In this article, Learn Crypto examines several topics for discussion related to pegging in crypto. You will learn:

What pegging refers to in a financial context, how the term was first used in traditional finance and why it was important. What pegging means in crypto and how it works Some examples of pegged crypto What are the risks of pegged crypto? Introduction Before taking a look at what pegged crypto is and learning about how pegging works in the crypto context, it’s worth going back to basics to understand the main features of traditional pegging in economics. The expression “pegging” refers to the act of linking the value of a currency or an asset to the value of another currency or asset. thereby establishing a fixed rate of exchange. In other words, the economic expression of pegging is the practice of tying a state’s currency exchange rate to another state’s currency.

Many nations throughout history have used pegging to overcome problems of unpredictability in determining the value of a currency, particularly in times of high volatility. This is because, for trade and commerce to take place, a currency that keeps changing value makes it difficult to establish a stable price. Most countries that peg their currencies do so to promote trade and foreign investment – which is why goods and services are often priced against a pegged currency, usually one that is most accepted or recognised regionally or globally.

Currency pegging can be traced way back to the 18th century Gold Standard and the Bretton Woods agreement after the Second World War. Under the mentioned agreement, many Western states pegged their currencies to the United States dollar, and the United States pegged their national currency to gold.

To learn more about the Gold Standard and its significance, read this Learn Crypto article: “What was Executive Order 6102 & why is it relevant to crypto?”.

The practice is used by states’ central banks to provide stability to the state’s national currency by linking it to a currency with a higher degree of stability. For example, the United States dollar has been frequently used as a currency peg by many other nations, taking into account it is the world’s reserve currency. Hence, currencies such as the United Arab Emirates dirham (AED) and the Hong Kong dollar (HKD) are pegged to the US dollar (USD).

October 2022, the European Union (EU) came to agree upon the full legal text of this MiCA legislation, including an additional law that would spell out the identification processes of those using crypto to make payments. This article discusses that.

Of course, that is yet to come into effect. That is to say, the regulation still needs to be approved by the EU Council and the Parliament. Following such approval, if granted, there will be a grace period before entering into force in 2024.  

Such regulatory approaches are likely to influence changes in other countries or regions as well. Interestingly, MiCA’s provisional text intensely focuses on stablecoins which seems like a logical step after the Terra/Luna market crash and the Tether affair. The consequences of the fast-moving EU crypto-regulation are linked to the probability of a global export of the European-style crypto regulation without checking out whether ‘one-size-fits-all'. On the other hand, after the downfall of stablecoins, it was evident that particular safeguards should be put in place in order to protect investors and users. 

The EU may be the first one to jump on the regulatory bandwagon, but others have been playing catch-up. The International Monetary Fund published its global financial stability report and called out cryptocurrencies for putting global financial stability at stake. The IMF singled out threats that crypto poses for national currencies, capital flows, money laundering risks, and bank disintermediation. The last one refers to one of crypto’s major advantages, namely removing the intermediary from the financial picture. Another large economy has not been resting as well. In March 2022, Joe Biden issued an Executive order on ensuring the responsible development of digital assets, and therefore, asked Federal Agencies to report back on the crypto industry, specifically on consumer/investor protection, financial stability, illegal activity, innovation, competitiveness, and financial inclusion. Obviously, all broad economies have been moving in the same regulatory direction.