Why they exist
Crypto exchanges needed a dollar that could move on a blockchain at weekends. Banking access for crypto firms has always been difficult, so the industry built a synthetic substitute: a token that an issuer promises to redeem for one dollar.
Stablecoins are now the settlement layer for the overwhelming majority of crypto trading volume, and increasingly used for cross-border payments in places where dollar access is restricted. That second use is arguably more economically significant than anything else in the sector.
Three designs, very different risk
Fiat-backed — the issuer holds cash and short-term government debt and redeems on demand. USDC and USDT are the dominant examples. Risk is straightforward counterparty and reserve quality risk. When Silicon Valley Bank failed in March 2023, USDC briefly traded at 87 cents because part of its reserve was stuck there. It recovered when the deposits were guaranteed, but the mechanism was exactly what it looked like: a bank run on a money market fund.
Crypto-collateralised — over-collateralised with volatile assets, managed by contract. More transparent, less capital-efficient, exposed to liquidation cascades in fast markets.
Algorithmic — maintained by a mechanism rather than by assets. TerraUSD collapsed from $18bn to nothing in days in May 2022, taking a great deal of related value with it. The design has repeatedly failed and there is a reasonable argument that it cannot work.
The regulatory direction
The UK has legislated to bring fiat-backed stablecoins used for payments into the regulatory perimeter, with the Bank of England and FCA developing the detailed regime. The EU's MiCA rules already impose reserve and redemption requirements. The direction of travel is clear: stablecoins are being regulated as payment instruments, which will likely consolidate the market around a few compliant issuers.
How you would actually trade it
Treat a stablecoin as an unsecured claim on its issuer, because that is what it is. Read the attestation reports — what the reserves actually consist of, who audits them, how often, and whether redemption is available to you or only to large institutional partners.
For most purposes stablecoins are a means, not an end: a way to sit out volatility or move value between venues. Holding large amounts for long periods means taking issuer risk for no yield, which is a poor trade unless you cannot access a bank.
Yields offered on stablecoin deposits come from lending them out. That is credit risk, and the platforms offering the highest rates in 2021 — Celsius, BlockFi — are instructive.
What goes wrong
- The peg is a promise, not a law of nature. Depegs have happened to the largest issuers.
- Reserve opacity. Attestations are not full audits.
- No FSCS protection. A stablecoin is not a bank deposit, whatever it resembles.
- Freezing. Major issuers can and do blacklist addresses at law enforcement request, which is either a protection or a risk depending on your position.
- Yield products on stablecoins have been a reliable route to total loss.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.