The Peg Is a Promise, Not a Property: A UK Stablecoin Depeg Drill
Photo: stablecoin depeg stress test chart with UK coins and financial newspaper, via cdn.viewcast.com
The peg is a promise, not a property. A stablecoin can trade at 99p, 95p or 90p on the pound, and the yield that looked like income can become a recovery calculation. For UK earners using stablecoin yield products, the useful question is not whether a depeg will happen. It is what you would do, and how long the yield would take to repair the damage, before a queue forms.
Run the drill before the queue
Pick a real position: £1,000 in a stablecoin yield product paying 5% APY. Write down the baseline: issuer, platform, custody arrangement, redemption terms, expected annual yield, and the amount of cash you keep outside crypto. The drill is not a forecast. It is a tabletop exercise with three scenarios: a 3% depeg, a 5% depeg and a 10% depeg. For each, calculate the loss on the position and the days of yield needed to break even. Then decide what you would do, not what you hope you would do.
The arithmetic is simple: days to break even equals the depeg loss divided by the annual yield, multiplied by 365. The table below ignores fees, tax and any change in APY. It is a floor, not a forecast.
| Depeg | Loss on £1,000 | Days of yield at 5% APY | At 3% APY | At 8% APY |
|---|---|---|---|---|
| 3% | £30 | 219 | 365 | 137 |
| 5% | £50 | 365 | 608 | 228 |
| 10% | £100 | 730 | 1,217 | 456 |
At 5% APY, the position earns about £50 a year, or 13.7p a day. A 3% depeg costs £30 and takes 219 days of yield to recover. A 5% depeg costs £50 and takes a full year. A 10% depeg costs £100 and takes two years. If the product pays 3% instead, the same 10% depeg takes more than three years and three months. If the depeg is permanent because the issuer has impaired reserves, no amount of yield at the original APY repairs it. The calculation only works if the stablecoin returns to par and the platform remains solvent.
Add exit costs: a 0.5% conversion spread, a withdrawal fee, and possibly a lower price in a stressed secondary market. A 5% depeg with 1% exit costs is really a 6% loss before yield. The break-even period extends. That is why the drill should use the amount you would actually receive, not the nominal balance.
Redemption queues change the question
A depeg often appears first in the secondary market. The issuer may still promise redemption at par, but the queue can lengthen. Terms matter: Is redemption direct with the issuer or only through a platform? Is there a minimum redemption size? Are there fees, gates or notice periods? Does the issuer have discretion to suspend redemptions? Who holds the reserves, and are they segregated in a bankruptcy? A promise of par is only as good as the assets behind it and the legal route to them.
Platform terms add another layer. The platform may hold the stablecoin in an omnibus account, lend it out, or place it in a yield strategy with its own counterparties. If withdrawals are suspended, the issuer's redemption window may not help you. Check whether the platform's terms allow it to suspend withdrawals, change the yield rate or apply a haircut. Check whether the yield is paid in the same stablecoin or in a platform token. A platform token can depeg too.
The issuer and platform checklist
Ask about reserves: What assets back the stablecoin? Are they cash, T-bills, commercial paper or crypto collateral? Who attests to the reserves, how often, and is the attestation a full audit? Are reserves segregated and bankruptcy-remote? Who is the custodian? What is the issuer's jurisdiction and regulatory status? Ask about redemption: minimum size, fees, notice period, queue priority, suspension rights. Ask about the platform: who has custody, what the yield source is, whether the stablecoin is rehypothecated, what happens on platform insolvency, and what the GBP off-ramp looks like. Ask about your own position: how much can you afford to have locked for a week, a month or a year?
UK promotion rules are relevant here. Cryptoasset financial promotions must be made by an authorised firm or approved by one, and they must include risk warnings. A promotion can be compliant and still describe a product with a redemption queue or a reserve composition you would not accept. Read the risk summary as a list of scenarios, not a formality. If a firm is offshore and not authorised in the UK, the Financial Ombudsman Service and Financial Services Compensation Scheme are unlikely to be available. That does not make the product fraudulent, but it changes the recovery map.
Tax and records
HMRC treats cryptoassets as property for capital gains purposes in most cases, and rewards or yield can be income depending on the facts. A depeg sale at a loss may be a disposal for capital gains purposes, while yield received may need to be valued at receipt. The exact treatment depends on the activity and the arrangements, so keep records: dates, amounts, stablecoin issuer, platform, valuation in GBP, fees and the reason for any sale. Do not assume a loss on a stablecoin is automatically deductible, and do not assume yield is tax-free because it is paid in crypto. Take advice if the amounts are material.
Pre-commit to a response
The drill is only useful if it produces a decision rule before the stress. For example: keep no more than a set share of savings in stablecoin yield; review, rather than add, on a 3% depeg; do not chase yield during a queue; and keep enough sterling cash outside crypto to avoid selling at the worst moment. A 10% depeg is not a reason to panic, but it is a reason to know whether the product is still doing the job you bought it for. If the answer depends on a redemption queue you did not read, the drill has already found the weakness.
