After Luna crash, authorities say not much they can do

Financial authorities are keeping an eye on the cryptocurrency market following the crash of TerraUSD cryptocurrency and its sister token Luna, but admit there's not much they can do immediately.

Terraform Labs CEO Do Kwon. [SCREEN CAPTURE]

Financial authorities are keeping an eye on the cryptocurrency market following the crash of TerraUSD cryptocurrency and its sister token Luna, but admit there's not much they can do immediately.

TerraUSD and Luna were developed by Singapore-incorporated Terraform Labs, which was founded in 2018 by two Koreans, Do Kwon and Daniel Shin. The company devised an algorithmic system designed to maintain a dollar peg by incentivizing arbitrage between the TerraUSD and Luna coins.

When the system failed on Wednesday, the price of Luna collapsed.

The Financial Services Commission and the Financial Supervisory Service plan to enact a law on digital assets next year to protect investors, according to local media reports on Sunday, although the law wouldn't be implemented until 2024.

“In regards to the Luna incident, we are monitoring the overall situational changes, but there isn’t a direct measure the government can take at this moment,” a spokesperson for the financial authorities told the Yonhap news agency. “There is no ground for the government to intervene because coin transactions are being freely operated by the private sector.”

The spokesperson added that financial authorities only have the right to supervise coin transactions linked to money laundering.

The Korean Financial Intelligence Unit under the Financial Services Commission is in charge of tracking money-laundering of cryptocurrencies in Korea.

TerraUSD, designed to maintain its value at $1, fell to as low as 23 cents on Wednesday. It traded around $0.19 on Sunday, according to CoinGecko. Luna, which is traded in exchange for TerraUSD to maintain its peg to $1, nosedived almost 100 percent overnight on Thursday after trading at about $80 just one week ago. It traded at around $0.0003 on Sunday.

Kwon, CEO of Terraform Labs, issued an apology to investors on Saturday.

“I am heartbroken about the pain my invention has brought on all of you,” Kwon wrote on Twitter. “Neither I nor any institutions that I am affiliated with profited in any way from this incident. I sold no Luna nor ust (TerraUSD) during the crisis.”

“It will become difficult for algorithm-based stablecoins to properly function in the future,” said Han Dae-hoon, an analyst at SK Securities.

Stablecoins are cryptocurrencies the value of which is pegged to another currency, like the TerraUSD.

The recent crash “will inevitably lead to the withering of other stablecoins. The cryptocurrency market is projected to contract in the short run amid inflation pressure and regulations on stablecoins,” Han added.

"A stablecoin known as TerraUSD experienced a run and had declined in value," said U.S. Treasury Secretary Janet Yellen when she testified before the Senate on Tuesday. "I think that simply illustrates that this is a rapidly growing product and that there are risks to financial stability."

Following the crash, a crypto investor trespassed on Kwon’s residence in Seongdong District, eastern Seoul, on Thursday. The man, who was said to have invested 2 billion won ($1.6 million) in Luna, rang the doorbell and asked Kwon’s wife if he was at home. He then fled, but Kwon’s wife requested emergency protection.

The man turned himself in, according to the police on Friday.

Stanford-educated Kwon, 30, was once called the Elon Musk of Korea, but is now being called the Elizabeth Holmes of crypto. He was an engineer at Apple and Microsoft before starting Terraform Labs.

Major cryptocurrency exchanges globally, including Binance, have halted trading of TerraUSD and Luna following the meltdown.

Kwon pitched a comeback plan in a post on a Terra discussion forum on Saturday.

“The Terra community must reconstitute the chain to preserve the community and the developer ecosystem,” he wrote.

The plan caused the Luna price to surge over 1,000 percent as punters bet the project could recover.

BY JIN MIN-JI [jin.minji@joongang.co.kr]