Stablecoins explained simply: types, backing and risks

Stablecoins are digital coins (tokens) whose price is meant to be tied to a fixed value, usually the US dollar. Whether this peg holds depends on what stands behind the token: money in reserve, crypto-assets as collateral or merely a computational procedure. Data as of 27 October 2026.

How the stablecoin peg works

Stablecoins get their name because they are usually pegged to a reference value such as the US dollar. They can also track other currencies or assets such as gold. The Swiss National Bank (SNB) describes them as digital assets that are mainly pegged to established currencies such as the US dollar or the Swiss franc.

The principle is simple. Tokens are issued in exchange for money, and anyone who returns them should receive money. The right of redemption and the issuer's assets are meant to keep the price close to the reference value. A comparison: a voucher is only worth as much as the promise that it will be redeemed.

The Bank for International Settlements (BIS), the central banks' bank, takes a sober view. In its 2022 Annual Economic Report, the BIS writes that, despite their name, stablecoins, especially algorithmic ones, are less stable than their issuers claim. There are also differences between issuers. According to the 2025 BIS Annual Economic Report, tokens from different issuers are separate claims, that is, claims against the respective issuer. Their prices can diverge from one another.

Bitcoin is built differently. It has neither an issuer nor a reference value. How it works as an asset is explained in the article on Bitcoin as a global asset.

Three types compared

The BIS distinguishes three main forms according to the type of backing.

Credit and liquidity risk means that a debtor in the reserve does not pay, or that the reserve cannot be turned into money quickly enough. With crypto-assets as collateral, the value of the backing depends on the crypto market. The numerical example below shows this.

The backing depends on the reserves

According to the BIS, the promise of stability rests on the issuer's reserve pool, the assets behind the tokens. Because redemption is possible at short notice, the quality of these assets matters. Issuers whose reserves carry credit or liquidity risk cannot guarantee stability in every scenario, according to the BIS.

In its guidance of 26 July 2024, FINMA, the Swiss financial market supervisor, notes that issuers in Switzerland often use default guarantees from banks. Here, a bank promises to step in if a default occurs. According to FINMA, the risks of the bank guarantees affect holders and the guarantor banks.

TerraUSD 2022: when the peg breaks

TerraUSD (UST) was an algorithmic stablecoin and was meant to be pegged 1:1 to the US dollar. According to the BIS, at its peak in May 2022 it was the third-largest stablecoin, with a market value of USD 18.7 billion. In the same month, its price fell to almost zero. Past performance is not a reliable indicator of future results.

The sequence of events according to the BIS: UST could be exchanged for Luna, a second token with no intrinsic value. UST was «burned» on a large scale, that is, taken out of circulation, in order to create Luna worth USD 1. Too few buyers were found for the new Luna, and the Luna price collapsed. During this period, another large stablecoin fell to USD 0.95 and then recovered. In the following weeks, there were outflows of more than USD 10 billion.

Rules in Switzerland and the EU

At international level, the Financial Stability Board (FSB) recommends clear redemption rights for stablecoin arrangements of global significance. For a peg to a single currency, it refers to redemption at par value (consultative report of 11 October 2022).

Switzerland: FINMA practice

FINMA assesses stablecoins according to their economic function, not their name. It stated this in its press release of 11 September 2019. Depending on the design, the Banking Act or the Collective Investment Schemes Act (the law on funds and similar investment vehicles) may be relevant. The classification can differ from project to project. According to FINMA Guidance 06/2024, issuers with a bank guarantee often do not need a banking licence. FINMA also sees increased risks of money laundering, terrorist financing and sanctions evasion.

Switzerland: bill for a new law

On 22 October 2025, the Federal Council opened the consultation on the amendment of the Financial Institutions Act (FinIA). This act governs which financial firms require a licence. A consultation is a public hearing on a draft bill. The consultation ran from 22 October 2025 to 6 February 2026.

The bill provides for a payment instrument institution, a new licence category. It is intended to replace the existing licence for fintech companies and would be allowed to issue a particular type of stablecoin. Client funds would be segregated in bankruptcy, that is, kept separate from the bankruptcy estate. The current ceiling of CHF 100 million for client funds would no longer apply.

As of 27 October 2026, the topic page of the State Secretariat for International Finance (SIF) gives the consultation as the status of the bill. The consultation is usually followed by the dispatch, that is, the Federal Council's draft bill with its explanatory report to Parliament. The bill is not applicable law.

EU: MiCA

Regulation (EU) 2023/1114 on markets in crypto-assets (MiCA) entered into force on 29 June 2023. According to the German supervisor BaFin, the rules for stablecoins have applied since 30 June 2024. They distinguish two types. E-money tokens are pegged to a single official currency, while asset-referenced tokens are pegged to other assets or to several currencies.

• E-money tokens: Only electronic money institutions and credit institutions may be issuers. Redemption must be possible at any time at par value in the official currency.
• Asset-referenced tokens: They require authorisation from the supervisory authority, a registered office in the EU and a reserve of assets. This reserve is disclosed regularly and forms part of the statutory audit. Redemption is made at the market value of the reference assets.

Switzerland is not a member of the EU. MiCA is EU law.

Risks and limitations

• Loss of value: The peg can break. Losses are possible, in the case of TerraUSD down to almost zero.
• Reserves: With credit or liquidity risks in the reserve, stability cannot be guaranteed in every scenario (BIS).
• Issuers and banks: According to FINMA, the risks of the bank guarantees affect holders and the guarantor banks. How the failure of a provider affects exchange-traded products is explained in the article on the insolvency of an ETP or ETF provider.
• Rush to redeem: If many holders want to redeem tokens at the same time, the reserve may not be sufficient. This is a run, comparable to a run on a bank.
• Contagion: In 2023, the FSB noted that the events of the previous year had revealed the volatility and structural vulnerabilities of crypto-assets. According to the BIS, the consequences outside the crypto market remained limited (Bulletin 69, February 2023).
• Misuse: The BIS describes stablecoins as a preferred choice for illicit purposes.
• Cross-border use: Stablecoins can be issued outside the currency area and circulate worldwide. According to the SNB, they are a niche phenomenon in Switzerland and, given the low volumes, currently pose no risk to financial stability. However, the SNB notes that their importance grows as they become more widespread.
• Legal position: The Swiss bill is not in force, and the classification of a token depends on the individual case. This overview is general and does not constitute legal or tax advice.

Conclusion

Stablecoins are meant to stay pegged to a reference value, but the peg depends on the backing. Money in reserve, crypto-assets as collateral and algorithms hold up to different degrees. The TerraUSD case in May 2022 is one example of why the BIS considers algorithmic stablecoins less stable than their issuers claim. In the EU, rules for issuers have applied since 30 June 2024. In Switzerland, FINMA assesses stablecoins according to their economic function. The consultation on the bill for a new law ended on 6 February 2026. The bill is not in force.