Stablecoin depeg: why USDC bounced back and TerraUSD never did

On 13 May 2022, TerraUSD, a coin designed to be worth exactly one dollar, was trading at around 12 cents. It never came back. That is a stablecoin depeg: a coin meant to hold a fixed value, usually $1, trading well away from it, almost always below. Not every depeg ends that way. USDC sank to $0.87 in March 2023 and was close to $1 again within days. The difference came down to what stood behind each coin, and whether holders could cash it in.

Key takeaways

A depeg is the gap between a stablecoin’s market price and its target. The gap is the symptom; doubts about reserves, a faulty design or thin trading are the cause.
Fiat-backed coins whose reserves were real and reachable have recovered from past depegs. TerraUSD, an algorithmic coin with no hard assets behind it, did not.
America’s GENIUS Act, signed on 18 July 2025, takes effect on 18 January 2027. The OCC issued its final rule on 21 October 2026.
The EU’s MiCA rules for e-money tokens have applied since 30 June 2024; a review under way in 2026 is looking at the reserve requirements.
Holders can limit the damage by knowing who is able to redeem, reading reserve reports, using more than one issuer and not being forced to sell mid-panic.

What does “depeg” mean for a stablecoin?

The peg is the price a stablecoin promises to hold: $1 for USDT or USDC, €1 for a euro token. On exchanges the price twitches by fractions of a cent all the time, and nobody minds. Traders start using the word “depeg” when the move is big enough, and lasts long enough, for holders to wonder whether a token can still be swapped for a full dollar. A 0.1% blip that vanishes in seconds is noise. Ninety-five cents is a warning. Twelve cents is a failure.

It helps to separate two markets. Exchange trading is the secondary market; the issuer’s own window for minting and redeeming coins is the primary market. Only approved business customers can redeem USDC directly with Circle, according to a Federal Reserve research note, and USDT’s primary market is similarly restricted, with a reported $100,000 minimum per mint. Most retail holders have one way out, which is selling on an exchange. So they feel a depeg first, and hardest.

How do stablecoins hold their peg?

Every design rests on arbitrage. If the price slips below $1, somebody has to be able to buy the cheap coin, turn it into a full dollar’s worth of value and pocket the difference; that buying pushes the price back up. Where the designs part ways is in what makes the dollar redemption believable.

Type	What backs it	How the peg is defended	Main weak point	Examples
Fiat-backed	Cash, bank deposits, short-term government debt held by an issuer	Approved users redeem 1 token for $1 from the issuer; arbitrage closes gaps	Reserves stuck at a failed bank, poor disclosure, redemption limited to banking hours	USDC, USDT, FDUSD
Crypto-collateralised	Other crypto locked in smart contracts, usually worth more than the coins issued	Over-collateralisation, automatic liquidations, stability modules	A crash in the collateral, or collateral that is itself another stablecoin	DAI
Algorithmic	Mostly a paired token created by the same project, not outside assets	Code mints and burns the paired token to reward arbitrage	A “death spiral” once confidence in the paired token breaks	TerraUSD (UST), Iron Finance’s IRON
Synthetic / hedged	Crypto plus offsetting derivatives positions	Mint and redeem with the protocol; hedges keep value near $1	Exchange liquidity, funding costs, venue-specific price gaps	Ethena’s USDe

Terra shows how the algorithmic version breaks. Each new UST was created by destroying some LUNA, and redeeming UST worked in reverse. That holds up for as long as LUNA is worth something. When holders ran for the exit, the system printed ever more LUNA to meet redemptions, LUNA’s price collapsed, and the peg was left standing on nothing.

Six ways a peg breaks

Reserve shock. Some of the backing is suddenly out of reach, or people stop believing in it. When Silicon Valley Bank failed, Circle had $3.3 billion of its roughly $40 billion in USDC reserves sitting there.
Mechanism failure. The design simply cannot survive a run. UST and IRON both went this way.
Contagion. A coin backed by another stablecoin catches whatever that coin has. In March 2023 about 54.5% of DAI’s collateral was USDC, and DAI dropped with it.
Redemption friction. Arbitrage stalls if redemptions stop for the weekend or depend on a bank wire. USDC redemptions were paused from Friday 10 March to Monday 13 March 2023, the Fed note says.
Thin liquidity on one venue. In the sell-off of 10 October 2025, USDe fell to $0.65 on Binance even as it held close to $1 on on-chain venues.
Allegations and rumours. FDUSD slid to about $0.87 on 2 April 2025 after public claims that its issuer was insolvent. First Digital denied them.

Biggest stablecoin depegs: dates, lowest prices and recovery

Reported lows vary by exchange and data provider; each figure comes from the linked source.

Stablecoin (type)	Date	Reported low	Trigger	Recovery
IRON, Iron Finance (partly algorithmic)	16 June 2021	Below $1; paired token TITAN fell to near zero	Bank run after TITAN’s price collapsed	Did not recover
TerraUSD, UST (algorithmic)	9–13 May 2022	Below 30 cents on 11 May; about 12 cents on 13 May	Large withdrawals, LUNA death spiral	Never recovered; about $40 billion in market value wiped out
Tether, USDT (fiat-backed)	12 May 2022	$0.95	Panic spreading from UST	Regained peg quickly; Tether processed about $10 billion of redemptions from 11 to 23 May
USD Coin, USDC (fiat-backed)	10–13 March 2023	$0.87	$3.3bn of reserves at failed Silicon Valley Bank	About three days, after US authorities said all SVB depositors would be fully protected
DAI (crypto-collateralised)	11 March 2023	$0.88	More than half its collateral was USDC	Recovered with USDC over roughly three days
First Digital USD, FDUSD (fiat-backed)	2 April 2025	About $0.87	Public insolvency allegations, denied by issuer	Brief; about $26 million redeemed in the following days
Ethena USDe (synthetic)	10 October 2025	$0.65 on Binance only	Thin order book during a market-wide crash	About 40 minutes on that venue

Read down the recovery column and a split appears. Coins backed by real assets that holders could reach bounced back once the market believed the money was there. Coins whose backing was mostly their own sister token stayed broken. Terra’s fallout is still felt in policy, too. The SEC won a settlement of more than $4.5 billion from Terraform Labs and Do Kwon in June 2024, and on 11 December 2025 a New York court sentenced Kwon to 15 years in prison.

Worked example: what a depeg costs if you sell in a panic

Take a holder with 10,000 USDC, worth about ₹9,49,300 at the rupee’s 23 October 2026 close of 94.93 per dollar. To keep things simple, every rupee figure uses that rate.

Scenario	Sale price	You receive	Loss vs $1	Loss in INR
USDT-style dip (May 2022)	$0.95	$9,500	$500	≈ ₹47,465
USDC low (March 2023)	$0.87	$8,700	$1,300	≈ ₹1,23,409
UST on 13 May 2022	$0.12	$1,200	$8,800	≈ ₹8,35,384
Half USDC at $0.87, half in a coin that held $1	Blended	$9,350	$650	≈ ₹61,705

Selling USDC at the bottom locked in a $1,300 loss. Sitting tight until it re-pegged cost nothing. Splitting the same $10,000 between two issuers halved the hit. None of this could be known in advance, though, and with UST, waiting only made things worse. The useful work happens before a crisis, in understanding what backs a coin, rather than during one.

The new rulebooks for reserves

United States: the GENIUS Act

The GENIUS Act became law on 18 July 2025. On 21 October 2026 the Office of the Comptroller of the Currency put out its final implementing rule, which sets out reserve, redemption and risk-management requirements for the issuers it supervises. The rule and the Act both take effect on 18 January 2027 (status as of October 2026). Anti-money-laundering and sanctions requirements are going through a separate rulemaking with the Treasury, and the OCC says it will announce separately when it opens for applications.

1:1 reserves in safe assets: cash, insured bank deposits, Treasury bills with 93 days or less to maturity, short repos, qualifying money market funds and deposits at the Federal Reserve.
Monthly disclosure: a reserve report on the issuer’s website each month, examined by a PCAOB-registered accounting firm and certified by the CEO and CFO. Issuers with more than $50 billion outstanding must also produce audited annual financial statements.
Holder protection: reserves are kept out of the issuer’s bankruptcy estate, and holders have a priority claim on them.
No yield and licensed issuers only: permitted issuers cannot pay interest, and only bank subsidiaries, federally qualified non-banks and state-qualified issuers may issue payment stablecoins for US persons.

European Union: MiCA

Europe got there first. MiCA’s rules for e-money tokens (single-currency stablecoins) and asset-referenced tokens have applied since 30 June 2024. Issuers have to redeem at par and hold at least 30% of reserve funds in segregated accounts at credit institutions, with the remainder in low-risk instruments denominated in the same currency. Tokens classed as “significant” face stricter liquidity and stress-testing requirements, and their bank-deposit floor goes up to 60%. Paying interest on them is prohibited.

Those rules are now being reopened. On 20 May 2026 the European Commission launched a consultation that takes in multi-issuance, the interest ban and reserves. Cointelegraph reports that euro-system central banks have suggested swapping the fixed bank-deposit minimum for liquidity tests (a set share of reserves available within one or five working days, for example), and that Circle’s response argues along similar lines. As of October 2026, all of this is at the proposal stage.

Rule	US GENIUS Act	EU MiCA (e-money tokens)
Status (October 2026)	Law; effective 18 Jan 2027	Applying since 30 Jun 2024; under review
Reserves	1:1 in cash, deposits, short T-bills, repos, MMFs	Min. 30% bank deposits (60% if significant), rest low-risk assets
Disclosure	Monthly, accountant-examined, CEO/CFO certified	White paper; oversight by national supervisors or the EBA
Interest to holders	Not allowed	Not allowed
Coins without asset reserves (our reading)	Would not meet the 1:1 reserve requirement for permitted payment stablecoins	Would not meet the reserve rules for e-money or asset-referenced tokens

Neither regime rules out a depeg. Money parked at a bank can still be caught when that bank fails; SVB proved as much. What the laws change is visibility and standing: holders can see the backing more clearly and have a firmer legal claim on it. That tends to make a panic shorter.

How to reduce stablecoin depeg risk

Know the design. Find out whether the coin rests on cash and short-dated government debt, on crypto, or on an algorithm. Be especially wary of high, steady yields: UST’s ecosystem was paying about 20% through Anchor before it collapsed.
Read the reserve report. Look at how often it comes out, who examines it, which assets it lists and where they sit. Once the GENIUS Act applies, US-regulated issuers will have to publish one every month.
Know your exit route. Without direct redemption rights, an exchange is your only exit, at whatever price it quotes in a panic. See whether your platform has frozen conversions during earlier episodes.
Spread across issuers. The worked example above shows how holding more than one well-backed coin caps the damage when a single issuer runs into reserve trouble. Steer clear of coins that lean on each other, such as one backed mostly by another stablecoin.
Watch prices across venues. One bad print on one exchange, as USDe had, is not the same thing as a broad depeg. Check several venues before doing anything.
Avoid leverage on stablecoins. A loan or margin position secured by a stablecoin can be liquidated in a short dip, and a temporary price gap becomes a permanent loss.
Check local rules. Indian residents should confirm the current tax and reporting rules on crypto assets with the Income Tax Department or a qualified adviser before buying, swapping or selling.

This article is for information and education only and is not investment, tax or financial advice. Figures were checked on 27 October 2026; confirm current details with the official source or a registered adviser before acting.

FAQ

What is a stablecoin depeg in simple terms?

A coin that should be worth exactly $1 (or €1) trades noticeably above or below that, because the market doubts it can be swapped back at full value.

Has USDT ever lost its peg?

Yes, briefly. On 12 May 2022, in the middle of the TerraUSD collapse, USDT dipped to about $0.95. It recovered as Tether handled roughly $10 billion of redemptions over the days that followed.

Why did USDC depeg in 2023?

Circle had $3.3 billion of USDC reserves at Silicon Valley Bank when the bank failed on 10 March 2023. USDC fell to about $0.87, then recovered after US authorities said every SVB depositor would be protected.

Can a depegged stablecoin recover?

USDC, USDT and DAI did, because real assets that holders could reach stood behind them and redemptions kept working. Algorithmic coins such as UST and IRON stayed down once confidence went.

Are algorithmic stablecoins allowed under the GENIUS Act?

From 18 January 2027, only licensed issuers holding 1:1 reserves in approved safe assets can issue payment stablecoins for US persons. On our reading of those reserve rules, a coin backed mainly by its own sister token would not qualify.

Is a stablecoin the same as money in a bank?

No. Stablecoins are not bank deposits and carry no deposit insurance. The new laws give holders a priority claim on reserves, but what the coin is worth still depends on the issuer and what it holds.

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