The information contained in this Crypto Asset Statement was last updated on August 15, 2022.
No securities regulatory authority in Canada has expressed an opinion about TerraUSD or any of the other Crypto Contracts or Crypto Assets made available through Newton Crypto Ltd. (Newton) on the Newton Platform, including an opinion that TerraUSD itself is not a security and/or derivative. Changes to applicable law may adversely affect the use, transfer, exchange, or value of any of your crypto assets, and such changes may be sudden and without notice.
Newton is offering Crypto Contracts in reliance on a prospectus exemption contained in the exemptive relief decision Re Newton Crypto Ltd. dated August 15, 2022. The statutory rights of action for damages and the right of rescission in section 130.1 of the Securities Act (Ontario) and similar legislation in the other provinces and territories of Canada would not apply in respect of a misrepresentation in this Crypto Asset Statement or the Newton Platform Risk Statement.
This overview provides a summary of certain risks associated with TerraUSD and is not an exhaustive description or summary of these risks and, in addition, does not take into account an individual’s particular situation or risk tolerance. Investors are encouraged to conduct their own research prior to trading any crypto asset.
Newton users should read the Newton Platform Risk Statement for additional discussion of general risks associated with crypto assets made available through the Newton platform. A copy of the Newton Platform Risk Statement acknowledged by you is available in your account in the “Statements & Reports” section.
Token Description & Project Background
The TerraUSD protocol aims to use algorithmically pegged fiat stablecoins to power payment systems, with their most popular stablecoin being UST. As stated in the whitepaper, TerraUSD combines the security, decentralization, and borderless nation of cryptocurrencies with the price stability of fiat currencies. Using a combination of open market arbitrage incentives and decentralized Oracle voting, the TerraUSD protocol creates stablecoins that consistently track the price of any fiat currency. This is accomplished through expansion and contraction mechanisms, where users are incentivized to burn LUNC and mint UST when the price of UST exceeds its $1.00 peg to increase the UST supply, and conversely users are incentivized to burn UST and mint LUNC when the price of UST falls below it’s $1.00 peg, to decrease the UST supply. TerraUSD was founded by Do Kwon, who prior to TerraUSD worked as a software engineer at Microsoft and Apple, and founded Anyfi, and Daniel Shin who founded Ticket Monster, and Fast Track Asia.
On the TerraUSD platform, LUNC and UST are mutually dependent, as LUNC backs the peg of UST, and holders are incentivized to expand or contract the UST supply, through the burning or minting of LUNC, in a financially profitable fashion. Both UST and TerraUSD can also be used to pay for transaction fees on the network, and can be exchanged or swapped for other tokens. LUNC holders can also benefit from staking rewards, and UST holders can benefit from the TerraUSD ecosystem’s saving protocol, Anchor.
* Currently, Newton does not provide its users with the ability to participate in the staking functions of UST to earn rewards.
Risks of TerraUSD
Like an investment in other crypto assets, an investment in TerraUSD includes the following general risks: (i) volatility risk and liquidity risk, (ii) short history risk, (iii) demand risk, (iv) forking risk, (v) code defects, (vi) regulatory risk, (vii) electronic trading risk, and (viii) cyber security risk.
For additional information of general risks associated with crypto assets, you may refer to the Newton Platform Risk Statement. In terms of specific risks, as TerraUSD is one of the longest-standing crypto assets and its community base is widely decentralized, there is no central working group or authority to disclose material information to the public regarding TerraUSD.
Risk of Depegging Event. Algorithmic stablecoins aim to achieve their peg with the desired fiat currency by using an arbitrage mechanism based, in theory, on the principles of economics. Generally, they are designed to arbitrage against a non-stablecoin crypto token, sometimes called a “sister token”. In general, the arbitrage algorithm works by burning one unit of the stablecoin and minting one unit of the sister token if the price of the stablecoin falls below the intended peg, and by implementing the reverse if the stablecoin rises above the intended peg. In the case of UST, the sister token is LUNC. Since algorithmic stablecoins do not use any actual fiat currency to back the tokens, a death spiral could trigger a depegging event and there is a risk that a depegging event could even trigger a “death spiral”. If the price of UST falls below 1 unit of the fiat currency, in theory any agent should be able to create a unit of the fiat currency, in terms of LUNC, by burning UST. However, for the agent to obtain fiat currency, this would necessitate selling the sister token, LUNC, which increases the selling pressure on LUNC, and which causes the price of LUNC to decrease if too many parties try to do the same. As this trend continues, the total supply of LUNC could skyrocket as more sister tokens are minted, resulting in the price decreasing further. If this trend is severe and sustained, it could cause a collapse of the algorithmic stablecoin peg system of UST and significantly impact the value of UST.
Please note that these risks and the associated summaries or overviews provided for each herein are not intended to be an exhaustive discussion pertaining to all such risks and, in addition, there may be other risks that come with exposure to TerraUSD. We encourage all Newton users to perform their own due diligence to assess the risks associated with TerraUSD and to determine whether this level of risk is acceptable to them. Neither TerraUSD nor Newton guarantees the value of TerraUSD, and holders of TerraUSD will not have any recourse to TerraUSD or Newton if the value of TerraUSD declines for any reason whatsoever.
Newton’s Evaluation Process
Newton has reviewed and assessed TerraUSD prior to making it available on the Newton Platform and has concluded that TerraUSD is not a security or derivative under Canadian securities legislation; however, there is a risk that this conclusion could change in the future and that, in such event, Newton will be required to halt, suspend, and then remove TerraUSD from its platform as described in the Newton Platform Risk Statement.
Further, as indicated above, no Canadian securities regulatory authority has expressed an opinion about TerraUSD, including an opinion that TerraUSD is not itself a security and/or derivative.
Based on publicly available information Newton has reviewed TerraUSD, including, but not limited to, a review of the following:
- The creation, governance, usage, and design of TerraUSD, including the source code, security, and roadmap for growth in the developer community and, if applicable, the background of the developer(s) that created TerraUSD.
- The supply, demand, maturity, utility, and liquidity of TerraUSD.
- Material technical risks associated with TerraUSD, including any code defects, security breaches and other threats concerning TerraUSD and its supporting blockchain (such as the susceptibility to hacking and impact of forking), or the practices and protocols that apply to them.
- Legal and regulatory risks associated with TerraUSD, including (i) any pending, potential, or prior civil, regulatory, criminal, or enforcement action relating to the issuance, distribution, or use of TerraUSD, and (ii) statements made by any securities regulatory authorities in Canada, other regulators in IOSCO-member jurisdictions, or the regulator with the most significant connection to TerraUSD about whether TerraUSD, or generally about whether the type of crypto asset, is a security and/or derivative.
A link to the TerraUSD White Paper is available at the following link.