Don’t be fooled by the “stable” tag in “stablecoins.” Things can become shaky. Although they are designed to be safe, they are not entirely risk-free. The three top risks to watch out for are de-pegging, blacklisting, and a possible loss of backing.

De-pegging Risk

The most significant risk is that a stablecoin might lose its peg to the underlying asset. This can happen due to various reasons, such as insufficient reserves, algorithmic failure, or market panic. Large-scale redemptions or a loss of confidence can trigger a "bank run" scenario, making it difficult for the stablecoin to maintain its peg.

Centralization Risk

Fiat-collateralized stablecoins rely on a centralized issuer. The implication is that the issuers can freeze your wallet if ordered by the authorities. Furthermore, the reserves are held by a third party, which could be subject to hacks, mismanagement, or regulatory actions.

In July 2025, Tether announced it had collaborated with U.S. authorities to freeze and reissue about $1.6 million in USDT. The funds were traced to wallets associated with Buy Cash Money and Money Transfer Company (BuyCash), a financial network in Gaza linked to terrorist financing. The company stated in the same report that it had frozen over $2.9 billion in USDT tied to illicit activity to date. While this is a laudable act, imagine you were just a victim in the scheme.

Top Stablecoin Failures, Controversies, and Frauds

1. TerraUSD (UST) and LUNA Collapse

This is arguably the most catastrophic stablecoin failure to date. In May 2022, TerraUSD, an algorithmic stablecoin designed to maintain a 1:1 peg with the US Dollar, depegged and plummeted to near zero. Its companion token, LUNA, which was meant to absorb UST's volatility, entered a "death spiral" as the system minted trillions of new LUNA tokens in a futile attempt to stabilize UST.

The collapse was triggered by a coordinated attack and a subsequent loss of confidence. The algorithmic design, which relied on arbitrageurs to maintain the peg, failed under immense selling pressure. The system created a feedback loop where selling UST caused the price of LUNA to drop, which in turn made it more expensive to mint UST, further exacerbating the de-pegging. The failure wiped out over $40 billion in market value and caused widespread contagion across the crypto market. Its founder, Do Kwon, is now facing fraud charges.

2. Iron Finance

In June 2021, the Iron Finance protocol, which used a partially collateralized algorithmic stablecoin called IRON, collapsed in a DeFi "bank run." IRON was backed by a combination of USDC and the protocol's native token, TITAN. A massive sell-off of TITAN by a few large investors caused its price to plummet from over $60 to nearly zero in a single day.

The selling pressure on TITAN created a "death spiral" similar to TerraUSD's, where the collapsing value of the collateral token caused the stablecoin to lose its peg. The panic and subsequent mass withdrawals by users proved too much for the algorithmic mechanism to handle. Even though the stablecoin was partially backed by USDC, the collapsing value of TITAN made the redemption mechanism worthless, resulting in billions of dollars in losses.

3. SafeMoon's "Locked" Liquidity Pool Fraud

While not a stablecoin in the traditional sense, SafeMoon's tokenomics included features often found in stablecoin-like projects, and its failure is a classic example of stablecoin-adjacent fraud. The creators of SafeMoon promised that the project's liquidity pool, which was funded by a 10% tax on every transaction, was "locked" and inaccessible to the developers.

In reality, the project's CEO and other co-conspirators allegedly had access to the liquidity pools and fraudulently diverted millions of dollars for their personal benefit, including buying luxury cars and real estate. The "locked" claim was a lie. The US Department of Justice and the SEC have since charged the executives with securities fraud, wire fraud, and money laundering, in what is often considered a large-scale "rug pull" scam.

4. Basis Cash Failure

Basis Cash (BAC) was an early algorithmic stablecoin project launched in 2020 by the pseudonymous developers of the failed Basis protocol. It was a partially decentralized, non-collateralized stablecoin that was designed to maintain its peg through a three-token system involving Basis Cash (the stablecoin), Basis Share (a governance token), and Basis Bond (an incentive mechanism).

The project's failure was not a result of a sudden collapse but a slow, continuous decline. The protocol struggled to maintain its dollar peg, and its value eventually plummeted. The project was eventually abandoned by its founders, including Terraform Labs' Do Kwon, who was reportedly a co-creator under a pseudonym. Basis Cash's failure was an early sign of the inherent fragility of non-collateralized algorithmic stablecoins.

5. Tether (USDT) Reserve Controversies

Tether, the largest stablecoin by market capitalization, has been the subject of long-running controversies regarding the sufficiency and composition of its reserves. For years, critics and regulators questioned whether the company had enough US dollars to back every USDT in circulation 1:1.

While not a scam in the same vein as an outright rug pull, the lack of transparency around Tether's reserves created significant market uncertainty and has led to legal and regulatory action. For instance, the New York Attorney General's office fined Tether and its sister company, Bitfinex, for making misleading statements about the backing of USDT. While Tether has since provided more frequent attestations about its reserves, the past controversies highlight the custodial and trust risks associated with centralized stablecoins.