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 in currencies are less likely.
Stablecoins can vary in structure.
Some fiat-pegged cryptocurrencies have a strict structure. This means they can only be issued if a unit of a fiat money is deposited.
Tether is one of the most renowned examples of fiat-backed cryptocurrencies.
It has been a very controversial cryptocurrency as Tether has previously claimed that each unit was backed by the U.S. dollar.
But in March 2019, Tether’s cryptocurrency expanded its backing to include loans to affiliate companies, which are considered less stable than fiat-backed currencies.
Cryptocurrency exchanges are considered the biggest holders of fiat-backed cryptocurrencies.
The best cryptocurrency exchanges are often required to protect positions from price volatility by holding some reserves in the fiat-backed asset.
This is cited as a key reason why exchanges are big holders of fiat-backed cryptos.
Boosting the exchange’s liquidity base is considered another big driver for exchanges to hold fiat-backed cryptocurrencies.
It is not always the case that all crypto exchanges have access to banking services. Holding some fiat-pegged cryptocurrencies can act as a hedge for this.