hankyoreh

The so-called Luna crash is claiming more and more victims as the South Korean cryptocurrencies Luna and TerraUSD have plunged by over 99% in value.

While major South Korean cryptocurrency exchanges have been rushing to contain the situation by delisting Luna, financial authorities are “observing matters closely” — but lack any direct means of protecting investors.

“In the absence of related laws, there isn’t anything we can do beyond observing how the [virtual asset] market situation is unfolding by means of domestic exchanges,” an official with Korea’s Financial Services Commission (FSC) said Sunday.

“We can’t do anything like forcing exchanges to delist [currencies] as in the stock market,” they added.

A Financial Supervisory Service official said the “potential for [the Luna situation] to pose risks for the established financial world is currently being investigated.”

As recently as May 1, Luna was being traded at over 100,000 won on South Korean and overseas markets. Around May 6, its price began dropping, losing over 99% of its value between May 9 and 10. As of Friday afternoon, it was all the way down to around 1 won (US$0.00078).

While South Korean coin investors are believed to have suffered major losses as a result of the fiasco, financial authorities’ hands are currently tied in terms of gauging the precise extent of damages or investigating and monitoring the companies responsible for issuing the coins — since no legal basis for doing so exists at present.

In the case of the stock market, the Capital Markets Act empowers authorities to conduct investigations and apply oversight on possible acts of price or accounting manipulation when a particular company’s shares drop dramatically in value.

But when it comes to cryptocurrency, the Act on Reporting and Use of Certain Financial Transaction Information — which went into effect late last year — only allows for monitoring of money laundering activities by exchanges and other virtual asset service providers. This means financial authorities have no recourse to protect investors through oversight or investigation, such as demanding information from Luna’s issuer, the blockchain firm Terraform Labs.

Could the problem be solved with the adoption of a “framework act on digital assets,” which President Yoon Suk-yeol included among his election pledges and government tasks?

Key terms in the legislation, which the FSC is reportedly preparing for next year with a plan to execute in 2024, include judicial procedures to allow the full recovery of profits from improper coin transactions; judicial procedures to allow the recovery of improper gains following investigation of unfair trading practices such as incomplete sales and market price manipulation; expanded insurance against hacking and system errors; and the fostering of specialized financial institutions connecting digital asset transaction accounts with banks.

The biggest limitation of the legislation is its inability to regulate assets issued overseas.

“If we create an industry framework act, that means protecting users from the coin issuance to circulation stages, but it’s unclear whether we would also be able to apply domestic law to coins like Luna that were issued overseas,” a source in the financial world explained. While Terraform Labs’ CEO Do Kwon is a South Korean national, the company is based in Singapore.

Many observers are suggesting that South Korean exchanges should be assigned suitable obligations. The same source said, “It appears that in cases where an overseas-issued coin is listed on the domestic market, they could examine whether the exchange did enough scrutiny on the risks.”

Analysts also said legislation should actively incorporate preventive measures rather than after-the-fact ones. One possibility that has been suggested is the use of “real assets” to shore up virtual ones in the case of “stablecoins” like Terra, where the emphasis is on stability.

“If we want to prevent another ‘Luna crash’ situation, I think one alternative would involve depositing real assets with a third party, rather than backing virtual assets with other virtual assets,” a source in the finance world told the Hankyoreh in a telephone interview.

By Noh Ji-won, staff reporter

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