What Every Investor Should Know
What Is a Stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a fixed value, usually one U.S. dollar, by holding reserves or using algorithmic mechanisms to offset price movements. Stablecoins are issued by companies like Tether, Circle, Paxos, and PayPal, and are sold through crypto exchanges, yield platforms, and increasingly through financial advisors who recommend them to clients seeking cash alternatives or higher yields.
Stablecoins fall into four main categories. Fiat-backed stablecoins like USDT (Tether) and USDC (Circle) claim to hold cash and short-term U.S. Treasuries equal to every token in circulation. Crypto-collateralized stablecoins like DAI require users to lock up crypto assets worth more than the stablecoins they mint. Algorithmic stablecoins like the collapsed TerraUSD relied on code and a paired token rather than reserves. Yield-bearing stablecoins like Ethena USDe and Ondo USDY pay holders interest generated from Treasuries or derivatives strategies.
The global stablecoin market reached approximately $318 billion in early 2026, with Tether holding about 60% market share and USDC about 25%. Stablecoin issuers collectively are now the seventh-largest purchasers of U.S. government debt. That growth has coincided with more than $50 billion in investor losses from failed platforms and algorithmic collapses.
What Are the Hidden Risks of Stablecoins?
Stablecoins expose investors to reserve risk, counterparty risk, depeg risk, and platform risk, none of which are disclosed with the same clarity as the risks of traditional securities. The word “stable” in the name is marketing, not a legal or financial guarantee.
Reserve risk means the issuer may not actually hold enough assets to redeem every token at one dollar. The Commodity Futures Trading Commission found that Tether was fully backed on only 27.6% of sampled days between 2016 and 2018, and imposed a $41 million penalty in 2021 for making misleading statements about its reserves. Tether has never completed a full financial audit, relying instead on quarterly attestations.
Depeg risk means the token can lose its dollar value suddenly and without warning. In March 2023, USDC briefly fell to about $0.87 after Circle disclosed that $3.3 billion of its reserves were trapped at the collapsed Silicon Valley Bank. The peg was only restored after federal regulators guaranteed all SVB depositors. The Federal Reserve later documented how the episode revealed that fully reserved stablecoins are still exposed to the health of their banking partners.
Counterparty risk arises because many investors do not hold stablecoins directly. Instead, they deposit them with yield platforms, crypto exchanges, or advisory programs that lend the assets out or deploy them in trading strategies. When those counterparties fail, the stablecoins vanish with them, regardless of whether the underlying token remained pegged.
How Do Investors Lose Money on Stablecoins?
Investors lose money on stablecoins through three primary channels: algorithmic collapses that wipe out the token entirely, platform failures that freeze customer funds, and depegs that cause temporary but severe losses for anyone who sells during the event.
The collapse of TerraUSD (UST) in May 2022 is the largest single example. Terra was an algorithmic stablecoin backed not by reserves but by a paired token called LUNA. When confidence broke, a redemption feedback loop destroyed both tokens within days, erasing more than $40 billion in investor value. Retail investors in Anchor Protocol, which had offered roughly 20% yield on UST deposits, lost nearly everything. South Korean prosecutors estimated 280,000 victims in that country alone.
Platform failures followed immediately. Celsius Network, Voyager Digital, BlockFi, and Gemini Earn all collapsed between June 2022 and January 2023, freezing billions in customer deposits held as stablecoins and other crypto assets. Celsius alone owed customers approximately $4.7 billion, and an independent bankruptcy examiner described its internal operations as “very Ponzi like.” Investors in these programs believed they held safe, interest-bearing cash alternatives. They held unsecured IOUs from insolvent companies.
Why Do Financial Advisors Recommend Stablecoins Despite the Risks?
Financial advisors recommend stablecoins because they generate higher fees, revenue-sharing, and referral compensation than traditional cash products, and because client demand for yield in a low-interest environment created strong sales incentives. The conflicts were rarely disclosed.
According to a 2026 Bitwise and VettaFi survey, 32% of financial advisors now allocate client assets to crypto, up from 22% two years earlier, and 42% are authorized to purchase crypto in client accounts. At the same time, FINRA’s targeted examination of more than 500 crypto retail communications found widespread problems, including statements that described crypto assets as “liquid” and “easily tradable,” overstated safety by calling products “secured” or “backed,” and misleadingly compared crypto holdings to gold or FDIC-insured cash alternatives.
The compensation structure creates the conflict. A broker or dual-registered advisor earns more from a crypto yield program paying undisclosed referral fees than from a money market fund with a 0.1% expense ratio. Under Regulation Best Interest and FINRA Rule 2111, a broker must have a reasonable basis to believe a recommendation is suitable for the client and must consider reasonably available alternatives, including safer, cheaper products. Recommending an uninsured, unregistered crypto yield program to a retiree seeking income is difficult to justify under either standard.
Are Stablecoins Suitable for Retirement Accounts?
Stablecoins and stablecoin yield programs are unsuitable for most retirement accounts because they lack the capital preservation features retirees depend on: FDIC or SIPC insurance, mandatory reserve oversight, and guaranteed redemption at par. A retiree seeking income should not be placed in a product whose principal can drop to zero.
Registered investment advisers (RIAs) owe clients a fiduciary duty under the Investment Advisers Act of 1940, including a duty of care and a duty of loyalty that cannot be satisfied through disclosure alone. Broker-dealers owe the best interest standard under Regulation Best Interest. When either type of advisor places conservative, elderly, or income-focused clients into crypto yield products offering 8% to 18% annual returns, that recommendation invites scrutiny under both standards.
The FBI’s 2023 Elder Fraud Report found that investment fraud against seniors caused approximately $1 billion in reported losses, with crypto-related schemes identified as a growing driver. FinCEN has warned financial institutions to watch for elderly clients making large withdrawals tied to crypto platforms. Yet enforcement against individual advisors who recommended stablecoin yield programs has lagged the scale of the losses, leaving many victims unaware that they may have legal recourse.
What Regulatory Warnings Exist About Stablecoins?
Federal and state regulators have issued repeated warnings that stablecoins are not what their marketing implies. FINRA states directly on its crypto assets page that “despite their name, stablecoins can pose risks for investors, including the potential for depegging,” and that claims of stable value “have been demonstrated to be false in many cases.”
Congress enacted the GENIUS Act in July 2025, creating the first federal regulatory framework for U.S. payment stablecoins. The law requires issuers to hold 1:1 reserves in cash and short-term Treasuries, publish monthly reserve disclosures, and give stablecoin holders first priority over other creditors in bankruptcy. It also prohibits payment stablecoin issuers from paying interest or yield directly to holders. The full effective date is expected in late 2026 or January 2027, meaning most losses to date occurred under the prior regulatory gap.
Importantly, the GENIUS Act specifies that payment stablecoins are not securities and not commodities under federal law. That technical classification means holders generally cannot bring claims under the federal securities laws for fraud involving the stablecoin itself. Claims against brokers, advisors, and platforms that recommended or mishandled stablecoins remain available under FINRA rules, state law, and common law theories of fraud, negligence, and breach of fiduciary duty.
Recent Stablecoin Fraud Cases and Enforcement Actions We Are Investigating
Regulators and prosecutors have pursued multiple significant actions involving stablecoins and stablecoin yield platforms in 2024 and 2025. Our firm is investigating claims on behalf of investors affected by these and related matters.
Do Kwon / Terraform Labs — 15-Year Prison Sentence (December 2025). Terraform Labs founder Do Kwon was sentenced to 15 years in federal prison on December 11, 2025, by Judge Paul Engelmayer of the Southern District of New York, who called the TerraUSD collapse “a fraud on an epic, generational scale.” Kwon pled guilty in August 2025 to conspiracy to commit fraud and wire fraud, and forfeited over $19 million. In a parallel civil action, Terraform Labs and Kwon agreed to a $4.47 billion SEC settlement in June 2024. The collapse destroyed more than $40 billion in investor value.
Alex Mashinsky / Celsius Network — 12-Year Prison Sentence (May 2025). Celsius Network founder Alex Mashinsky was sentenced to 12 years in federal prison on May 8, 2025, for commodities fraud and market manipulation of the CEL token. Mashinsky was ordered to forfeit $48 million. Celsius had marketed its stablecoin yield program as “the safest place for your crypto,” collected roughly $25 billion in customer deposits, and froze withdrawals in June 2022. Customers were owed approximately $4.7 billion at the time of the Chapter 11 filing.
Paxos / BUSD — $48.5 Million NYDFS Consent Order (August 2025). The New York Department of Financial Services fined Paxos Trust Company $26.5 million and required an additional $22 million compliance investment, citing systemic anti-money-laundering failures connected to its Binance partnership and the BUSD stablecoin. NYDFS identified approximately $1.6 billion in illicit flows routed through BUSD between Binance and Paxos. Paxos remains under a three-year compliance reporting requirement.
BlockFi Securities Class Action — $13.25 Million Settlement (2025). A proposed class action settlement of $13.25 million was reached in 2025 with holders of BlockFi Interest Accounts against founders Zac Prince and Flori Marquez. BlockFi had previously agreed to a $100 million settlement with the SEC and 32 state regulators in 2022 over its unregistered interest-bearing crypto accounts, and filed for bankruptcy in November 2022 after losses tied to Three Arrows Capital and FTX.
What Should You Do If You Lost Money on Stablecoins?
You may have legal recourse through FINRA arbitration if a broker or dual-registered advisor recommended stablecoins or a crypto yield program, even if your account agreement contains a mandatory arbitration clause. Claims can be based on unsuitable recommendation, misrepresentation, failure to disclose material risks, failure to supervise, breach of fiduciary duty, and negligence. The specific theory depends on who recommended the product, what was said about it, and how the firm supervised the advisor.
Time limits apply. FINRA’s eligibility rule requires that arbitration claims be filed within six years of the event giving rise to the dispute. State statutes of limitation and federal securities law deadlines may be shorter. Investors who lost money in the 2022 crypto platform collapses still have time to file, but the window is closing. If you believe your advisor recommended a stablecoin or crypto yield product that was unsuitable for your situation, do not delay in seeking legal advice.
Talk to an Investment Fraud Attorney About Your Stablecoin Losses
If you lost money on stablecoins, crypto yield programs, or platforms like Celsius, Voyager, BlockFi, or Gemini Earn because a broker or financial advisor recommended them without properly explaining the risks, you may have a viable claim to recover those losses.
Attorney Robert Wayne Pearce has over 45 years of experience representing investors in FINRA arbitration and securities litigation. The Law Offices of Robert Wayne Pearce, P.A. has recovered more than $175 million for clients nationwide in cases involving complex financial products, stockbroker fraud, and investment misconduct.
Call (800) 732-2889 today for a free consultation. There is no cost to discuss your situation and find out whether you have a claim worth pursuing. The sooner you act, the stronger your position — time limits on FINRA arbitration and securities claims can work against investors who wait.
Frequently Asked Questions About Stablecoins
Are Stablecoins FDIC Insured?
No. Stablecoins are not bank deposits and are not insured by the FDIC, SIPC, or any government agency. Even fiat-backed stablecoins like USDC and USDT are unsecured obligations of their issuers. If the issuer fails or its reserves prove insufficient, holders become general creditors with no guarantee of recovering any portion of their principal.
What Happens to My Stablecoins If the Issuing Company Goes Bankrupt?
Before the GENIUS Act takes effect, stablecoin holders in a bankruptcy are typically treated as general unsecured creditors, meaning they stand in line behind secured lenders and receive whatever is left after other claims. The GENIUS Act, signed in July 2025, will give holders of qualifying payment stablecoins first priority over other creditors, but that protection does not apply retroactively to losses already incurred and only covers issuers that qualify under the new framework.
Can My Financial Advisor Be Held Liable for Recommending a Crypto Yield Program?
Yes. Under FINRA Rule 2111 and SEC Regulation Best Interest, a broker must have a reasonable basis to believe that a recommended investment is suitable for your financial situation, objectives, and risk tolerance. Registered investment advisers owe a fiduciary duty under the Investment Advisers Act. Recommending an uninsured, high-risk crypto yield program to a conservative or retirement-focused investor may violate both standards, especially when the advisor failed to disclose compensation arrangements or platform risks.
What Is the Difference Between a Payment Stablecoin and a Yield-Bearing Stablecoin?
A payment stablecoin like USDC or PYUSD is designed to be used as digital cash, with reserves backing each token one-for-one and no interest paid to holders. A yield-bearing stablecoin like Ethena USDe or Ondo USDY pays holders a return generated from underlying Treasuries, staking rewards, or derivatives strategies. Yield-bearing stablecoins carry additional risks from the strategies used to generate yield, and the GENIUS Act prohibits payment stablecoin issuers from paying interest directly to holders.
How Long Do I Have to File a FINRA Claim for Stablecoin Losses?
FINRA’s eligibility rule requires that arbitration claims be filed within six years of the event giving rise to the dispute. For losses tied to the 2022 collapses of Celsius, Voyager, BlockFi, and Gemini Earn, that deadline generally falls in 2028, but state statutes of limitation and federal securities law deadlines may be shorter depending on the legal theory. Consulting a securities attorney promptly preserves the widest range of options.
Can I Recover My Losses If I Bought Stablecoins Directly on a Crypto Exchange Without an Advisor?
Direct purchases through a crypto exchange present different legal issues than broker-recommended investments, because FINRA has no jurisdiction over non-member exchanges. However, claims may still be possible through class actions, bankruptcy proceedings, or direct lawsuits against platforms, issuers, or promoters who made material misrepresentations. A securities attorney can evaluate which venue and legal theory gives you the best chance of recovery based on your specific facts.
