has a somewhat fixed value referenced via a fiat currency (any sovereign currency such as the US dollar or Japanese yen)."

Methods that issuers use to create stability include collecting fiat currency as collateral for each stablecoin issued, or taking cryptocurrencies as collateral instead, he explained.

However, in general, these stablecoins "are not subject to any statutory protection for their trading of stablecoins (that are digital payment tokens)," Mr Ang added.

"Should a stablecoin experience a dramatic fall in value (from the fiat currency that it is meant to be pegged to), any recourse available to the investors will likely revolve around the circumstances surrounding the terms under which the investor purchased the stablecoin and any potential promises provided by the issuer of the stablecoin to the investor." 

Other lawyers said that the crash has called into question the "classical notion of a stablecoin". 

Mr Leong from Withers KhattarWong said: "Because, for example, if you use the word 'cryptocurrency', people confuse it with a real currency. That is questionable.

"When you use the language 'stablecoin', people confuse it and think that it is the most stable out of the cryptocurrencies... but this is not necessarily true."

HOW ARE PROMOTIONS DIFFERENT FROM SCAMS? 

Even if most of the attractive, too-good-to-be-true promotions offered are unlikely to be straight-out scams, the lack of regulation of cryptocurrencies has allowed these investment channels to get away without having to explain their strategies or underlying technology in great detail. 

Mr Yam Wern-Jhien, a partner in law firm Rajah & Tann’s commercial litigation practice group, said: "Many of these platforms do offer legitimate trading strategies, backed by legitimate underlying technology or algorithm.

"The trouble is that too many investors simply do not understand the exact nature of the trading strategies, or the underlying technology, or even the high-risk nature of the investments."

Investors should also do some research into the decentralised finance platforms where they are looking to park their investments. 

Mr Mike Chiam, partner at PDLegal LLC, a commercial law practice with expertise in fintech, blockchain and cryptocurrency related matters, said: "As investing in technology becomes popular, more retail and non-accredited investors jump on the investing bandwagon and to available platforms offering attractive deals and promotions." 

WILL THE AUTHORITIES BE ABLE TO HELP AFFECTED INVESTORS? 

The lawyers generally agreed that there is little that the MAS or other authorities can do to help those who have been burnt by the crash.

Mr Koh from Osborne Clarke said: "MAS cannot do much more for these investors aside from investigating for regulatory offences. MAS does not have the duty or the power to reinstate investment losses." 

He added that regulations alone would not have been able to prevent the crash and that cryptocurrencies "do not pose a significant systemic or widespread consumer risk". 

However, given the nature of the cryptocurrency space, it is hard for regulators to formulate policies that can help protect investors or keep track of businesses.

Mr Chia Hock Lai, co-chairman of the Blockchain Association Singapore, said: "Given the rapidly evolving nature of crypto assets, and the underlying blockchain technology, no regulation will be perfect and able to plug all gaps in a timely manner.

"Close collaboration with industry associations will be one of the more effective means to address the challenges." 

Mr Ang from Allen & Glenhill LLP said: "Given the speed in which cryptocurrency services develop, regulators have to stay in step with such developments and ensure that regulations that address such regulatory risks are put in place promptly."

He added that the amendments to the Payment Services Act 2019, which were passed in January this year to expand the definition of digital payment token service, would be able to address the emerging regulatory risks posed by such services.

Related topics

cryptocurrency MAS investment lawyers legal recourse stablecoin

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