Stablecoin
IntermediateA stablecoin is a type of cryptocurrency designed to maintain a stable value by linking it to a reference asset, usually a traditional currency such as the US dollar.
Most cryptocurrencies, such as Bitcoin, have highly volatile prices, which makes them impractical for everyday payments or holding savings. Stablecoins aim to combine the speed and accessibility of cryptocurrencies with the stability of traditional money.
Most large stablecoins are backed by reserves, such as cash and short-term government securities, held by the issuing company. For example, a stablecoin pegged to the US dollar aims to be redeemable for one dollar, with the issuer holding at least one dollar of reserves for every coin in circulation. Other stablecoins use cryptocurrency collateral or algorithms to try to maintain their value.
Stablecoins are widely used for trading on cryptocurrency exchanges, transferring money across borders and in decentralised finance applications.
Stablecoins carry risks. If the reserves are insufficient, poorly managed or not transparent, holders may not be able to redeem their coins at full value. Some algorithmic stablecoins have collapsed, notably TerraUSD in 2022, wiping out billions of dollars. Regulators in several jurisdictions, including the European Union and the United States, have introduced rules requiring stablecoin issuers to hold high-quality reserves and meet disclosure requirements.
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