identifies<\/a> the potential risks that come with pegging stablecoins, which are crypto assets backed by a reserve asset such as fiat or another cryptocurrency to offer price stability against the dollar.<\/p>\n\u201cI don\u2019t think that there\u2019s anything wrong, per se, with backing stablecoins in terms of dollars. It\u2019s just that there are some limits to the things that you can do with the use cases of the so-called centralized stablecoins.<\/em><\/p>\nThe issue is that if you\u2019re keeping a dollar in the bank account for every unit of stablecoin that\u2019s issued, that stablecoin now has an issuer and an operator. What that means is that you have all the attendant compliance and custodian risks of having an operator and an issuer because, for instance, what happens if the company for some reason goes bankrupt? In that case, everybody that built interesting things on top of that stablecoin is now held hostage to the bankruptcy court\u2026 <\/em><\/p>\nOr given that bank deposits are so easy to regulate, I think one of the things that we\u2019ll start to see with centralized stablecoins is that there\u2019s going to be massive compliance creep, which means that over time, you\u2019re going to start to layer on things like KYC [know your customer] requirements and sort of vetting what types of applications can use a stablecoin, which isn\u2019t necessarily appropriate for all use cases.\u201d<\/em><\/p>\nKwon says that Bitcoin (BTC) and altcoins such as LUNA may eliminate the risks tied with centralized stablecoins, or those backed by traditional currency.<\/p>\n
\u201cA decentralized stablecoin, as something that is backed in native cryptocurrency like LUNA or Bitcoin, has the property that there is no issuer, there is no operator because anybody in the world can trade in a dollar\u2019s worth of Bitcoin, can trade in a dollar\u2019s worth of LUNA to issue one TerraUSD. This has the nice property that it makes decentralized finance truly decentralized.\u201d<\/em><\/p>\n