The race to punish Terra-Luna of the United States and South Korea: Lessons toward avoiding another digital asset catastrophe

This comparative study analyzes the legal categorization and regulatory approaches adopted by the United States and South Korea in response to the collapse of Terra and Luna, two major digital assets issued by Terraform Labs (TFL) that lost nearly all their value in May 2022. The case highlights key challenges in regulating digital assets. This study examines the critical issue of defining digital assets within existing securities law frameworks, and the implications for policy formulation and investor protection. The Korean Capital Markets Act categorizes securities into six types, with Terra and Luna's classification hinging on their potential categorization as “investment contract securities.” In contrast, the U.S. Securities Act of 1933 (hereinafter, the Securities Act) provides a broader definition, also including “investment contracts.” This study examines key enforcement challenges in prosecuting Do Hyeong Kwon, TFL's CEO, under Korean criminal law if Terra and Luna are not classified as “investment contract securities,” requiring demonstration of intent to deceive under the Korean Criminal Code, which proves more challenging in secondary markets than primary markets. The U.S. wire fraud statute has a considerably broader scope. South Korea's Prosecutors' Office has criminally indicted Kwon, and Korean victims have filed civil actions against Kwon, whereas the U.S. has pursued both criminal indictment and civil enforcement actions by the Securities and Exchange Commission (SEC). If the SEC is successful, the funds recovered are distributed through the Fair Fund, which is unavailable in South Korea. This study contributes to the ongoing discourse on legal classification and regulation of digital assets, emphasizing the need for comprehensive frameworks that balance innovation and investor protection.