Stablecoin

A stablecoin is a token on a blockchain that aims to keep a fixed value, most often one US dollar. The most common kind is backed by reserves: the issuer holds cash, short-term government bonds or similar assets and promises to redeem each token at face value. Others are backed by other crypto assets locked in smart contracts, with more collateral than tokens issued, and some so-called algorithmic stablecoins rely on trading incentives rather than reserves. Stablecoins are widely used to move money between crypto exchanges, to trade without returning to a bank account, in DeFi lending and increasingly for cross-border payments.

Stable does not mean safe. A stablecoin is only as sound as its reserves, its issuer and its legal structure: if reserves are insufficient, illiquid or frozen, or if many holders try to redeem at once, the token can lose its peg. In 2022 a large algorithmic stablecoin collapsed to almost nothing within days. Most holders cannot redeem directly with the issuer and rely on exchanges, and holdings are generally not protected by deposit guarantee or investor compensation schemes. Stablecoins are high-risk crypto assets and can lose all their value. Regulators in the EU, the UK and the US have introduced or are developing specific rules for issuers, but protections vary.