This risk summary is not exhaustive of all the risks associated with stablecoins. The information contained in this summary is for information purposes only and is not investment advice or a solicitation to purchase stablecoins. Customers should always carry out their own research on stablecoins before investing in them to ensure they have an accurate and complete understanding of the risks involved.
What do we mean by Stablecoin?
‘Stablecoin’ is a term used for a type of cryptoasset that purport to be backed by, or aim to maintain stable value relative to, another asset including fiat currency (such as the US Dollar, GB Pound or Euro). Ramp Network offers a number of stablecoins on its platform, including USDC and USDT.
What specific risks do Stablecoins pose to investors?
Stablecoins use a range of different ways to maintain stability, each with its own risks. This includes the risk that any particular stablecoin may not hold its value against the fiat currency from which they are claiming stability.
An overview of some of the risks associated with Stablecoins is provided below:
Depegging events: These may occur with stablecoins that fail to maintain adequate controls and risk mitigants. A depegging event is when the value of the stablecoin no longer matches the value of the underlying asset (i.e., the price of a USDC may not always reflect the value of US Dollars, the underlying fiat currency). This could result in a loss of some or all of your investment.
Counterparty and collateral risk: When a stablecoin is backed by collateral involving a third party maintaining this collateral, this carries additional risks. Specifically, if the third party were to become insolvent or fail, a customer may lose some or all of their investment linked to the collateral the third party was providing.
Redemption risk: This risk refers to the possibility that a stablecoin's ability to be redeemed for the underlying collateral may not be as anticipated during market fluctuations or operational issues.
Exchange rate fluctuations: Stablecoins, often denominated in US Dollars, expose UK investors to fluctuations in the USD:GBP exchange rate.
Algorithmic risk: Algorithm risk refers to the possibility of a stablecoin's stability being compromised due to unexpected failure or behaviour of the underlying algorithm, potentially leading to loss of value.