A peg is a commitment to hold the price of one asset fixed against another — historically a national currency fixed to gold or to the US dollar, and in decentralised finance a stablecoin held at parity with a fiat currency. Maintaining a peg requires reserves, redemption rights, or algorithmic supply adjustment strong enough to absorb market pressure and sustain arbitrage back to parity; when confidence in these defences fails the peg breaks, as in classic currency crises and stablecoin de-pegging events such as the 2022 TerraUSD collapse.
Semantic Classification
Content
Definition
A peg is a fixed price promise: the issuer or authority behind one asset commits that it will exchange at a set rate against a reference asset. The concept long predates cryptocurrency. Under the gold standard, currencies were pegged to gold; under Bretton Woods (1944-1971), currencies were pegged to the US dollar, itself convertible to gold; today the Hong Kong dollar, the Danish krone (to the euro), and several Gulf currencies operate maintained pegs, defended by central banks through reserves and interest-rate policy. A peg trades monetary-policy autonomy for stability and predictability — the “impossible trinity” of international economics says a country cannot simultaneously have a fixed exchange rate, free capital movement, and independent monetary policy.
In decentralised finance the same concept reappears as the defining property of the Stablecoin: a token intended to trade at parity with (usually) the US dollar. The Peg Mechanism — the machinery that defends the target — varies by design. Fiat-collateralised issuers (USDC, Tether) hold reserve assets and offer direct redemption; crypto-collateralised systems (DAI) over-collateralise with volatile assets and liquidate positions that fall below a safety ratio; algorithmic designs attempt to hold parity through supply elasticity and incentive games alone. In every case, the working principle is arbitrage anchored by a credible Redemption Mechanism: if the token trades below parity, arbitrageurs buy it cheaply and redeem at face value, pushing the price back up; above parity, minting and selling does the reverse.
Pegs fail the same way in both worlds: when the market doubts the defender’s capacity or willingness to honour the promise, holders rush to exit before reserves run out, and the resulting run is self-fulfilling. Sterling’s ejection from the ERM in 1992 and the 2022 collapse of TerraUSD — whose algorithmic peg unravelled from parity to near zero within a week, erasing roughly $40 billion — are structurally the same event: a peg without sufficient credible backing meeting coordinated selling pressure. Even fully reserved stablecoins wobble under stress, as USDC’s brief de-peg during the March 2023 Silicon Valley Bank exposure showed.
Current Landscape
- US GENIUS Act enacted: the Guiding and Establishing National Innovation for U.S. Stablecoins Act was signed into law on 18 July 2025, creating the first federal framework for payment stablecoins; it requires 1:1 reserves in cash and short-dated (≤93-day) Treasuries with monthly public reserve disclosures. The framework is not yet fully in effect, with implementing rules expected around late 2026.
- EU MiCA live: MiCA’s stablecoin (EMT/ART) rules have applied since 30 June 2024, imposing 100% reserve backing and a bank-deposit floor of 30% (rising to 60% for “significant” tokens).
- UK regime finalised but delayed: the Financial Services and Markets Act 2000 (Cryptoassets) Regulations 2026 (SI 2026/102) bring stablecoin issuance and custody under FCA supervision, with the full regime commencing 25 October 2027; the Bank of England oversees “systemic” sterling stablecoins and in June 2026 replaced individual holding caps with a temporary £40 billion aggregate issuance cap.
- Algorithmic pegs marginalised: all three major regimes mandate full reserve backing and redemption rights, effectively outlawing unbacked algorithmic designs of the kind that produced the 2022 TerraUSD collapse.
- Sovereign pegs: hard pegs (currency boards such as Hong Kong’s), conventional fixed pegs, and crawling pegs remain defended with foreign-exchange reserves and rate policy under Monetary Policy constraints and the “impossible trinity”.
- Sources:
- https://www.whitehouse.gov/fact-sheets/2025/07/fact-sheet-president-donald-j-trump-signs-genius-act-into-law/
- https://eco.com/support/en/articles/14796313-mica-vs-genius-act-vs-uk-fca
- https://www.spark.money/tools/stablecoin-regulation-by-country
- https://www.gibsondunn.com/wp-content/uploads/2026/03/global-stablecoin-rules-in-focus-a-cross-border-guide-to-the-new-era-of-stablecoin-regulation.pdf