Hello Community, sharing an article on Stablecoins on professional investor (CFA UK).
Author: Prasad Gollakota, CFA
This article was originally published by International Financing Review (IFR), and has been shared by IFR with CFA UK.
The article examines why even fully reserve‑backed stablecoins can lose their peg during periods of stress. Using the 2023 Silicon Valley Bank (SVB) collapse and its impact on USDC as a case study, it illustrates that stability is not only a function of reserves but also of market confidence, liquidity access, and timing. The piece argues that true stability emerges only when users believe reserves are reliably accessible especially at moments of stress.
1. Fully backed ≠ fully confident
Even if a stablecoin is completely backed by high‑quality assets, confidence can still break during stressed market conditions. This can push the token off its peg despite sound underlying reserves.
2. USDC's 2023 de‑peg illustrates the confidence problem
When SVB went into resolution, Circle disclosed US$3.3bn of USDC reserves were parked at SVB. Markets quickly questioned whether these reserves were accessible at par, causing USDC to fall into the high‑$0.80s temporarily.
3. Peg mechanisms work only under normal conditions
Arbitrage mechanisms-minting when above $1 and redeeming when below-support the peg during normal times. But when confidence in reserves breaks, arbitrage cannot operate effectively, and the peg can collapse.
4. The issue wasn't crypto tech it was traditional banking exposure
The de‑peg occurred due to fears about real‑world reserves in the banking system, not blockchain mechanics. This highlights that stablecoin risk often stems from traditional finance, not DeFi.
5. The "backstop" restored the peg
Once U.S. authorities guaranteed all SVB deposits, confidence returned immediately. This shows that external interventions-not reserve design or arbitrage-ultimately fixed the problem.
6. Stability is a design challenge revealed only in crisis
The article stresses that stablecoins must be evaluated by how they behave during moments of stress, not in normal times. Confidence, liquidity access, and credible reserve management matter more than simple "fully backed" claims.
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Aya Pariy
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