Can Terra USD investors recover losses under Hong Kong securities laws?
Terra USD “pegged” to US Dollar
Terra USD aimed to maintain its fixed value by a conversion mechanism under which one Terra USD can be converted into one dollar worth of LUNA, the digital staking token of the Terra blockchain, and vice versa, regardless of market prices
Peg based an exchange mechanism with LUNA
Under the algorithm, if supply and demand causes the value of Terra USD to fall below 1 US Dollar, holders of Terra USD can burn 1 Terra USD to mint 1 US Dollar of LUNA, the intention being to restore the value of their investment to 1 US Dollar and simultaneously reduce the supply of Terra USD, thereby increasing the value of Terra USD.
Terra USD falsely touted as a “fiat-backed” “safe asset”
Though Terra USD was pegged by design to the US Dollar, only LUNA tokens rather than US Dollars actually backed the stablecoin and LUNA’s primary intrinsic value is staking and governance on the Terra blockchain
Securities may include digital assets as derivatives
Hong Kong securities laws define “securities” to include instruments where the return is determined by reference to changes in the price, value or level or property and agreements the purpose of which is to provide returns calculated by reference to changes in the value of property
Uncertainty as to status of Terra USD
Like many digital assets, there is ongoing uncertainty as to whether Terra USD might be properly classified as “securities” under Hong Kong securities laws
Securities laws offer a wider range of remedies
Though the position remains uncertain, under Hong Kong securities laws, false or misleading statements relating to Terra USD may ground statutory causes of action not only for investors buying Terra USD following those statements but also for investors who refrained from selling Terra USD following those statements.