What Is a Stablecoin?

Most crypto-asset prices move widely. A stablecoin tries to avoid that by pegging its value to a reference, which is usually a national currency such as the dollar and sometimes a commodity such as gold or a basket. The Bank for International Settlements describes stablecoins as tokens that promise to be worth a fixed amount of fiat currency, issued by a single entity whose pool of reserve assets backs the tokens in circulation.

Designs differ. Fiat-backed stablecoins hold bank deposits, short-term government securities or similar assets as reserves. Crypto-collateralised stablecoins lock up other crypto-assets, usually worth more than the tokens issued. Algorithmic designs try to hold the peg through rules and incentives and not through reserves, and several have lost their peg. The framework that the Financial Stability Board published for global stablecoin arrangements expects a legal claim on the issuer or the reserves, timely redemption at par into the reference currency and disclosure about the reserve; whether a given coin offers this depends on its issuer and on the jurisdiction.

A stablecoin price near its peg is no assurance. A coin can trade below or above its reference on a given venue, especially under stress, when redemption is limited or when the reserve is questioned. Holders depend on the issuer, the reserve custodians, the blockchain and the venue they use, and rules differ by country. They should not assume the protections of a bank deposit; whether any protection applies depends on the issuer's terms and on local law.