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What Are Stablecoins? Why Did TerraUSD Go So Wobbly?

Inside Hong Kong Digital Asset Exchange's Cryptocurrency Trading Store
Photographer: Paul Yeung/Bloomberg
Updated on

If you put a dollar bill under your mattress, you know you’ll get a dollar bill back when you go looking for it. And that paper currency will still be worth $1. A branch of cryptocurrencies called stablecoins aims to replicate that kind of dependability in totally new ways. Some issuers say they keep stores of assets as collateral to guarantee the value of their stablecoins. Other versions involve more complex arrangements. One of those, TerraUSD, and its sister token Luna melted down in spectacular fashion in May, sending their combined market value of $60 billion to near zero. The episode appeared to confirm what regulators have been saying for years -- that stablecoins are a growing risk to the financial system. 

They are digital assets designed to hold a steady value, in contrast to the price volatility seen in Bitcoin and other so-called tokens. They’re usually pegged to another currency, most commonly the US dollar. That makes stablecoins useful for crypto investors who need to park their profits somewhere safe but don’t want to convert them back into real money. One of the most popular stablecoins, Tether, can be exchanged for thousands of other cryptocurrencies. There are dozens of stablecoins in use, with a combined market value that topped $180 billion at the beginning of May before the TerraUSD collapse and a broader slump in crypto assets.