Most crypto-assets swing wildly in price. Stablecoins are designed to do the opposite: to keep a steady value, usually pegged one-to-one to a currency such as the US dollar. They are widely used inside the crypto world to move between assets, settle trades and send value across borders. But a peg is a promise maintained by an issuer or a mechanism, and promises can break.
Why stablecoins exist
Converting crypto back to dollars through a bank can be slow and costly. Stablecoins let people hold a dollar-like value on a blockchain, moving it quickly between platforms and wallets. They are also used in decentralised finance apps for lending and trading.
The three main designs
| Type | How the peg is maintained | Key risk |
|---|---|---|
| Fiat-backed | Issuer holds reserves such as cash and short-term government securities | Reserves may be insufficient, inaccessible or poorly disclosed |
| Crypto-backed | Locked crypto collateral worth more than the stablecoins issued | Collateral can crash in value |
| Algorithmic | Software adjusts supply, sometimes using a companion token | Can enter a death spiral if confidence fails |
Fiat-backed
The most common kind. A company issues one token for each dollar it says it holds in reserve and redeems tokens for dollars. Holders depend on the issuer actually having the reserves, keeping them in safe and accessible assets, and honouring redemptions. Quality of disclosure varies.
Crypto-backed
These lock up more crypto than the value of stablecoins created, to absorb price falls. If the collateral falls too fast, the system can struggle to maintain the peg.
Algorithmic
These try to hold their peg through code and incentives rather than reserves. The best-known example, TerraUSD, collapsed in May 2022 when confidence evaporated, taking its companion token with it and wiping out tens of billions of dollars of value.
How stablecoins lose their peg
- Bank-run dynamics: if many holders try to redeem at once and reserves are not liquid, the price can fall.
- Reserve problems: if reserves are lost, frozen or overstated.
- Collateral crashes in crypto-backed designs.
- Design failure in algorithmic designs.
- Platform failure: even a sound stablecoin is only as accessible as the platform holding it.
Several stablecoins have temporarily traded below their peg during market stress.
Not a bank deposit
Stablecoins are not bank deposits. They are not covered by the Australian Government's Financial Claims Scheme. Interest-like returns offered on stablecoins by platforms come with platform and counterparty risk. If a platform offering high "yield" on stablecoins seems too good to be true, treat it with suspicion.
Australian regulation
Australia is reforming how digital assets are regulated. The Corporations Amendment (Digital Assets Framework) Act 2026 brings digital asset platforms and tokenised custody platforms into the financial services licensing regime, with commencement scheduled for April 2027. The government has also been reforming payments regulation, which is expected to cover certain stablecoin arrangements. Read crypto regulation in Australia.
Stablecoins and tax
The ATO generally treats stablecoins as crypto-assets. Swapping crypto for a stablecoin, or a stablecoin for other crypto, can be a CGT event even though no Australian dollars change hands. Read crypto tax basics.
Questions to ask about any stablecoin
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Key terms
- Peg: the target value a stablecoin aims to hold, such as one US dollar.
- Depeg: when a stablecoin's market price moves away from its peg.
- Reserves: the assets an issuer says back its tokens.
- Attestation: a report from an accounting firm about reserves at a point in time; it is narrower than a full audit.
- Redemption: exchanging stablecoins with the issuer for the underlying currency, often only available to approved customers.
- Over-collateralised: backed by more collateral than the value of tokens issued.
- Yield: returns a platform offers for depositing stablecoins, which come with platform and counterparty risk.
Stablecoins versus a central bank digital currency
A stablecoin is issued by a private company. A central bank digital currency would be issued by a central bank. The Reserve Bank has researched wholesale digital money and tokenised settlement; this is separate from privately issued stablecoins.
The bottom line
Stablecoins aim for stability but carry issuer, reserve, design and platform risks. Understanding how a particular stablecoin keeps its peg is the key to understanding what could make it fail.
Frequently asked questions
Can stablecoin issuers freeze tokens?
Some fiat-backed stablecoin issuers have the technical ability to freeze tokens held at particular addresses, for example in response to law enforcement requests. Check an issuer's terms to understand its powers.
Why do people use stablecoins instead of dollars?
Mainly for convenience within crypto markets - moving value between platforms and blockchains quickly, at any hour. Converting back to Australian dollars still depends on a platform or the issuer.
Are stablecoins safe?
Not necessarily. A stablecoin is only as reliable as the assets backing it and the issuer behind it. Some stablecoins have lost their peg, and holders are not covered by the Financial Claims Scheme.
What happened to TerraUSD?
TerraUSD was an algorithmic stablecoin that lost its US dollar peg in May 2022 and collapsed, wiping out tens of billions of dollars in value and contributing to a wider crypto downturn.
Is a stablecoin the same as a bank deposit?
No. A stablecoin is a token issued by a private company, not a deposit with a bank. It is not guaranteed by the government.
Are there Australian dollar stablecoins?
Some issuers have launched AUD-pegged stablecoins. Australian law is changing to regulate stablecoin and payment arrangements more closely.
Do I pay tax on stablecoins?
The ATO generally treats stablecoins as crypto-assets. Swapping one crypto-asset for another, including to or from a stablecoin, can be a CGT event.
What does losing the peg mean?
It means the stablecoin's market price moves away from its target, for example falling below one US dollar.
Sources and further reading
Facts on this page were checked against these primary and official sources. Conditions change — confirm before you travel or buy.
- Stablecoin — Wikipedia
- Terra (blockchain) — Wikipedia
- Cryptocurrencies — ASIC Moneysmart
- Cryptocurrencies explainer — Reserve Bank of Australia
