What are stablecoins and how do they work?
Stablecoins are cryptocurrencies designed to hold a steady value, usually by tracking a currency such as the US dollar. They are the working capital of the crypto market: traders park gains in them, money moves between exchanges through them, and most lending and DeFi activity is priced in them. This guide explains how they hold their value, where they have failed, and what UK investors should check before relying on one.
How stablecoins hold their peg
Fiat-backed stablecoins are the most common kind. The issuer holds reserves, typically cash and short-dated government debt, and promises that each token can be redeemed for one unit of the currency it tracks. Tether (USDT) and USD Coin (USDC) work this way, and between them they account for most of the stablecoin value in circulation.
Crypto-backed stablecoins such as DAI take a different route. Instead of a company holding dollars in a bank, the token is backed by other cryptoassets locked in smart contracts, with more collateral posted than the value of the tokens issued, so the peg can survive a fall in the collateral’s price.
Algorithmic stablecoins try to hold their peg with code and trading incentives rather than reserves. Their record is the weakest of the three, and the collapse of TerraUSD in 2022 showed how quickly that design can unravel once confidence goes.
What UK investors use stablecoins for
Stablecoins have practical uses well beyond speculation, and most of the people we speak to touch them at some point:
- Parking profits between trades without cashing out to a bank account
- Moving value between exchanges quickly and at low cost
- Holding a dollar-linked balance without opening a foreign currency account
- Sending money across borders faster than a traditional transfer
- Earning yield through lending or DeFi, which carries its own significant risks
One point catches many people out: swapping bitcoin or any other token into a stablecoin is still a disposal in HMRC’s eyes, so gains up to that point can be taxable even though no pounds ever reached your bank.
Where stablecoins have gone wrong
A stablecoin is only as good as what stands behind it. TerraUSD collapsed entirely in 2022 and took tens of billions of dollars of value with it. USD Coin slipped below its dollar peg for a weekend in 2023 when a bank holding part of its reserves failed, and recovered once US authorities stepped in.
The risks worth understanding before you rely on any stablecoin: the quality and transparency of the issuer’s reserves, whether you can redeem tokens directly or only sell them on an exchange, how the peg behaves in a panic, and the platform your tokens sit on, since exchanges and lenders have failed with customer balances inside. None of this is covered by the Financial Services Compensation Scheme.
Stablecoins and UK regulation
The UK has been bringing stablecoins inside the regulatory perimeter. The Financial Services and Markets Act 2023 created the framework, and the FCA has since consulted on detailed rules for how fiat-backed stablecoins must be issued, backed and safeguarded in the UK. The direction of travel is clear: regulated issuers, reserves held to defined standards, and clearer redemption rights for holders.
Two things have not changed. Most of the stablecoins UK investors actually use are issued overseas, outside those protections. And crypto held on exchanges or lending platforms is not protected by the FSCS, whatever the marketing implies. UK financial promotions rules already require risk warnings on crypto marketing, which is why every exchange now tells you to be prepared to lose all your money.
How we help with stablecoins
We are consultants and educators, not salespeople, and stablecoins come up in almost every conversation we have. If you are deciding whether a stablecoin holding fits your wider plans, our crypto wealth management work looks at the whole picture. If you have been swapping in and out of stablecoins and are unsure what you owe, our crypto tax accountants can reconstruct your history and produce figures HMRC will accept. And if your stablecoins are stuck on a failed platform or were taken in a scam, our crypto recovery services team will give you an honest view of what can and cannot be recovered.
The initial consultation is free, and there is no obligation beyond it.
Frequently asked questions
Are stablecoins a safe place to park money?
They are steadier than other cryptoassets, but they are not risk-free. You are relying on the issuer’s reserves, the strength of the peg and the platform where the tokens sit, and none of it is covered by the Financial Services Compensation Scheme. For short periods between trades many investors accept those risks, but a stablecoin is not a savings account.
Do I pay tax when I swap crypto into a stablecoin?
Usually, yes, if you made a gain. HMRC treats a swap from one cryptoasset to another as a disposal for Capital Gains Tax, so exchanging bitcoin for a stablecoin crystallises any gain on the bitcoin even though you received no pounds. Yield earned on stablecoins is generally taxable too. If your history is messy, our crypto tax team can work out the figures.
What is the difference between USDT, USDC and DAI?
USDT (Tether) and USDC (USD Coin) are issued by companies holding reserves of cash and short-dated debt, and are the two largest stablecoins. DAI is issued by a decentralised protocol and backed by other cryptoassets locked in smart contracts rather than money in a bank. All three track the US dollar, but the thing you are trusting differs in each case.
Are stablecoins regulated in the UK?
A UK regime is being phased in. The Financial Services and Markets Act 2023 brought stablecoins into scope and the FCA has been consulting on the detailed rules for issuance and custody. Until the regime is fully in force, and for tokens issued overseas, you should assume the protections you would expect from a bank do not apply.
What We Do
Portfolio Guidance
Our crypto consultants will educate you to invest in the safest and lucrative crypto assets.
Crypto Staking
Staking is a way to earn passive income from your cryptocurrency holdings.
Crypto Reports
We provide crypto portfolio performance reports within our investment packages.
Crypto Tax Planning
Our consultants work alongside with our recommended crypto accountant to plan crypto tax.
Proud to work with the leading crypto exchanges in the UK
Speak to us
Crypto Asset Consultants provides consultancy, education and guidance. We do not provide FCA-regulated financial advice. Cryptoassets are largely unregulated in the UK and their value can fall as well as rise.