Por 29 junio, 2022 No Comments

After a brief analysis of Terra’s goals and situation prior to May 2022 and having analyzed the causes of the collapse, we are in a position to make a technical-legal revision and to draw some conclusions on the legal implications of all the parties involved. In this post we will analyze Terra’s developers’ liability (if any), victims’ contributory fault (if any) and perpetrators’ crimes (if any) related to the attack (with probable huge profits).

Can the attack be considered as crime?

Spoiler alert: It is not, at least for most legal systems worldwide. Regulated markets like the Stock Exchange are governed by rules and governmental agencies for enforceable purposes to avoid this type of events; there even are criminal procedures available to avoid economic collapses.

In the crypto universe, the market is proudly free from any state control. So, this is a key point to be considered by investors upon evaluating crypto investment options: the crypto market has no state control and the lack of regulatory framework still prevails.

This said, it does not mean that these types of attacks are totally legal. The violation of private entities’ security (in this case Luna Foundation Guard or “LFG”) are unlawful events likely to harm (indeed it was quite harmful) entities and the people who trusted in their projects as well. In this sense, it can be compared to corporate espionage or to social network data leakage (with huge damage, comparable to the 2008 crisis, not something simple as sharing photographs).

Can we find out who was/were behind the attack?

In this particular case, perpetrators cannot be judged according to the rules of any specific legislation nor we can speak of malicious conduct by those who speculated and profited from this event. Many investors could have analyzed the market and, having seen the fallout, have considered that LUNA and UST were likely to drop their prices; therefore, speculate on the decline and bet on a lower price. There are screenshots with “shorts” (short selling transactions) with profits over 100x (if “I bet one dollar on the price drop, I won 100”).

At this moment, no person can yet be identified. The only available data comes from the blockchain public data, recording the transactions triggering a chain reaction. In order to sue any individual or legal person for carrying out an illegal activity, it would be necessary to detect who controlled those wallets and, beyond any reasonable doubt, to prove that transactions were carried out with a clear intention to harm (or aiming to profit regardless of damages to third parties). Some speculate that perpetrators could be traditional entities and outsider financial groups without crypto investments aiming to damage the reliability and value of the overall ecosystem. We stress the fact that no legislation can punish this event without a clear evidence of the intention to harm.

Moreover, even if it were confirmed that those who started selling under UST peg (as a result of malicious tampering) shorted BTC being aware that LFG would be forced to sell large portions of its bitcoin reserve to maintain the peg; even, in that case, there is no offense (though it is quite a reproachable act). Some people even report that those profits were used for further attacks on the Terra ecosystem. In most regulated markets, this type of speculative strategies could be punished but, in unregulated markets, this type of concerted market attacks is not subject to penalties by governmental agencies (such as CNV in Argentina or SEC in the United States).

To clarify this controversial issue, it is not illegal to profit by betting against an asset; it is illegal to inflict harm for such purpose. Prosecution for the parties held responsible is another issue for debate.

If the parties held responsible are sued, which is the applicable law and jurisdiction for prosecution purposes?

This issue is quite relevant and it is a matter of Private International Law: which is the applicable law? The jurisdiction governing legal disputes is quite complex but, in this particular case, we will only state that the attack should be “linked” to a certain territory in order to be brought to Court.

No conclusion can be reached due to the lack of further relevant information but, apparently, 3 or 4 jurisdictions would be involved in the conflict. First of all, a broad agreement should be reached, globally, on the competent judge to settle the matter. Something quite difficult for the crypto ecosystem, completely unregulated by central authorities. So, this issue does not seem likely to be solved in the short term.

Are developers liable for fraudulent misconduct?

There are no reasons to believe that developers are liable for fraudulent misconduct or liable for having incurred in a criminal offense. Based on the information currently available, offense or fraud could exist upon evidence of the perpetrators’ intention to damage the overall crypto ecosystem in order to profit largely by disrupting the market. In such case, people inside LFG could be considered as accomplices knowing the sale prospects at Curve. The public persons connected to Terra do not appear to be involved in fraud.

Even if confirmed (resuming the prior title), an international market operating 24/7 without an adequate legal framework makes nearly impossible to be legally implicated, even if the perpetrators’ identities were disclosed. Developers are, in some way, protected by the crypto ecosystem in terms of data privacy and applicable jurisdiction.

Regardless of the liability’s technical-legal aspect, we could not find any fraudulent misconduct by the parties involved: developers, the LFG nor its authorities.

It rather seems a badly-designed and badly-performed project (negligence, civil liability) unable to endure a market attack. Some liability could exist if investors had not been properly informed of the risks involved (and this is not the case).

Even though the Terra ecosystem was compared to a Ponzi scheme by many people, its developers were completely transparent regarding the backing systems and the project’s stability, according to their opinion. Even their portfolios and backing assets were publicly known (useful information for the attack perpetrators). Developers are not liable for fraud, trickery nor deceit, all facts related to the Terra community were known to the public and decisions were made based on a previously- approved consensus mechanism within the protocol (to which all LUNA tokens’ holders belonged).

Should investors have been better informed?

Definitely, at least most of them. Investors need to rely on trustful information upon investing in any project and need to be suitable informed of the risks and backing assets involved. Beyond the crash characteristics, it was something totally unforeseeable and losses were reported by most players but, in my opinion, most LUNA and/or UST holders were not deeply informed of the platform’s policies in terms of tokens issuance, stability, burn-and-mint mechanism and/or yields’ offer through Anchor protocol.

Challenges posed by algorithmic stablecoins involve operational and financial integrity risks perfectly known by users involved with these coins and to whom this scenario was possible (though unlikely to happen). In the end, they believed that the free-market conditions, the benefits’ system and BTC as backing asset would suffice to design a synthetics-derived ecosystem of traditional coins with new rules and a financial scheme completely decentralized and without state control.

What can be expected from regulators?

Cryptoassets regulation has been a concern for enforcement authorities since 2020 and is included in the main political agendas, Terra’s collapse could prompt legislation and regulatory guidelines. On March 2022, the President of the United States signed an Executive Order to ensure a responsible development of digital assets; in Europe, with the MiCA regulation, the European Union is getting specific legislation for crypto assets, especially stablecoins (to be further detailed in another article) and the G7 is also on the move.

As reported by iProUp, this issue was addressed by Germany, Canada, The United States, France, Italy, Japan and the United Kingdom in their last meeting. It can be helpful in avoiding SWIFT codes blocks as well.

International regulatory frameworks are expected for the coming months of 2022 aiming to govern the use of stablecoins, encouraging broader research and development over the crypto industry.







Diego J. Nunes


Estudio Nunes & Asoc.