A stablecoin is a crypto token built to trade at a fixed price, almost always one US dollar. Traders use stablecoins to hold value between trades without cashing out to a bank, and most crypto exchanges quote their busiest markets against them.
Keeping a token at exactly $1 is harder than it sounds, and the method a stablecoin uses to stay there says a lot about how it could fail. Two episodes less than a year apart show two very different kinds of failure.
How a reserve-backed stablecoin keeps its price
The largest stablecoins, including Tether’s USDT and Circle’s USDC, are backed by reserves. The issuer holds cash and short-term government debt. When an approved customer sends it dollars, it creates new tokens. When a customer hands tokens back, it destroys them and returns the dollars. These two operations are called minting and redemption.
Most individual holders never deal with the issuer. They buy and sell stablecoins on exchanges, where the price is set by supply and demand like any other token. What keeps that market price near $1 is arbitrage. If USDC trades at $0.99 on an exchange, a firm with redemption access can buy it there and redeem it with Circle for $1.00. If it trades at $1.01, the same firm can mint new tokens for $1.00 and sell them. Either trade nudges the price back toward a dollar.
The loop works as long as two conditions hold. The reserves have to exist and be easy to sell, and the redemption window has to be open. Remove either one and the market price can drift a long way.
March 2023: USDC and Silicon Valley Bank
On Friday, March 10, 2023, California regulators closed Silicon Valley Bank. That evening Circle disclosed that $3.3 billion of USDC’s reserves were held at SVB and could not be withdrawn. A Federal Reserve analysis published in 2025 puts that at around 8% of total reserves, which stood at a little over $40 billion.
Nobody doubted the other 92%. The trouble was timing. Banks were shut for the weekend, so Circle could not move cash or process redemptions, and nobody knew whether SVB customers with deposits above the insured limit would get their money back. With the arbitrage loop switched off, the exchange price slid. At its lowest point USDC traded at about 86 cents.
At 6:15 p.m. Eastern time on Sunday, March 12, the Treasury, the Federal Reserve and the FDIC issued a joint statement saying SVB depositors would have access to all of their money. USDC recovered most of the gap that evening and was back at $1 once Circle resumed redemptions on Monday. By Wednesday, Circle said it had redeemed $3.8 billion of USDC and minted $0.8 billion since Monday morning.
This was a liquidity scare. The assets existed. Holders could not reach them for about two days, and the market priced in the chance that a slice of them would be lost for good.
May 2022: TerraUSD
TerraUSD, usually called UST, was built differently. It had no pile of dollars behind it. Instead, the Terra blockchain let anyone swap one UST for a dollar’s worth of newly created LUNA, the network’s second token, and swap LUNA back into UST the same way. If UST slipped to $0.98, a trader could buy it, convert it into $1.00 worth of LUNA and sell the LUNA, keeping two cents and removing UST from circulation along the way.
That only works while LUNA is worth something and people want to own it. In practice, the stablecoin was backed by confidence in its sister token, and the sister token’s value depended heavily on demand for the stablecoin.
Much of that demand came from Anchor, a lending protocol on Terra that paid close to 19.5% a year on UST deposits. The total value locked in Anchor peaked at about $17 billion on May 5, 2022, according to CoinGecko’s account of the collapse.
Over the weekend of May 7 and 8, heavy withdrawals from Anchor and large sales of UST pushed the price below $0.99. The Luna Foundation Guard, a non-profit set up to defend the peg, had built a reserve of bitcoin and other assets worth close to $4 billion at its peak, and it started selling to support UST. It was not enough. As holders turned UST into LUNA and sold the LUNA, the supply of LUNA ballooned and its price collapsed. Each redemption was worth less than the one before, which gave everyone a reason to get out first. By May 10 UST was trading around 60 cents. Within days it was worth a fraction of that, and LUNA was close to worthless.
Roughly $40 billion in value disappeared, a figure cited widely in coverage of the collapse and of the criminal case that followed. Terraform Labs co-founder Do Kwon pleaded guilty in August 2025 to wire fraud and conspiracy to defraud. In December 2025 a federal judge in New York sentenced him to 15 years in prison.
USDC had a liquidity problem. UST had a solvency problem. Once confidence went, there was nothing outside the system to absorb the selling.
What the rules now require
In the European Union, the stablecoin provisions of the Markets in Crypto-Assets Regulation, known as MiCA, have applied since June 30, 2024. In the United States, the GENIUS Act was signed into law on July 18, 2025. According to a Congressional Research Service summary, its requirements for payment stablecoin issuers include:
- at least one dollar of permitted reserves for every dollar of stablecoins issued, held in assets such as cash, insured bank deposits, short-dated Treasury bills and government money market funds;
- regular reports on reserves and tokens outstanding, certified by executives and examined by a registered public accounting firm;
- a ban on issuers paying interest to holders, although the law does not stop exchanges from paying customers rewards of their own;
- priority for stablecoin holders over other creditors if an issuer goes bankrupt.
Regulators are still writing the detailed rules, and the law takes effect on January 18, 2027, or 120 days after final regulations are issued, whichever comes first. A design like UST’s, with no reserve of dollar assets, would not meet the reserve requirement.
Questions to ask before you hold one
New rules reduce some risks. You still need to know what you are holding. Before keeping a meaningful amount in any stablecoin, find out:
- who issues it, and which regulator supervises the issuer, if any;
- what the reserves consist of, how often they are reported and who checks the reports;
- whether you can redeem directly with the issuer, and if you cannot, how deep the market is where you would sell;
- where any yield comes from. If a platform pays 8% on a stablecoin, someone is taking a risk to earn that money, and it may be you. Anchor’s 19.5% was the clearest case of a rate that could not last;
- where your tokens actually sit. Stablecoins held on an exchange carry the exchange’s risk on top of the issuer’s.
A stablecoin that has held its peg for years has a track record, and that counts for something. A track record is still not a guarantee, and the difference tends to show up on weekends, during bank failures and in panics, which is exactly when getting out is hardest.
Sources
- Federal Reserve, FEDS Notes: “In the Shadow of Bank Run: Lessons from the Silicon Valley Bank Failure and Its Impact on Stablecoins,” December 2025
- Congressional Research Service: Stablecoin Legislation, an overview of the GENIUS Act of 2025
- CoinGecko: UST depegged, Terra’s biggest test
- The Block: Do Kwon sentenced to 15 years, December 11, 2025
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