A South Korean law firm represents investors who lost millions of dollars due to last month’s $40 billion crash of algorithmic stablecoin TerraUSD and its sister token Luna.

Terraform Labs founders Do Kwon and Daniel Shin, who created Luna, have become the target of the crypto industry’s wrath after the stablecoin lost its peg to the dollar. Its stabilization mechanism failed and caused Luna to suffer hyperinflation, reducing its value to practically zero.

Seoul-based LKB & Partners told local media it will file a complaint against Terraform’s founders, filing two charges, including fraud. The firm also told the local newspaper Munhwa Ilbo that it filed a seizure order with the Seoul Southern District Public Prosecutor’s Office to seize Kwon’s property.

The plaintiffs are believed to include LKB & Partners’ own attorneys. The firm did not respond to a request for comment.

More potential lawsuits may be on the way. Investors who suffered losses from Luna’s accident have joined the movements against Kwon and Shin. A community called LUNAscam, hosted by the South Korean online platform Naver, has gathered more than 1,700 members since it was created in mid-May.

It is unclear whether Terraform has retained outside counsel for legal advice. Last year, Kwon was represented by Dentons when the US Securities and Exchange Commission charged him with violating its own rules and the due process clause of the US Constitution.

Luna’s accident has also caused an implosion within Terraform. The company’s legal team, including chief corporate counsel Lawrence Florio, general counsel Marc Goldich and regulatory counsel Noah Axler, resigned shortly after the stablecoin’s colossal collapse.

According to South Korean media reports, Kwon may be summoned to appear before the local government to testify. National politician Yun Chang-Hyun has requested that Kwon and other executives at local cryptocurrency exchanges explain their actions as the decoupling took place. The local police have also launched a criminal action investigation against Do Kwon.

The lawyers note that any lawsuits against Kwon and his companies will be significantly affected by the conclusion of the police investigations.

“If the police investigation bears fruit, the civil lawsuits could probably proceed on a much better evidentiary basis,” said Daniel Lai, a former in-house attorney for Uber, Crypto.com and Airwallex. “If the investigation does not come to fruition, I hope there will be a private and confidential settlement.”

Until then, Luna’s investors have little to fall back on. In fact, it’s not even clear at this stage what or who would be the right entity to sue, the lawyers say.

Potential legal actions against Kwon or his companies have been compared to securities class actions in the US: most do not go to trial or settle out of court. Especially for cryptocurrency investments, investor protection is scant on paper.

“Generally speaking, in many countries, crypto assets do not yet have the status of financial products or securities. Therefore, victimized investors are unlikely to be able to claim securities fraud,” Lai said.

South Korean regulators have said they are keeping an eye on any possible fallout from Luna’s collapse, but also added there is little they can do about it.

“It is difficult to take specific measures because there are no laws to protect investors” in cryptocurrencies, Koh Seung-beom, chairman of South Korea’s top regulator, the Financial Services Commission, told local media, adding that regulators are closely observing changes in price and volume of transactions.

Misrepresentation, fraud, and embezzlement have been listed as possible charges against Do Kwon. The possibility that the setup was a Ponzi scheme has also been suggested, but that is difficult to prove, particularly as Luna’s coding was transparent to the public and its investors, although the coding ultimately failed.

“The stablecoin, in its ‘death spiral,’ appears to have operated exactly as the encryption intended, given that there have been articles and warnings that have been previously articulated online about such issues; and there does not appear to be a specific ‘user protection’ regime applicable to stablecoins in the relevant jurisdictions,” said Hoi Tak Leung, a Hong Kong-based lawyer at Ashurst.

Issues with “miscoding” are unlikely to be the basis for a successful fraud or misrepresentation claim, with no additional factors involved, he explained.

“Often, entrepreneurs are just bad entrepreneurs. They are guilty of being overly optimistic about their own businesses and tend to ignore or neglect risks, even though they are aware of the risks,” Lai said. “Drinking your own Kool-Aid does not necessarily equate to fraud.”

One possible remedy would be for the plaintiffs to argue that the latest Terra on Luna white paper did not specify a threshold for issuing new coins. The whitepaper is a comprehensive document that discusses the theory and plan for cryptocurrencies, including the technology behind it. Initial Luna drafts capped the distribution of Luna coins at 800 million, but over 6 billion Luna tokens were issued in May alone.

Growing pains?

While speaking at the Asia Tech x Singapore summit earlier this week, Singapore’s Deputy Prime Minister Heng Swee Keat used the stablecoin’s collapse to warn retail investors not to invest in cryptocurrencies. But he also admitted that digital dollars could transform finance.

The conundrum is part of cryptocurrency’s growing pains, some lawyers say.

Regulators are now facing more pressure to impose robust rules and frameworks for crypto and digital asset trading.

“On a broader level, Luna’s failure and subsequent fallout illustrate the difficult balance between innovation and decentralization, and regulation and consumer protection,” Leung said.

But he added that regulators are unlikely to look favorably on projects and technologies that cause the loss of such massive amounts of money that can then be “revived” without consequences for founders or compensation for affected users.

On the other hand, this is good news for lawyers, as investors are now more likely to hire legal advisors to help them assess the risks involved with their cryptocurrency investments.

“Regardless of the outcome of these actions, business promoters should always be careful and balanced in disclosing risks to their investors, and this should be done on the advice of lawyers,” Lai said.

Those complex legal risks and ramifications may arise sooner than expected. On May 16, Kwon proposed revival plans that included creating a new blockchain and issuing new LUNA tokens. According to data from Terra Station, the official wallet of the Terra blockchain, 65% of all voters support the proposal. But looming legal action will inevitably complicate the response and reception of Terra 2.0.

“The fact that Luna holders will receive and presumably accept Terra 2.0 tokens, what does this mean for the legal position of Terra 1.0 holders?” Lai asked.

An investment in Terra 2.0 may mean that investors in Luna have unwittingly waived their rights to any potential claims from the financial meltdown that took place in May.

Lawyers Still Bullish on Stablecoin

However, some are strong believers in the revival of the algorithmic stablecoin. Even the lawyers are optimistic about the revolutionary but risky form of financing.

Benjamin Bai, principal legal counsel at digital asset trading firm Amber Group, was an investor in Luna. Bai was until recently vice president and chief legal counsel for intellectual property at Ant Group, which operates China’s largest digital payment platform.

“I thought a lot about the algorithmic stablecoin,” said Bai. “They had a unique product that failed, but that doesn’t change the fact that it was a great idea.”

“Luna has been used in some e-commerce platforms, so it has a use case,” Bai added. “It is a great experiment that failed. But that’s what innovation is all about.”