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Stablecoins

A stablecoin is a token that claims to stay near a dollar. The claim depends on what it is pegged to, and on who can refuse a redemption.

A worked case

A dollar token is treated as cash. The issuer can freeze an address. A freeze is used. The price is still a dollar. The money is stopped. Stable was never the same as withdrawable.

Three kinds

Fiat-backed: a company says it holds bank deposits. Crypto-backed: other coins are locked, often more than the stablecoins issued. Algorithmic: a design tries to hold the price with incentives, and can fail when people leave.

The check

Who can mint it. Who can freeze an address. Where the reserves sit, and whether you can redeem. A freeze function means someone can stop your money.

Stable is a claim about price, not a claim that the issuer has your interests.

A dollar is a claim, and the issuer can refuse it

A stablecoin is a token that claims to stay near a dollar. Fiat-backed tokens such as USDC say a company holds reserves. Crypto-backed tokens lock other coins, often more than they issue. Algorithmic designs try to hold the price with incentives, and they fail when people leave. TerraUSD was the large failure of that third kind. In May 2022 it lost the peg. The SEC later said Terraform and Do Kwon had misled investors about how stable it was, including a earlier slip in 2021 that a trading firm quietly helped repair. In 2024 a jury found them liable for fraud, and they agreed to pay more than 4 billion dollars in a settlement, with the money routed through Terraform's bankruptcy. The SEC's number for the wipeout was about 40 billion dollars of market value.

USDC is the other kind of story, and it also left a dollar. In March 2023 Circle said 3.3 billion dollars of the reserves, about 8 percent, sat at Silicon Valley Bank, which had failed. USDC traded below a dollar until US authorities said depositors would be made whole. Circle's own press note is the record. The peg came back. For a weekend, a token marketed as cash was a claim on a bank that had closed.

Stable is a sentence about price. Freeze functions are a sentence about power. Circle and Tether can both block addresses. A frozen token can still be worth a dollar and be useless to you. Read who can mint, who can freeze, and whether you can redeem, before you call it cash.

Read it yourself

• SEC: Terraform and Kwon fraud charges (2023)
• SEC: Terraform and Kwon to pay more than $4.5 billion (2024)
• Circle on the SVB reserves and the USDC peg (March 2023)

These links are the record. They are not a recommendation, and they are not instructions. A news story or a court paper can still be wrong about a detail. The check does not change because a famous name is in the story.

Apply the check

Open a question. The line is about this topic. It is not a verdict that anything is safe.

Check yourself