What Is a Fiat-Pegged Cryptocurrency?

Also known as “pegged cryptocurrency,” it is a coin, token or asset issued on a blockchain that is linked to a government or bank-issued currency. Each pegged cryptocurrency is designed to always have a specific cash value in reserves. Fiat-pegged cryptocurrencies are considered to be examples of stablecoins. They were created to tackle extreme levels of volatility.

Cryptocurrencies can typically be very volatile. Huge upward and downward swings are very common. Stablecoins are usually pegged to key currencies such as the euro, the British pound or the U.S. dollar. While it is very much possible for fiat currencies to depreciate against other currencies, massive swings are less likely. 

Stablecoins can vary in structure. Some fiat-pegged cryptocurrencies have a strict structure where they can only be issued if a unit of fiat money is deposited. 

Cryptocurrency exchanges are considered the biggest holders of fiat-backed cryptocurrencies. The most popular cryptocurrency exchanges are often required to protect positions from price volatility by holding some reserves in these assets. This is cited as a key reason why exchanges are big holders of such cryptos. Boosting the exchange’s liquidity base is considered another big driver for exchanges to hold fiat-backed cryptocurrencies.