Depeg

A depeg is a stablecoin failing at the one job in its name. The coin is engineered to trade at a fixed value, almost always one dollar or one euro, and a depeg is the market pricing it below (or occasionally above) that value. Since the peg rests on the belief that one coin can always be exchanged for one unit of the reference currency, a depeg is best understood as a run: holders selling faster than the issuer can demonstrate that redemption at par still works.

The two defining episodes illustrate the two kinds. In March 2023, Circle disclosed that $3.3 billion of the reserves backing USDC, roughly 8% of the total, sat at the just-failed Silicon Valley Bank. USDC traded down to about 86 cents that weekend. When US authorities announced that SVB depositors would be made whole and Circle resumed processing redemptions on the Monday, the price snapped back to par. The reserves were sound; the doubt was about access to them, and once access was confirmed the peg held. The Federal Reserve later published a detailed post-mortem of the episode as a case study in stablecoin run dynamics.

TerraUSD, in May 2022, was the other kind. UST held its peg not with reserves but with an algorithm: a holder could always burn one UST for a dollar’s worth of a paired floating token, Luna. When UST slipped below par, holders burned en masse, hyperinflating Luna’s supply and collapsing its price, which destroyed the very asset the peg depended on. Roughly $45 billion of market value across the two tokens evaporated in a week. There was nothing to redeem and no par to return to.

What a depeg means in a settlement context

For institutions, the lesson is not that stablecoins are unusable; it is that the peg is a credit exposure with a price. A payment settled in a stablecoin carries the issuer’s risk from the moment of settlement finality until the coin is redeemed or exchanged. Treasury and risk teams therefore evaluate reserve composition, custody of reserves, attestation frequency, and redemption terms before approving a coin for settlement use, and diversify across coins where policy allows.

Regulation has converged on the same diagnosis. MiCA’s e-money token regime and the US GENIUS Act both mandate high-quality liquid reserves and redemption at par on demand, precisely the properties whose absence turned Terra’s slip into a collapse and whose presence let USDC recover in a weekend.