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CFA Level I · CFA Level I Exam · Introduction to Digital Assets

An investor holds a stablecoin that is backed by a reserve of short-term government securities and bank deposits. The risk that is most likely specific to this type of asset is that:

The risk most specific to a reserve-backed stablecoin is that the reserve assets may be insufficient or illiquid when holders seek redemption. The coin's stability depends on the quality and liquidity of the reserve, so a shortfall can break the peg to the reference currency.

  1. Athe reserve assets may be insufficient or illiquid when holders seek redemptionCorrect
  2. Bthe coin's supply is algorithmically fixed at issuance with no reserve
  3. Cthe value of the coin depends solely on speculative demand for mining rewards

Explanation

A fiat-backed stablecoin aims to hold a stable value through reserves. Its main risk is that the reserves are inadequate, mismanaged or cannot be liquidated quickly enough to meet redemptions, breaking the peg. The other options describe unbacked or mining-based assets.

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