TerraUSD’s meltdown illustrates the perils. Stablecoins typically peg themselves to the dollar and hold a reserve of actual dollars in a bank deposit to redeem the coins. TerraUSD was an algorithmic stablecoin backed only by another coin called Luna and by a now-depleted reserve fund of bitcoin and other cryptocurrencies, i.e., nothing tangible.
With libertarian logic, Mr. Kwon once argued this made TerraUSD superior to regular stablecoins which are “held hostage to whoever feels like they have control over the underlying bank deposits.” TerraUSD offered “decentralization purity in the sense that there’s nobody that can freeze your assets…It’s a lot more robust from regulation,” Mr. Kwon said. Of course, that meant when the combined value of TerraUSD and Luna went from $48 billion to under $3 billion in less than two weeks, there wasn’t much in the way of assets for investors, either. (Mr. Kwon has announced a plan to distribute 1 billion tokens of a new version of Luna to existing Luna and TerraUSD holders and developers.)
Investors, including from underrepresented communities, who shared in crypto’s wealth creation are now sharing in its wealth destruction. Caveat emptor, one might say. Except, Timothy Massad, former chairman of the Commodity Futures Trading Commission notes, “We’ve decided that caveat emptor in the financial markets is not a good way to grow markets overall…Financial access and inclusion needs to come with a reasonable framework of investor and consumer protection.”
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