Stablecoin risks and depegging

A depeg is a move of the market price away from the reference value. The Block names market conditions, liquidity gaps, regulatory changes, problems with the collateral and technical faults such as smart contract bugs or network congestion. The design decides how hard the fall is. Halborn separates fiat-collateralized tokens such as USDC, crypto-collateralized tokens such as DAI, where users deposit collateral worth about 150 percent of the stablecoin, and algorithmic tokens without direct collateral. TerraUSD, an algorithmic stablecoin, depegged and collapsed in 2022.

A fully backed token can still depeg when holders cannot reach the reserve. In March 2023, 3.3 billion dollars of USDC reserves sat at Silicon Valley Bank when it failed, and USDC fell to 0.87 dollars before it recovered, according to Halborn. Stripe's guide to stablecoin infrastructure draws the lesson that issuers need to spread reserves across banks.

The European Systemic Risk Board points at the same channel from the bank side. Reserves held at commercial banks tie stablecoins to the banking system, so the ESRB wants EU reserve assets to be high-quality and liquid.

A run happens when many holders redeem at once and the issuer has to sell reserve assets fast. An ECB blog post cites the warning of the BIS about the fragility of stablecoin pegs and the risk of contagion if a large token collapses in a disorderly way. The ESRB adds a risk specific to tokens issued jointly inside and outside the EU: in stress, holders would redeem wherever the terms are best, which can drain the EU issuer. The ECB and stablecoins page covers that case.

Under MiCA, holders of e-money tokens redeem at par at any time and without a fee (Article 49). Article 54 puts at least 30 percent of reserve funds into separate bank accounts and the rest into highly liquid instruments in the same currency. Financial crime risk is its own subject, on the stablecoin AML page.

Finance Loop is the meeting place for risk, treasury and compliance people who assess stablecoins before their firm holds or accepts them. Finance Loop supports When Banks Say 'No', a payments seminar in Frankfurt for compliance, treasury and legal teams that covers digital assets next to blocked payments and de-risking. The Digital Euro Conference, organized by the Digital Euro Association with Finance Loop as strategic partner, covers stablecoins next to the digital euro.

A stablecoin depegs when its market price moves away from the value it tracks, for example when a dollar token trades at 0.95 dollars. Small moves happen often; large ones follow doubts about the reserve or the design.

Yes. USDC fell to 0.87 dollars in March 2023 because part of its reserve was stuck at Silicon Valley Bank. It returned to its peg once the reserve was accessible again.

MiCA gives holders of e-money tokens a right to redeem at par at any time and without a fee, forbids interest on the tokens, and fixes how the issuer invests the reserve. A token without a reserve cannot be authorized as an e-money token.