Stablecoin depegs: how a dollar token loses its dollar

Five different failures, one word

Traders call any dollar token trading away from a dollar a "depeg", and the word flattens five distinct failures into one. A reserve can be impaired while redemption still works. Redemption can freeze while the reserve is intact. A crypto-backed design can lose its collateral. An algorithmic design can lose its stabiliser entirely. And a token can trade below a dollar on an exchange while its issuer keeps paying out a dollar to every eligible holder who asks. Each has a different cause, a different fix and, increasingly, a different regulatory answer. This is not investment, legal or tax advice.

Reserve-asset shock: when the backing itself is impaired

On the morning of Friday 10 March 2023, Silicon Valley Bank entered resolution. Circle, issuer of USDC, had $3.3 billion of USDC reserves at SVB, around 8% of the total, and at 10 p.m. that evening announced it could not withdraw them. Circle said redemptions over the weekend were constrained by the working hours of the US banking system. A Federal Reserve staff note published in December 2025 concluded that "a suspension of primary market redemption during a crisis can both amplify price instability on the secondary market and exacerbate the run". Hourly trading volume rose to nearly $2 billion on 11 March, and USDC fell to about 87 cents, 86 cents at its trough by the Fed note's measure. The shock spread into decentralised finance: MakerDAO's Peg Stability Module, which swaps USDC for Dai one-for-one, hit its 950 million USDC daily cap, and Dai, although it remained solvent, was dragged down to about 91 cents.

The episode ended because the US authorities, not Circle, restored confidence: at 6:15 p.m. ET on Sunday 12 March, the Federal Reserve, Treasury and FDIC announced that SVB's depositors would be protected. Circle began processing redemptions on Monday 13 March and said its backlog had cleared on 15 March. The fault was narrow: reserve cash sitting at a single bank, above the deposit-insurance limit. It was not a rumour-driven run, and it was not a collateral failure inside a crypto-native design.

A run on redemption: when the exit breaks, not the money

Contrast Tether in October 2018. Wells Fargo had cut off services to Bitfinex and Tether in March 2017. In October 2018, Bitfinex, Tether's affiliated exchange, froze fiat deposits for certain customer accounts and said a new deposit system would be available by 16 October. Traders read that as a solvency signal rather than an operational one, and on 15 October USDT briefly fell to about $0.88 as holders on Bitfinex swapped it for bitcoin. No loss of reserves was disclosed. The run was a crisis of confidence in the exit, triggered by a banking disruption. On 1 November 2018, Tether confirmed Deltec Bank & Trust as its bank, and Deltec published a signed statement putting the account's cash value at $1,831,322,828 as of 31 October. A reserve-shock stablecoin has a specific loss that can be sized. A redemption-run stablecoin can be solvent throughout and still trade well below par for as long as holders doubt they can get out.

Collateral collapse in a crypto-backed design

Crypto-collateralised stablecoins fail differently again: the assets behind the loans that mint the token are themselves volatile. Abracadabra's MIM shows the exposure can be structural. Its Degenbox strategy let users deposit Terra's UST, borrow MIM against it and loop the proceeds back into more UST, so when UST collapsed in May 2022, loans backing MIM were secured by a token worth a fraction of face value. MIM fell to $0.914 on 18 June 2022, and on 19 June Abracadabra said its treasury held enough assets to cover about $12 million of bad debt from the UST crash. It asked borrowers to repay while the peg was depressed, and MIM was back at $0.992 by that evening. A design that accepts another stablecoin as collateral inherits that stablecoin's failure modes on top of its own.

The algorithmic death spiral

Terra's UST had no external collateral. It was stabilised by a mint-and-burn swap against its sister token, LUNA: one UST could always be exchanged for a dollar's worth of newly minted LUNA. On 7 May 2022, with UST at $1.00 and LUNA around $80, about $350 million of UST was withdrawn from a Curve Finance pool, and the design turned a small deviation into a collapse. As UST fell, holders burned it for new LUNA and sold, which inflated LUNA's supply and cut its price, which weakened the backing for the next round, which deepened UST's discount. LUNA's circulating supply went from roughly 350 million tokens to about 6.5 trillion in five days. UST was at $0.29 by 11–12 May and LUNA went to effectively zero, erasing roughly $40–45 billion across the two tokens, depending on the estimate. A new chain, Terra 2.0, launched later that month without a stablecoin; the original peg never came back. One academic post-mortem traced the fragility to the project's "vicious dependence on the Anchor protocol". The thing standing behind the peg was confidence in a second token, not an external asset.

Market-structure depeg: when redemption holds but the market doubts it

The fifth pattern is easy to miss because the issuer keeps paying. On 2 April 2025, public allegations that First Digital, the issuer of FDUSD, was insolvent sent the token as low as $0.87, and to 0.76 against USDC on Binance, its main trading venue. First Digital said it was "completely solvent" and that FDUSD was fully backed by US Treasury bills. It kept processing redemptions, about $25.8 million of them in the days that followed, and the price stabilised at around $0.96 to $0.98. The point here is mechanical, not a verdict on the issuer. A rumour can move a stablecoin's traded price well away from par while the redemption window stays open, because most holders cannot use that window and sell into whatever bid is available. A monthly reserve report does not close that gap either, as our look at what stablecoin attestations do and do not establish sets out.

The arbitrage that should fix this, and what stops it

In principle, a stablecoin below a dollar is a standing profit: buy the discounted token, redeem it with the issuer for a full dollar, and the buying pushes the market price back up. Above the peg, the trade runs the other way, by minting. That is the mechanism meant to hold a stablecoin at par, and four things routinely stop it working when it is needed.

Redemption minimums and eligible redeemers

Direct redemption is open to few holders. The Fed note found that stablecoins, USDC included, "tend to restrict access to their primary markets to a select few institutional investors", and that most individual holders can only trade on secondary markets. Researchers at the MIT Digital Currency Initiative describe the conditions for primary access: full KYC and AML checks, minimum redemption thresholds, fees and approved jurisdictions. Everyone else sells at the market price the arbitrage is supposed to correct.

Banking hours

Redeeming a fiat-backed stablecoin ends in a bank wire, and wires do not move at weekends or on bank holidays. In March 2023 the arbitrage could not close because the leg that pays out real dollars was shut for the weekend.

Gates

Some designs cap redemption volume outright. MakerDAO's Peg Stability Module and its 950 million USDC daily cap in March 2023 is one example. A gate stops the system behind it being drained at once, but it also means the arbitrage cannot run at the size needed, at the moment it is needed most.

What the new rules require, and when

The United States' GENIUS Act, signed on 18 July 2025, requires a permitted payment stablecoin issuer to back its tokens at least one-to-one with a defined list of reserves: cash, insured deposits, Treasury bills of 93 days or less, certain repo and money market funds. The reserves must be segregated from operating funds and may not be rehypothecated except in narrow cases. Issuers must publish their redemption policy and their reserve composition every month, and may not pay holders interest or yield. The Act is law, but its requirements do not yet apply. They take effect on the earlier of 18 January 2027 or 120 days after final implementing rules, and the statute's deadline for those rules, 18 July 2026, passed with no final rule issued. As of early September 2026, the OCC (February 2026), the FDIC (April 2026) and Treasury (August 2026) had published proposed rules only, and the Federal Reserve had not proposed one. The Comptroller of the Currency said on 19 August 2026 that the OCC expected to finalise its rule by November.

The European Union's Markets in Crypto-Assets Regulation is further along. Its titles on asset-referenced tokens and e-money tokens have applied since 30 June 2024. An e-money token issuer must redeem "at any moment and at par value" and invest the funds it receives in secure, low-risk assets held in a separate account. An asset-referenced token issuer must hold reserves covering its liabilities, plus own funds of at least the greater of €350,000, 2% of average reserve assets or a quarter of the previous year's fixed overheads. Neither regime has a category for a design like Terra's: both are built around a reserve of real assets. The Financial Stability Board's July 2023 recommendations for global stablecoin arrangements call for a robust legal claim, timely redemption at par for single-currency coins and an effective stabilisation mechanism. They are a standard for national authorities, not law, and an FSB review of 16 October 2025 found implementation "incomplete, uneven and inconsistent".

So reserve-composition risk and redemption-run risk are addressed by law that is either in force (MiCA) or enacted but not yet applying (GENIUS). The FDUSD pattern, an open redemption window and a panicked secondary market, has no direct answer in either. Reserve and redemption rules bind the issuer. They do not reach the rumour, or the exchange liquidity that decides what a holder who cannot redeem actually receives.

What a treasury or trading desk should monitor

• Where the reserve sits: which banks and custodians, and how much of the cash is uninsured and concentrated, not just the headline "one-to-one".
• Who can redeem, at what minimum, and how fast. A stablecoin your desk cannot redeem directly is a secondary-market instrument for you.
• Whether redemption depends on a banking window that can close for a weekend or holiday just as stress arrives.
• Any protocol, lending market or peg-stability module that treats the token as always worth a dollar. That assumption is where a small depeg becomes someone else's liquidation, as our note on how price oracles work and fail explains.
• The issuer's economics and buffer against a reserve shock; see how stablecoin issuers make money.
• Where liquidity sits under stress, since displayed exchange depth can vanish when a desk needs to trade out, a dynamic covered in our piece on liquidity and leverage.
• The status of any rule an issuer cites: in force, enacted but not yet applying, or proposed. MiCA's stablecoin rules apply now; the GENIUS Act's do not yet.