'Tera·Luna Incident' Shin Hyun-sung Fully Denies Charges... Three Key Issues in First Trial

①Securities Nature of Lunacoin
②Feasibility of the Business
③Where Lies the Responsibility for the Crash

The first trial for eight individuals, including former Chai Corporation CEO Shin Hyun-sung (38), a key figure in the cryptocurrency 'Terra·Luna incident' that caused damage worth thousands of billions of won, was held on the 30th at the Seoul Southern District Court Criminal Division 14 (Presiding Judge Jang Sung-hoon). The prosecution focused on proving the 'securities nature' of Luna coin, which is central to the violation of the Capital Markets Act, and demonstrating that the Terra project was unrealistic at the time of execution to substantiate their fraud charges. The defense countered by arguing there was no intent to commit fraud and that former CEO Shin was not responsible for the collapse of Terra·Luna.

[Image source=Yonhap News]

① Does Luna Coin Have Securities Characteristics?

The question of whether Terra·Luna has securities characteristics is the biggest issue in this trial. Recognition of the coin's securities nature is necessary to apply charges under the Capital Markets Act, which directly affects sentencing. The prosecution views Luna coin, created by former CEO Shin and others, as an 'investment contract security' and thus possessing securities characteristics. According to Article 4, Paragraph 6 of the Capital Markets Act, an investment contract security refers to a contractual right indicating that a specific investor invests money in a joint business between the investor and others and primarily receives profits or losses based on the results of the joint business performed mainly by others. The prosecution argued that there is a joint business between Luna investors and Terraform Labs in the Terra blockchain platform business, that Luna investors invested legal tender or virtual assets in this business, and that Terraform Labs exclusively controls the joint business. Luna holders thus obtain contractual rights to profits or losses from the business results, such as fees and seigniorage.

The defense argued that Luna coin does not have securities characteristics. Former CEO Shin’s side claimed, "It is difficult to recognize the joint business nature between the issuing corporation and Luna holders, as well as among Luna holders themselves, and because the business has been conducted and developed through the activities of many participants, the element of 'otherness' is also difficult to acknowledge." They added, "Since Luna holders do not have any contractual rights against the issuing corporation, the requirement to hold contractual rights is not met." They also cited the Seoul Southern District Court’s dismissal of the prosecution’s seizure request in February, stating that "based solely on the materials submitted by the prosecutor, it is difficult to view Luna coin as a financial investment product."

There was also a dispute over the applicability of U.S. case law cited by the prosecution. The prosecution presented rulings from the U.S. Securities and Exchange Commission (SEC) lawsuit against Ripple Labs, the issuer of the coin 'Ripple,' where the Southern District Court of New York ruled that "Ripple is a security when sold to institutional investors but not when sold to the general public." The prosecution emphasized that the court recognized the securities nature of coins sold to institutional investors. However, the defense argued, "The U.S. court rulings cited by the prosecution are only lower court decisions," and "Some rulings related to Terra have judged that securities regulations are necessary following the split with Kwon Do-hyung and the launch of Anchor and Mirror Protocols, which leads to the conclusion that Luna was not a security during the defendant’s involvement."

② Was the Cryptocurrency Payment Business Impossible to Realize Due to Regulations?

Whether the Terra project was realistic at its inception is also crucial to proving fraud charges. The prosecution holds that at the time the Terra project was underway, legal regulations made cryptocurrency payment business impossible. To enable simple payments using Terra coin as a payment method, registration as an electronic financial business with financial authorities was required, but this was not done. Despite the difficulty of the payment business itself due to financial authorities’ policies, former CEO Shin and others allegedly engaged in false promotion and disclosure through the media and white papers, constituting fraudulent acts, according to the prosecution.

The defense countered that there were no legal or administrative regulations at the time. Former CEO Shin’s side argued, "There was no regulation prohibiting the use of cryptocurrency unless it was a financial institution," and "The government has stated through the virtual asset joint task force that while it strictly responds to illegal activities such as fraudulent fundraising, blockchain is a sector to be fostered." They added, "Even after early 2018, responses from financial authorities indicated no stance prohibiting the use of cryptocurrency as a payment method, and there were replies stating the absence of prohibitive regulations."

③ Can Shin Hyun-sung Be Held Responsible for the Collapse of Terra·Luna?

The prosecution fundamentally views former CEO Shin as having pushed forward the Terra project alongside Kwon Do-hyung, CEO of Terraform Labs (32), who was sentenced to four months in prison in Montenegro for possessing a forged passport. They believe this caused damage to investors worldwide. The prosecution also judged that former CEO Shin realized significant profits by selling Luna coins starting from the launch of the Anchor Protocol, when Luna’s price rose.

The defense argued that the collapse occurred after former CEO Shin had parted ways with CEO Kwon. They presented a paper by Antoinette Schoar, a professor at MIT Sloan School of Management, titled ‘Terra·Luna Collapse, Dissection of Capital Flight,’ arguing, "The collapse of Terra·Luna was caused by the release of the Anchor Protocol, which was based on an unsustainable high-yield structure, the linkage with leveraged protocols, and a 'bank run' triggered by an external attack in May last year." They emphasized that the Anchor Protocol was launched in March 2021, while the two parted ways at the end of 2020. The defense claimed, "Former CEO Shin separated the business due to differing management philosophies and directions from CEO Kwon, who focused solely on DeFi, and since March 2020, the two have pursued completely independent business paths," adding, "Former CEO Shin had no involvement in projects such as Mirror and Anchor Protocol, which CEO Kwon developed independently."

◆Terra·Luna Incident= An event in May 2022 where the prices of cryptocurrencies Terra and Luna plummeted. The prosecution, which began investigation in the same month, indicted Terraform Labs and its associates in April for falsely promoting the Terra project as successful and manipulating trades to sell and trade the two coins, obtaining approximately 462.9 billion won in illicit profits. Key accomplices, Terraform Labs CEO Kwon Do-hyung and associate Han Chang-jun, fled overseas but were arrested at Podgorica Airport in Montenegro for forged passport offenses and sentenced to four months in prison each.

◆Terra Project= A project announced by Terraform Labs to create an algorithm-based stablecoin, Terra coin, whose value is fixed. Within the algorithm, Terra coin operates based on Luna coin, adjusting issuance volume to stabilize Terra’s price. If Terra falls below $1, additional Luna is issued to buy Terra, reducing Terra’s supply and raising its price; if above $1, Terra’s supply increases to lower the price, maintaining it at $1. Fees generated through Terra payments are rewarded to Luna holders, preserving Luna’s value.

◆Anchor Protocol= Terra’s decentralized finance (DeFi) service. It promises to guarantee principal and pay interest when Terra coins are deposited.

This content was produced with the assistance of AI translation services.