Stablecoins

A stablecoin is a cryptocurrency designed to keep its value relatively steady against a reference asset, usually a national currency such as the US dollar. It uses reserve assets or other stabilisation mechanisms to maintain this peg, but the intended stability is not a guarantee of its market price or redemption value.

How stablecoins maintain their value

Unlike cryptocurrencies whose prices fluctuate freely, stablecoins attempt to anchor their value. Their reliability depends on how this promise is supported.

• Fiat-backed stablecoins rely on reserves such as bank deposits and short-term financial assets; confidence depends on the reserves’ quality, liquidity and availability for redemption.
• Crypto-collateralised stablecoins use other cryptoassets as backing, often requiring collateral worth more than the stablecoins issued because the collateral itself can fluctuate sharply.
• Algorithmic stablecoins attempt to maintain their peg through programmed supply adjustments and market incentives rather than relying solely on conventional reserves.
• A stablecoin can lose its peg if reserve backing proves inadequate, redemption becomes difficult or confidence in its stabilisation mechanism collapses.

Role in the cryptocurrency ecosystem

Stablecoins provide a relatively stable unit for holding and transferring value within cryptoasset markets. They can reduce the need to convert repeatedly between cryptocurrencies and conventional money.

• They are used to quote prices and settle trades on cryptoasset exchanges.
• They are used in decentralised finance, including blockchain-based lending and borrowing arrangements.
• They can facilitate cross-border transfers, although actual cost, speed and accessibility depend on the network, intermediaries and applicable rules.
• A stablecoin is distinct from a central bank digital currency: a CBDC is a liability of the central bank, whereas a privately issued stablecoin is not.

Financial and cybersecurity risks

The word “stable” describes the intended price behaviour, not the safety of the entire arrangement. Users remain exposed to financial, operational and cyber risks.

• Reserve and redemption risks can trigger runs when many holders seek to exit simultaneously.
• Cyberattacks against exchanges, wallets or smart contracts can cause losses even when the stablecoin’s peg remains intact.
• Stablecoins can be misused for money laundering and illicit transfers; cross-border transactions can complicate identification, investigation and enforcement.
• Secure custody, reliable reserve disclosures and anti-money-laundering safeguards address different risks; price stability alone does not provide these protections.