SEOUL (THE KOREA HERALD/ASIA NEWS NETWORK) - Cryptocurrencies still sound cryptic to most people, especially those who are not familiar with how its jargon-filled blockchain technology works.

But the message from the plunging market capitalization of major cryptocurrencies like bitcoin is not so cryptic: Panicky investors are selling off their risky digital assets. At the center of the rushed crypto sell-offs are none other than Korean-made cryptocurrencies, terra and luna, both of which were launched by local startup Terraform Labs.

Its founder and CEO, Do Kwon, was dubbed the "Korean Elon Musk" when the prices of the two cryptocurrencies skyrocketed. Now, things appear extremely bad for Kwon and many investors both at home and abroad who placed bets on the two cryptocurrencies in hopes of making huge profits as Tesla shares once generated.

Terra, also known as UST, is a "stablecoin," a type of cryptocurrency that is pegged to another currency such as the US dollar. Specifically, terra belongs to the category of "algorithmic stablecoins" that rely on an automated process to shore up the peg. Terra is backed with its sister token luna.

On May 9, the prices of the two linked cryptocurrencies began to tumble as their pegging system collapsed amid deepening concerns about other well-known cryptocurrencies like bitcoin under massive sell-off pressure. Since then, terra's market cap has dropped by over 90 per cent as of Wednesday (May 18). Luna, whose price once hit a record US$119 and became the world's fourth-largest cryptocurrency, similarly has lost most of its value.

The dramatic downfall of the two Korean cryptocurrencies also coincided with the heightened volatility of tech stocks following interest rate hikes by the US Federal Reserve. On Tuesday, Terraform Labs CEO Kwon revealed a terra revival plan by redistributing the ownership of the blockchain network to investors, describing terra's peg failure as "a chance to rise up anew from the ashes." Kwon's proposal, however, failed to soften the angry voices of critics on social media.

As the impact of the cryptocurrencies' collapse was rapidly spreading in the crypto market and beyond, Korean financial regulators were also alarmed. Financial Services Commission chief Koh Seung-beom told lawmakers Tuesday that the regulators are closely watching the price changes and trade trends related to terra and luna.

Asked about a report filed by a lawmaker that 541 crypto coins have been delisted since 2017, Koh said there is no special measure in place due to the absence of related laws on virtual assets aimed at protecting investors.

As for the luna-related losses, Koh said that some 280,000 investors are currently holding 70 billion luna units, adding that the financial regulator is planning to work with Korean digital asset developers and exchanges to come up with detailed notices about crypto investment risks.

Korean investors who put their money in risky digital assets are estimated to have lost as much as 1 trillion won (S$1.09 billion) over the past five years due to the collapsed cryptocurrencies.

High-ranking officials from financial watchdogs said the crashes of terra and luna are feared to undermine the confidence in digital assets in general, which in turn could lead to bigger losses among investors.

The government and financial regulators should not repeat the same excuse of having their hands tied whenever a virtual currency debacle occurs. The Digital Asset Basic Act, which is yet to be legislated, is expected to contain regulatory measures to protect investors and related warnings, though most of the details are being drawn up.

But even before the legislation of the bill next year, the government and financial regulators should step up oversight into some problematic digital assets. If not, these digital assets - riddled with hype and fraudulent technology - will continue to ensnare unsuspecting investors. For the government and regulators, stepping up oversight is a task that is straightforward enough in contrast to navigating an opaque crypto market.

• The Korea Herald is a member of The Straits Times media partner Asia News Network, an alliance of 23 news media organisations.