Pegged Currency

November 21, 2023 - Around 2 mins mins to read

Understanding Pegged Currency

Pegged currency, also referred to as currency pegging, is the process by which a country links its exchange rate to another currency, a basket of currencies, or another measure of value. This practice, commonly known as a fixed exchange rate, aims to provide stability to a currency by establishing a predetermined ratio with a more stable currency.

The use of a pegged currency offers several advantages, particularly for governments looking to promote credibility and discipline in their monetary policies, especially in impoverished or unstable economies.

One benefit is that businesses can gain a competitive advantage in international markets compared to competitors who face foreign exchange risks. Conversely, countries that do not adopt currency pegs are susceptible to foreign influence, resulting in trade imbalances and difficulties in achieving automatic exchange rate adjustments. Even a slight deviation from the peg can trigger significant speculative attacks.

In the world of cryptocurrencies, pegged currency is seen in stablecoins. Stablecoins are digital currencies whose value is tied to real-world assets, such as fiat currencies. There are numerous stablecoin projects, and they play a crucial role in an industry known for its price volatility. Stablecoins facilitate easy conversion of crypto coins into fiat currencies, address liquidity issues on crypto exchanges, and enable the implementation of various financial services, including loans and insurance, within the cryptocurrency realm.