Stablecoins: Why 'Stable' Is Doing a Lot of Work in That Name
How coins pegged to a currency actually hold that peg, and what happens to holders on the occasions the mechanism fails.
By Firoz Khan|4 September 2026|Updated 1 October 2026|5 min read
A stablecoin is designed to track the value of a real currency, almost always the US dollar, rather than to go up. That makes it look like the boring corner of crypto, and most of the time it is, but the word 'stable' describes an intended outcome, not a guarantee, and the mechanism behind that outcome varies a lot more than the branding suggests.
Three ways a peg is actually held
Fiat-backed stablecoins hold real dollars or equivalent low-risk assets in reserve for every coin issued, at least in theory, and the peg depends entirely on those reserves genuinely existing and being accessible. Crypto-collateralised stablecoins are backed by other cryptocurrencies held in excess of the value issued, to absorb the underlying asset's volatility. Algorithmic stablecoins hold no real backing at all, relying instead on code and market incentives to maintain the peg, which is the riskiest of the three by a clear margin.
What 'backed 1:1' actually requires you to trust
A reserve attestation, a snapshot confirming assets existed at one point in time, is not the same as a full independent audit, and most stablecoin issuers publish the former rather than the latter. Holding a fiat-backed stablecoin means trusting the issuer's solvency and honesty about its reserves, a different kind of risk to the market risk you're taking on with a volatile coin, and one that's much harder for an individual holder to verify directly.
Why they matter more than most beginners realise
Stablecoins are the base layer almost all crypto trading and DeFi activity actually runs through, used to move between other assets, to price trades, and to earn yield in lending protocols. Anyone active in crypto is very likely holding or interacting with a stablecoin regularly, whether or not they've thought of it as a distinct kind of asset with its own risks.
What to check before holding one
Look at four things. Who the issuer is and where it is based. What the reserves are made of, since cash and short-term government bonds are a very different backing from riskier assets. How often reserves are reported, and whether that is a full audit or only an attestation. And the redemption terms, meaning who can swap the coin back for currency at par. Some issuers only redeem directly for verified, larger customers, so most holders rely on selling on an exchange at whatever price is available on the day.
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Holding a dollar stablecoin from the UK
Most large stablecoins track the US dollar, so a holder whose money is in pounds takes an exchange-rate risk that has nothing to do with the peg. Say you hold 1,000 dollar stablecoins when £1 buys $1.25, so they are worth £800. If the pound strengthens to $1.35, the same coins are worth about £741, even though the coin held its peg perfectly. If it also slipped to 95 cents, they would be worth about £704. The exchange rates here are examples, not forecasts.
De-pegging is a real, recurring event
TerraUSD, an algorithmic stablecoin, collapsed in May 2022, wiping out tens of billions of dollars in value within days as its peg failed entirely. Fiat-backed stablecoins have also traded briefly below their peg during periods of acute market stress or concern over an issuer's reserves. These aren't hypothetical tail risks, they've happened to coins that looked secure right up until they weren't.
Tax when you swap
HMRC guidance says that exchanging one cryptoasset for a different type of cryptoasset, or using it to pay for goods or services, counts as a disposal for Capital Gains Tax. A stablecoin is a cryptoasset, so swapping Ethereum for a stablecoin is a disposal of the Ethereum, even though no pounds were involved. The gain or loss on later disposals of the stablecoin itself is usually small, but each one still needs recording, with the type of token, the date, the number and the value in pounds. The first £3,000 of gains in the 2026/27 tax year is covered by the annual exempt amount.
The UK regulatory picture
UK stablecoin rules are being built now but are not in force yet. The Cryptoassets Regulations were approved by Parliament on 4 February 2026. The FCA says the new regime, which covers stablecoin issuance, custody, trading platforms, staking, lending and borrowing, starts on 25 October 2027, and its application window for firms runs from 30 September 2026 to 28 February 2027.
The Bank of England and the FCA have also published a joint approach to regulating stablecoin issuers large enough to matter for the wider financial system, and the FCA has said that supporting UK-issued sterling stablecoins is a priority for 2026. Until the regime starts, treat most stablecoins as unregulated for practical purposes. The FCA says crypto is largely unregulated in the UK, and that it is highly unlikely you would be covered by the Financial Services Compensation Scheme.
A reminder
The FCA risk warning still applies to higher-risk crypto content. Always assess how much risk you are willing to take before buying.
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