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  • Frank Tian

Terra/Luna Collapse

$42 billion TerraUSD/Luna collapse.

Many unsophisticated investors got hurt.

Why still not much regulation in the space?

Here is a quick take: 👇

There are 3 types of cryptocurrencies:

  • Native crypto (such as bitcoin).

  • CBDC.

  • Stablecoin.

🚩 Native Crypto

Some view native cryptos as clubs, where people trade sports cards.

If a hockey card has the price fluctuating like a roller coaster,

That only impacts a small population who are the fans.

That is why the regulators in many market-oriented economies leave them alone.

🚩 CBDC (Central Bank Digital Currency)

CBDC is the digital token of a country’s official fiat currency.

How it works with the existing banking system is still up for discussion,

However, the central bank technically can have as much control as it wants.

🚩 Stablecoin

Stablecoin pegs its value with a fiat currency such as the US dollar.

It facilitates the transactions of cryptos on the blockchain.

Recent events highlight this key question:

How stable is a stablecoin?

TerraUSD uses the Luna tokens to maintain its peg through an algorithmic mechanism.

The problem is that there is nothing stable behind either coin to support the value.

Other stablecoins use reserves including dollars, commercial paper, and crypto.

The problem - nobody knows what reserves are held by the unregulated entities.

However, the name of stablecoin plus high interest as high as 20%,

Draw more and more investors/depositors to put in their money.

Does this sound familiar?

We have seen many similar plots before.

When a humongous amount of money flows into unprotected places,

It creates a huge systemic risk - for which the regulation is supposed to step in.

Regulators in many countries have talked a lot about stablecoins.

However, specific regulation always lags.

In this case, it has lagged a lot.

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