Source: Deutsche Bank Research; Compiled by: Tao Zhu, Golden Finance

Two years ago, the TerraUSD stablecoin collapsed, causing a chain reaction in the cryptocurrency market. TerraUSD was designed to maintain a 1:1 peg to the U.S. dollar through an algorithmic balance with another cryptocurrency, Luna. However, a bank run on TerraUSD caused Luna to collapse, resulting in the breaking of TerraUSD's peg to the U.S. dollar. In March 2023, the collapse of Silicon Valley Bank further exacerbated market instability, and in January 2024, TrueUSD experienced a decoupling event, causing concerns among investors and traders. These events highlighted the volatility and risks associated with stablecoins, as well as the need for greater transparency and regulation in the cryptocurrency market.

Our survey of over 3,350 consumers showed that these events have caused many to question the stability of stablecoins, with only 18% of investors expecting stablecoins to thrive, while 42% expect them to disappear.

Source: Deutsche Bank, dbDIG. Surveys are current as of March 2024. Europe is an average of Germany, France, Spain and Italy. A nationally representative sample of 3,350 people was interviewed in March (550 in France, Germany, Spain, Italy, UK, 600 in the US)

The similarities between non-algorithmic stablecoins and pegged currencies are striking. Both require sufficient reserves and credibility of the issuer, are subject to speculative forces, and most stablecoins and historical currencies are pegged to the US dollar. To gain a deeper understanding of the stablecoin market, we studied 334 currency pegs over 223 years. Our research found that 49% of pegged currencies failed, with a median lifespan of eight to ten years. Macro fragility, speculation, and governance issues are the main reasons for failure. Surviving currencies are generally from smaller authoritarian states or oil-exporting economies with strong financial backing.

Based on our findings, historical events suggest that stablecoins may face volatility and decoupling. While some may survive, most are likely to fail, particularly due to the lack of transparency in stablecoin operations and susceptibility to speculative sentiment. The dominant crypto stablecoin, Tether, is of particular concern given its questionable solvency and its status as an industry standard for crypto derivatives. A “Tether Peso Moment” could result in significant losses, negatively impact leveraged traders, and have severe consequences for the entire crypto system.

While cryptocurrencies are new, it is critical to acknowledge the challenges of building stablecoin pegs as we move forward. We are likely to see more instability in the coming years, so it is necessary to closely monitor stablecoin operations and market sentiment to mitigate potential risks.

Currency Pegging Status

Source: Deutsche Bank