A stablecoin is never safer than the reserves behind it. How reserves work, and what can go wrong.
The value of a stablecoin rests on its reserves. For every token, the issuer must hold at least as much in cash, bank deposits or short-term government securities.
Issuers publish regular reports from auditors confirming that the reserves exist. How thorough and frequent the reports are varies.
If the market doubts the reserves, the price can fall below one dollar. This is called losing the peg.
In March 2023 it happened to USDC, because part of the reserves was held at the US bank Silicon Valley Bank when it collapsed. The price recovered after a few days, once it became clear the deposits were safe.
Tether, the issuer of the largest stablecoin, has for years been criticized for a lack of transparency about its reserves. The company has since increased its share of government securities and publishes more information.
The example shows that a stablecoin is in practice a promise from a company. That makes the issuer's soundness and regulation crucial.
The issuer can freeze tokens at specific addresses, for example at the request of authorities. That helps against crime, but shows that stablecoins are not as free as bitcoin.
Technical failures, hacks of bridges between blockchains and bugs in smart contracts are other risks.