What is a stablecoin?
Short answer
A stablecoin is a crypto-asset designed to hold a steady value, usually one US dollar per coin, by being backed by reserves or managed by a rule. It can lose its peg if the backing or confidence fails.
The idea
Most crypto-assets change in price a lot. A stablecoin tries to keep a fixed value against a reference such as the US dollar, the euro or gold, so it can be used as a unit of account and a means of payment between crypto and traditional money. Well-known examples include Tether (USDT) and USD Coin (USDC), both aimed at one US dollar per coin.
How the peg is supported
Fiat-backed stablecoins hold reserves of cash and short-term securities against the coins issued, and promise redemption. Crypto-collateralised stablecoins are backed by other crypto-assets, usually over-collateralised to absorb price falls. Algorithmic stablecoins use code and incentives rather than full reserves; this design has been the most fragile, and TerraUSD (UST) lost its peg and collapsed in May 2022.
| Type | Backing | Main risk |
|---|---|---|
| Fiat-backed | Cash and short-term securities | Quality and access to reserves |
| Crypto-collateralised | Other crypto-assets, over-collateralised | Collateral price falls |
| Algorithmic | Rules and incentives | Loss of confidence, de-pegging |
Uses and oversight
Stablecoins are used for trading on exchanges, moving money across borders and as a store of dollars in countries with unstable currencies. Authorities such as the Financial Stability Board have published recommendations on regulating them, and rules differ by country and are changing, for example under the European Union’s MiCA regulation. A stablecoin is not a bank deposit and is generally not covered by deposit insurance.