A currency peg is when the exchange rate of one currency is fixed to match another currency or a basket of assets. A good example is the Hong Kong dollar (HKD) pegged to the US dollar (USD) at about 7/8:1. What is Depegging? Is deppegging a real threat to financial stability? If you do not know what Depegging is, this article is for you.
What Does Pegging Mean In Crypto?
In cryptocurrencies, pegging refers to pegging the value of an underlying asset to an external asset, usually at a 1:1 ratio. This is done so that the pegged asset mimics the price movements of other assets or currencies. For example, both USDC and USDT are pegged to the U.S. dollar, meaning that one unit of either stablecoin can be exchanged for 1 U.S. dollar. A different example is the PAX Gold cryptocurrency pegged to one troy ounce of 400 ounces of London Gold Delivery (gold bars).
What is Depegging?
Decoupling is the phenomenon in which a stablecoin deviates from its intended peg. For example, if the value of a dollar-pegged stablecoin continues to fall below $1, the coin is said to be de-pegged. Decoupling events are common in both fiat and crypto. The loss of the Thai baht to the dollar in 1997 is a case in point.
When decoupling occurs, it questions the validity of the currency and its ability to maintain the desired peg. As with any stablecoin, decoupling usually portends disaster, especially in the case of algorithmic stablecoins whose coin supply and exchange rate are governed by computer code.
Is depegging a real threat to financial stability?
The closest analog to stablecoins, central bank digital currencies (CBDCs), is slowly gaining ground, at least in policymakers' plans. The Bank of Israel touted public support for its "Digital Shekel" program, which was halted at one point but entered a new testing phase last year. In this sense, the European Central Bank has nothing to brag about, and it continues to educate the public about its various anonymous options for a digital euro.
Additionally, Bitcoin miners who acquire newly minted BTC will also be tax-free after holding it for one year. Hessel also said that the Federal Treasury will continue to issue further guidance on the use and trading of cryptocurrencies.
Germany has taken a proactive approach to cryptocurrency regulation, adopting a national blockchain strategy in 2019. From January 2020, cryptocurrency service providers, including exchanges and custody platforms, will have to obtain a license from BaFin ensuring the industry operates service providers to the same standards as the traditional financial industry.
I hope this article will help you to learn what is Depegging and whether is Depegging a real threat to financial stability. Powerful arbitrage mechanisms can help algorithmic stablecoins add a layer of protection on top of smart contract management. Whenever a stablecoin trades below $1, arbitrageurs can buy it cheap, then trade it for $1, take a profit and restore the peg.
