Stablecoin Depeg Risks: Why '1 Dollar' Coins Can Break
Stablecoin depeg risks explained: how fiat-backed, crypto-backed and algorithmic coins lose their peg, past depegs, and India's 30% tax and 1% TDS (Oct 2026).
In this article
A stablecoin depegs when its market price drifts away from the value it promises, usually 1 US dollar, because people doubt they can actually redeem it for that dollar. The risk depends on what backs the coin: fiat-backed coins depend on the quality and accessibility of reserves held at banks and in Treasury bills, crypto-backed coins depend on collateral that can crash, and algorithmic coins depend on market confidence alone. For Indian users, as of October 2026, a depeg loss cannot be set off against any other income, while gains are taxed at 30% plus cess with 1% TDS.
This article is an educational explainer and does not recommend buying, selling or holding any stablecoin. Crypto assets, including stablecoins, are not legal tender in India.
What a stablecoin promises
A stablecoin is a crypto token designed to hold a steady value against a reference asset, most often the US dollar. Its peg is maintained in one of three broad ways:
| Type | How the peg is supposed to hold | Main depeg trigger |
|---|---|---|
| Fiat-backed (e.g. USDT, USDC) | Issuer holds cash, bank deposits and short-term government securities and redeems tokens at 1:1 for eligible customers | Doubts about reserves, a bank holding reserves fails, redemptions paused, regulatory action against the issuer |
| Crypto-collateralised (e.g. DAI-type designs) | Users lock more crypto than the stablecoins they mint; automatic liquidations keep it over-collateralised | Sharp crash in collateral prices, liquidation systems overwhelmed, oracle failures |
| Algorithmic | A paired token and incentives expand or contract supply; little or no hard collateral | Loss of confidence triggers a "death spiral" as the paired token is minted and dumped |
Why depegs happen: the mechanics
1. Redemption is not open to everyone
Most retail holders cannot redeem directly with the issuer; only approved institutions can. Retail users rely on exchanges and market makers who arbitrage between the market price and the redemption value. If redemptions slow or close (weekends, bank holidays, legal blocks), the market price can fall sharply even if reserves exist.
2. Reserve quality and location
If reserves sit in a single bank that fails, or in assets that cannot be sold quickly at full value, holders rush to exit before others. This is a classic bank-run dynamic, but without deposit insurance.
3. Collateral crashes
Crypto-collateralised coins are only as stable as the liquidation process. If collateral prices fall faster than positions can be liquidated, the system becomes under-collateralised.
4. Reflexive design
Algorithmic stablecoins rely on demand for a companion token. When confidence falls, the mechanism prints more of that token, its price collapses and the peg fails.
5. Platform and chain-specific issues
On an exchange, a stablecoin can trade below the peg because of local liquidity, withdrawal freezes or regulatory action against that exchange, even if the coin is fine elsewhere. In India, stablecoins have often traded at a premium or discount to the official rupee-dollar rate because of local demand and rupee on-ramp friction.
Depegs that actually happened
| Event | What happened | Outcome |
|---|---|---|
| TerraUSD (UST), May 2022 | Algorithmic stablecoin lost confidence; paired token LUNA was minted in huge quantities | Fell to a few cents and never recovered; combined losses ran into tens of billions of dollars |
| Tether (USDT), May 2022 | Contagion fears from the Terra collapse; heavy redemptions (reported around USD 7 billion over a few days) | Briefly dipped to around 95 cents, recovered within days |
| USD Coin (USDC), March 2023 | Circle disclosed about USD 3.3 billion of reserves at Silicon Valley Bank, which had failed; weekend meant redemptions were not possible | Fell to around 87 cents, recovered after US authorities protected SVB depositors |
These figures come from widely reported market data and issuer statements; exact intraday lows vary by data source. The lesson is that even the most widely used coins have deviated from the peg under stress, and one major design failed entirely.
Worked example: an Indian holder and a depeg
Rohan buys 1,000 USDT on an Indian exchange at ₹90 per token (₹90,000), when the official rupee rate is about ₹88, so he already pays a local premium. All figures are illustrative.
Scenario A: Peg holds, rupee unchanged, he sells at ₹90
- Sale: ₹90,000, no gain
- TDS at 1%: ₹900 (if his annual transfers exceed the threshold), claimable as credit in his return
- Tax: nil, but ₹900 of cash is locked until he files
Scenario B: Temporary depeg, he panics and sells at ₹81 (about 10% below)
- Sale: ₹81,000 → loss of ₹9,000
- The loss cannot be set off against salary, other crypto gains or anything else, and cannot be carried forward
Scenario C: Rupee weakens, he sells at ₹93
- Gain: ₹3,000
- Tax: 30% = ₹900; cess 4% = ₹36 → ₹936
- Net gain after tax: ₹2,064
The asymmetry matters: in Scenario B the full ₹9,000 loss is borne without tax relief, while in Scenario C the gain is taxed at 31.2% (before any surcharge). Also note that swapping a stablecoin for another crypto token is itself a taxable transfer in India, even if no rupees are involved. To see where this fits with the rest of your income, use our income tax calculator.
India's tax and regulatory position (as of October 2026)
- Tax: Stablecoins are virtual digital assets. Gains are taxed at 30% plus surcharge and 4% cess (old Section 115BBH, carried into the Income-tax Act, 2025), with only the cost of acquisition deductible. TDS of 1% applies on transfers above ₹50,000 a year for most individuals and HUFs, and ₹10,000 for others. Budget 2026 made no change to these rates.
- Not legal tender: Stablecoins cannot be used as currency in India. Using them to make cross-border payments outside the banking system raises FEMA concerns; remittances must go through authorised channels under the Liberalised Remittance Scheme.
- RBI stance: RBI's Financial Stability Reports have described a cautious stance on crypto assets including stablecoins, and RBI advocates central bank digital currencies over private stablecoins. News reports in mid-2026 said RBI continues to see prohibition of bank exposure to crypto as an option; the government has not announced a final framework.
- Exchanges: Platforms serving Indian users must register with FIU-IND under anti-money laundering rules. Registration is not a guarantee of solvency or of the stablecoin itself.
Questions to ask about any stablecoin (for understanding, not advice)
- What backs it, and where are the reserves held?
- Who can redeem it, how fast, and at what minimum?
- Are reserve reports independently audited or only "attested"?
- Which jurisdiction regulates the issuer, and what happens to holders if it fails?
- On which platform are you holding it, and can that platform freeze withdrawals?
For the difference between keeping tokens on an exchange and in a self-custody wallet, read our crypto exchange vs wallet explainer. To understand how a stablecoin differs from the RBI-issued e₹ and UPI, see digital rupee vs UPI vs crypto.
Key takeaways
- A stablecoin's peg is only as strong as its reserves, its redemption access and its design.
- Algorithmic stablecoins have failed completely (TerraUSD, 2022); even major fiat-backed coins have temporarily depegged (USDC to about 87 cents, March 2023).
- In India, stablecoins are not legal tender and have no deposit insurance or dedicated investor protection.
- As of October 2026, gains are taxed at 30% plus surcharge and cess, 1% TDS applies above thresholds, and depeg losses cannot be set off or carried forward.
- A dollar stablecoin is not the same as holding dollars in a regulated bank account.
Frequently asked questions
What does it mean when a stablecoin depegs?
A depeg happens when a stablecoin designed to trade at a fixed value, usually 1 US dollar, trades meaningfully below or above that value on the market. It usually reflects doubts about the reserves, redemption access or the stabilising mechanism behind the coin.
Have major stablecoins ever lost their peg?
Yes. TerraUSD, an algorithmic stablecoin, collapsed to near zero in May 2022 and never recovered. USDC fell to around 87 cents in March 2023 after Circle disclosed that about USD 3.3 billion of its reserves were at the failed Silicon Valley Bank, before recovering once depositors were protected.
Are stablecoins legal tender or regulated in India?
No. Stablecoins are not legal tender in India and there is no Indian regulatory framework for issuing them as of October 2026. RBI has repeatedly expressed caution about privately issued stablecoins and favours its own digital rupee.
How are stablecoins taxed in India?
Stablecoins are treated as virtual digital assets. Any gain on transfer is taxed at 30% plus surcharge and 4% cess, 1% TDS applies above the annual thresholds, and losses, including losses from a depeg, cannot be set off or carried forward.
Does a stablecoin protect an Indian from rupee depreciation?
A dollar-pegged stablecoin moves with the dollar against the rupee if the peg holds, but it adds issuer, platform and depeg risks, and gains from rupee movement are still taxed at 30%. It is not equivalent to holding dollars in a regulated bank account.
This article is for general education and is not personalised financial, tax or legal advice. Rates and rules are as of 19 Oct 2026; confirm current terms with your lender, AMC or a qualified adviser.
