Stablecoin Depegging and Risks

What has actually caused depegs

• Reserve doubts: holders question whether assets backing the token are sufficient or accessible.
• Banking disruption: reserves held at a failed or restricted institution become temporarily unavailable. USDC briefly traded below one dollar in March 2023 during the Silicon Valley Bank failure, and recovered after the deposits were made whole.
• Mechanism failure: reflexive designs unwind, as with TerraUSD in 2022.
• Liquidity shocks: large sales into thin markets push the price down faster than arbitrage can respond.
• Redemption friction: when direct redemption is slow or restricted, the arbitrage that restores the peg weakens.

Risks that exist even at the peg

• Issuer risk: insolvency, mismanagement or a change in redemption policy.
• Counterparty risk in where reserves are actually held.
• Regulatory and legal risk, including freezing of specific addresses by the issuer.
• Smart-contract risk on each network where the token is deployed.
• Concentration risk from holding a large balance with one issuer.

Major fiat-backed stablecoin issuers can freeze balances at specific addresses. That capability is part of the design, not a malfunction.

How to check an issuer yourself

1. Read the issuer's own current reserve reporting and note its date and scope.
2. Check who prepared it and what it does and does not verify.
3. Confirm who may redeem directly and under what conditions.
4. Check the regulatory regime the issuer says it operates under, using the regulator's own publications where possible.
5. Re-check periodically: these facts change, and a report from last year says nothing about today.

Reducing your own exposure

• Avoid holding more in one stablecoin than you would be willing to have frozen or discounted.
• Know which network your balance sits on and whether you can move it quickly.
• Do not treat a yield offer on a stablecoin as risk-free; the yield comes from somewhere.
• Remember that a stablecoin balance is not an insured deposit.

Sources

• Circle: USDC transparency and reserve reporting
• Tether: transparency reports