Description
Stablecoins are cryptoassets where the value is pegged to an underlying asset, such as a fiat currency, and reserves held in the pegged asset are used to maintain the stability of the stablecoin's value. They aim to maintain a 1:1 value with a specific fiat currency, such as the US Dollar, Euro, or Pound Sterling. They are widely used as a unit of account and a medium of exchange within the crypto ecosystem to preserve purchasing power during market downturns.
Risks
De-pegging Risk. The primary risk is that the token loses its 1:1 peg to the underlying fiat currency. This means the market price drops below the target value, such as trading at $0.90 instead of $1.00. This can happen if the market loses confidence in the issuer's solvency, if the issuer faces legal action, or if the mechanisms maintaining the peg fail.
Reserve Transparency and Quality. Stablecoin issuers publish reports on their reserves, but these are often 'attestations' rather than full, independent financial audits. There is a risk that the reserves are not fully backed 1:1, or that the reserves consist of assets that are illiquid, such as commercial paper or long-term bonds, rather than cash. If the issuer cannot sell assets quickly enough to meet a surge in redemption requests, the stablecoin may collapse.
Counterparty and Banking Risk. The fiat reserves are held in traditional banks. If the bank holding the reserves fails or becomes insolvent (as seen in the collapse of Silicon Valley Bank in 2023), the stablecoin issuer may lose access to the backing funds. Such an event could render the stablecoin partially unbacked and cause a permanent loss of value.
Regulatory Classification Risk. The UK regulatory regime for stablecoins is evolving. There is a risk that a specific stablecoin may not meet future UK regulatory standards for use in payments or custody. This could lead to the delisting of the stablecoin from the Bitpanda Platform.
Lack of Deposit Protection. Stablecoins are not fiat currency. They are not protected by the Financial Services Compensation Scheme (FSCS) in the UK or equivalent deposit insurance schemes. In the event of the issuer's insolvency, you would be an unsecured creditor and could lose your entire investment.
