Stablecoins explained: how they hold a peg, how they lose it, and the MiCA rules

A stablecoin is a crypto token designed to keep a steady value against a reference asset, usually the US dollar, sometimes the euro or gold. Most try to do this by holding reserves of cash and short-term government debt and promising to redeem tokens for one dollar each; others hold surplus crypto as collateral or rely on trading incentives. "Stable" describes the aim, not a promise: stablecoins have lost their pegs, sometimes for hours and occasionally for good.

This guide explains the three main designs, what keeps a peg in place, the best-documented failures, how the EU's Markets in Crypto-Assets Regulation (MiCA) treats stablecoins, and the risks that remain even for the largest ones. If blockchains and tokens are new to you, read what is cryptocurrency first.

Risk first. A stablecoin is not a bank deposit, is generally not covered by deposit protection schemes, and can fall below its peg or become worthless. Stablecoins are often the cash leg of highly volatile crypto trading, where you can lose all of the money you put in.

Why stablecoins exist

Crypto markets trade around the clock, but banks do not. Moving dollars or euros in and out of exchanges is slow, costly and limited to banking hours. Stablecoins solve that by putting a dollar-like token on a blockchain, where it can move between platforms and wallets at any hour within minutes.

In practice they are used for:

• Trading. Many crypto pairs are quoted against stablecoins rather than against dollars or euros, so they act as the cash side of trades.
• Moving money between platforms. Traders shift stablecoins between exchanges and wallets far faster than a bank transfer.
• Collateral in DeFi. Lending and trading programs on Ethereum and similar networks use stablecoins as collateral and as the unit of account. See Ethereum and altcoins.
• Payments and transfers, including cross-border transfers in some countries.

Stablecoins are issued as smart contracts on one or more blockchains, which means they inherit the strengths and weaknesses of those networks: speed and global reach, but also irreversible transfers, gas fees and the need to look after your keys.

The three main designs

1. Fiat-backed (reserve-backed)

The issuer, a company, takes in dollars (or euros) and issues the same number of tokens. It holds reserves, typically bank deposits, short-term government bills, repurchase agreements or money-market funds, and promises to redeem tokens for one unit of currency each, usually for verified customers above a minimum amount.

The peg holds through arbitrage. If the token trades at 0.99 dollars on an exchange, firms with redemption access can buy it there and redeem it with the issuer for 1.00, which pushes the market price back up. If it trades at 1.01, they can deposit dollars, mint new tokens and sell them. This works only as long as the market believes redemption will be honoured in full.

That belief depends on what the reserves actually are, where they are held, and how often independent firms check them. Reserve reports vary in quality: an attestation is a snapshot of holdings at a date, not a full audit of the issuer. In October 2021 the US Commodity Futures Trading Commission fined Tether 41 million dollars, finding that for long stretches between 2016 and 2019 it had misrepresented that its tokens were fully backed by dollar reserves. Tether settled, saying the findings concerned historical disclosures that had since been resolved.

2. Crypto-backed (over-collateralised)

Users lock up crypto, such as ether, in a smart contract and borrow newly created stablecoins against it. Because the collateral is volatile, the system requires more collateral than the stablecoins issued, and automatically sells, or liquidates, the collateral if its value falls too close to the debt. DAI is the best-known example.

Worked example: over-collateralisation. Illustrative numbers. A protocol requires collateral worth at least 150% of the stablecoins borrowed.

• You deposit ether worth 1,500 dollars and borrow 900 stablecoins, leaving a buffer above the minimum.
• If ether falls 30%, your collateral is worth 1,050 dollars. The minimum for 900 borrowed is 1,350, so your position is liquidated: the collateral is sold to repay the debt, and you typically pay a penalty on top.
• The stablecoin holders are protected as long as liquidations happen fast enough. In a crash, if collateral prices fall faster than liquidations can be processed, the system can be left short.

These designs avoid reliance on a single company's bank accounts, but replace it with dependence on smart contracts, price feeds called oracles, and the liquidity of the collateral. Many have also added fiat-backed stablecoins to their collateral, which links them to the same banking risks.

3. Algorithmic

An algorithmic stablecoin tries to hold its peg with little or no outside collateral, using a paired token and trading incentives. Typically, one stablecoin can always be swapped for one dollar's worth of the paired token, and vice versa. If the stablecoin falls below a dollar, traders buy it cheaply and swap it for a dollar of the paired token, reducing the stablecoin supply.

The weakness is that the system's backing is the market value of its own paired token. If confidence breaks, holders rush to swap out, huge amounts of the paired token are created and sold, its price collapses, and the swap is no longer worth a dollar. This is a self-reinforcing spiral, and it is exactly what happened to TerraUSD.

When pegs break: what history shows

TerraUSD, May 2022

TerraUSD (UST) was an algorithmic stablecoin on the Terra blockchain, paired with a token called LUNA. In early May 2022, large withdrawals and sales pushed UST below one dollar. Holders swapped UST for LUNA en masse, creating vast amounts of new LUNA, whose price collapsed to almost nothing within days. UST fell to a small fraction of a dollar and never recovered, and the Terra blockchain was temporarily halted on 13 May 2022. Tens of billions of dollars of market value were wiped out, by most estimates, and the collapse helped trigger failures of crypto lenders and funds later that year.

The lesson is structural: a stablecoin backed mainly by a token that its own issuer can create cannot survive a run.

USDC, March 2023

USDC is a fiat-backed stablecoin issued by Circle. On 10 March 2023 Circle disclosed that 3.3 billion dollars of its roughly 40 billion dollars of reserves were held at Silicon Valley Bank, which had just failed. Over the weekend of 11 March, while US banks were closed and redemptions could not be processed, USDC traded as low as roughly 0.88 dollars on some venues. DAI, which used USDC as part of its collateral, also fell. After US authorities announced that SVB's depositors would be protected, USDC returned to around one dollar.

The lesson is that even well-reserved stablecoins carry banking risk, and that a peg depends on redemptions actually working at the moment people want them. Weekends, when crypto trades and banks do not, are when that gap is widest.

What a de-peg costs you

An illustrative example. You hold 10,000 dollars of a stablecoin. It slips to 0.97 for a day.

• If you hold and it recovers, you have lost nothing but sleep.
• If you need to sell during the slip, perhaps to meet a margin call elsewhere, you receive about 9,700 dollars, a loss of 300.
• If the issuer fails, you may wait months for a partial recovery through insolvency proceedings, or get nothing.

How MiCA regulates stablecoins in the EU

The Markets in Crypto-Assets Regulation entered into force in June 2023. Its stablecoin rules have applied since 30 June 2024, and the rules for crypto-asset service providers, such as exchanges and brokers, since 30 December 2024, with a transitional period for existing firms that ended on 1 July 2026 at the latest (member states could set shorter windows). MiCA does not use the word "stablecoin" for its categories; it defines two types of token.

E-money tokens (EMTs)

Tokens that aim to keep a stable value by referencing one official currency, such as a euro or dollar stablecoin. Key rules:

• The issuer must be authorised as a credit institution (a bank) or an electronic money institution.
• Holders have a right to redeem their tokens at par, in the referenced currency, at any time and free of charge.
• Funds received must be safeguarded in secure, low-risk assets, partly as deposits with credit institutions.
• The issuer cannot pay interest to holders.
• A white paper must be published and notified to the regulator.

Asset-referenced tokens (ARTs)

Tokens that reference something other than a single currency, such as a basket of currencies, a commodity or other crypto-assets. Issuers need authorisation from a national regulator, must hold a reserve of assets, must offer holders redemption rights, and cannot pay interest. Tokens that become "significant", because of their size or use, face stricter requirements and supervision by the European Banking Authority.

What this means in practice

• A stablecoin offered to the public in the EU should have an issuer authorised under MiCA. EU-authorised crypto service providers are expected not to offer stablecoins that do not comply, and several platforms restricted non-compliant stablecoins for EU users as a result.
• Algorithmic designs with no proper reserve do not fit either category, so they cannot be offered to the public as EMTs or ARTs.
• MiCA authorisation is not a promise of value. It sets rules for reserves, redemption and disclosure; it does not make a token a bank deposit or cover you through deposit protection.

You can check whether an issuer or service provider is authorised through ESMA's interim MiCA register and national regulators' registers; see our regulator registers page and our guide to crypto scams and regulation.

Outside the EU

Rules differ elsewhere. In the United States, the GENIUS Act, signed into law on 18 July 2025, created a federal framework for payment stablecoins covering who may issue them, what reserves must back them, redemption and supervision, and left regulators to write detailed implementing rules. Other jurisdictions have their own regimes or none at all. A stablecoin's legal protections depend on who issued it and where.

The risks that remain

Even for large, reserve-backed stablecoins:

• Issuer and reserve risk. You rely on the issuer to hold what it says, where it says, and to honour redemptions.
• Banking and custody risk. Reserves held at banks or custodians can be caught in their failures, as USDC was.
• Redemption access. Retail holders often cannot redeem directly with the issuer; they sell on an exchange at whatever price is available.
• Freezing. Most fiat-backed issuers can freeze tokens at specific addresses, for example under court or sanctions orders.
• Smart-contract and network risk. Bugs, bridge hacks and sending tokens on the wrong network can all lose money.
• Platform risk. Stablecoins held on an exchange are only as safe as the exchange. See crypto wallets and custody.
• Currency risk. For a European trader, a dollar stablecoin moves with EUR/USD. A euro-based account holding dollar stablecoins has exposure to the exchange rate; see currency conversion and account base currency and the EUR/USD profile.

Yield offers: a warning

Platforms sometimes advertise high "interest" or "yield" on stablecoin deposits. Under MiCA, issuers of EMTs and ARTs cannot pay interest, and crypto service providers cannot pay interest on e-money tokens either. Yields offered by others come from lending your tokens out, from DeFi strategies or from the platform's own balance sheet, and carry the risk that you do not get your tokens back. Several lending platforms that offered such returns failed in 2022, after the TerraUSD collapse. A high, steady yield on a "stable" asset is a reason for more scrutiny, not less.

Common mistakes

• Treating a stablecoin as cash in the bank. It is a claim on a private issuer, without deposit protection.
• Assuming all stablecoins are alike. Reserve quality, transparency, regulation and design differ widely.
• Ignoring the network. The same stablecoin can exist on several blockchains; sending it on the wrong one can lose it.
• Chasing yield. See above.
• Forgetting currency risk. A dollar stablecoin is still a dollar exposure if your life runs in euros or pounds.

Our glossary defines terms such as liquidity and segregated funds, and our risk warning explains the risks of trading.

Frequently asked questions

Are stablecoins safe?

They are designed to be less volatile than other crypto-assets, not to be safe. Their value depends on the issuer, its reserves and its ability to meet redemptions. They have lost their pegs before, and they are generally not covered by deposit protection.

What is the difference between USDT, USDC and DAI?

USDT (Tether) and USDC (Circle) are fiat-backed: each issuer holds reserves of cash and short-term assets. DAI is crypto-backed, created by users who lock up more crypto than they borrow, although its collateral has also included fiat-backed stablecoins. Each has different issuers, reserves, regulators and risks.

What happened to TerraUSD?

TerraUSD (UST) was an algorithmic stablecoin backed mainly by its sister token LUNA. In May 2022 it lost its peg, holders rushed to swap out, LUNA's supply ballooned and its price collapsed, and UST fell to a small fraction of a dollar. It never recovered.

Can a stablecoin issuer freeze my tokens?

Many fiat-backed issuers can freeze tokens at particular addresses, and do so in response to law-enforcement requests, court orders or sanctions. Crypto-backed designs generally cannot freeze the stablecoin itself, but they may hold frozen tokens as collateral.

How does MiCA protect stablecoin holders?

For e-money tokens, MiCA requires an authorised bank or e-money institution as issuer, a right to redeem at par at any time free of charge, safeguarding of the funds received and a ban on paying interest. Asset-referenced tokens have similar reserve and redemption rules. It does not make a stablecoin a bank deposit.

Do stablecoins pay interest?

Under MiCA, issuers of e-money tokens and asset-referenced tokens are not allowed to pay interest. Returns advertised by platforms come from lending or other strategies and carry the risk of losing your tokens.