What Are Stablecoins — And Why Do They Matter?

Bitcoin and Ethereum get the headlines. The quieter success in crypto is stablecoins: tokens designed to stay worth one dollar (or, less often, one euro or one ounce of gold). The Financial Action Task Force reported roughly $316 billion in stablecoins outstanding in October 2025, and the Bank for International Settlements devoted a chapter of its 2025 annual report to them. Central banks, finance ministries, and card networks are all trying to work out what to do about a technology whose main feature is that it is meant to be boring.

Educational only — not financial advice. Investing involves risk of loss; past performance does not guarantee future results. Consult a licensed financial advisor before making investment decisions.

Key takeaways

• A stablecoin is a crypto token designed to hold a fixed value, usually one US dollar.
• The two largest, Tether's USDT and Circle's USDC, accounted for about 90% of the market in July 2025, per BIS data as summarized by Wikipedia.
• Most stablecoins are backed by reserves such as short-term US Treasury bills and bank deposits; a few use crypto collateral; algorithmic designs have failed badly.
• Uses include trading, cross-border transfers, and holding dollars where local currencies are unstable.
• Risks include reserve quality, redemption limits, depegs, freezes, and regulatory change.

The problem stablecoins solve

Crypto has a usability problem: prices swing too much for ordinary commerce. If your salary were paid in a volatile token, your pay would effectively change every day, and no business can plan around that. Bitcoin's own record as a payment method suffers from this. For a deeper look at why a currency has to hold its value, see how money actually works.

Stablecoins try to combine two things:

1. The rails of crypto: transfers that settle on a blockchain at any hour, across borders, with software that can move money automatically.
2. The stability of a familiar currency, usually the dollar.

The Bank of England's explainer describes the basic idea plainly: a stablecoin is "backed by a specified asset or collection of assets," typically a currency, and the issuer holds the same value in that currency, often in a bank account, for each coin issued. Holders can exchange coins for that amount, which is what is supposed to keep the price close to the peg (Bank of England).

An analogy helps. A stablecoin works like a coat-check ticket. The ticket itself is a scrap of paper, but it is worth a coat because the cloakroom promises to hand one over. If everyone trusts the cloakroom, tickets trade as if they were coats. If the cloakroom lost the coats, the tickets would be worth exactly what was left in the back room.

How they stay pegged

The mechanism depends on the type of stablecoin.

Type	What backs it	Peg mechanism	Examples	Main weakness
Fiat-backed	Cash, bank deposits, short-term Treasury bills held by an issuer	Issuer promises redemption at $1	USDT, USDC	Trust in the issuer and its reserves
Crypto-collateralized	Other crypto locked in smart contracts, worth more than the coins issued	Automatic liquidation of undercollateralized positions	DAI, USDS	Collateral crashes; smart contract bugs
Algorithmic	Little or no reserve; code and incentives	Mint and burn of a companion token	Terra's UST (collapsed)	Reflexive collapse when confidence breaks
Commodity-backed	Physical commodities such as gold	Redemption against the commodity	PAX Gold, Tether Gold	Custody and audit questions

The Financial Action Task Force estimates fiat-backed coins make up about 95% of the market, and nearly all are pegged to the dollar (Wikipedia: Stablecoin, summarizing FATF and BIS data). The BIS adds that over 99% of stablecoins are denominated in US dollars.

Fiat-backed: the dominant model

For each token in circulation, the issuer holds roughly one dollar of reserves, typically in short-term Treasury bills, bank deposits, and repurchase agreements. If you redeem, the issuer pays you from those reserves. Trust is therefore trust in the issuer's books, and the quality of the disclosure matters. Circle's transparency page, for example, lists its reserve categories as of October 15, 2026: bank deposits, deposits at systemically important institutions, overnight reverse repurchase agreements, and Treasury securities with under three months to maturity, with monthly assurance by a Big Four accounting firm (Circle).

Why does the price stay near $1 on exchanges? Because of arbitrage, in theory. If a coin trades at $0.98 and you can redeem it for $1, you buy and redeem and pocket the difference, which pushes the price back up. The catch is that the logic only works if redemption is open and credible. Redemption rights depend on the issuer's terms, and not every holder can redeem directly with the issuer, so for retail users the peg is often held by traders at exchanges rather than by a contractual right.

Crypto-collateralized: the over-secured model

DAI, issued by the system now branded Sky, works differently. A user deposits collateral such as Ether into a smart contract and borrows DAI against it. Each type of collateral has a minimum collateralization ratio, usually 110 to 200 percent. If the collateral's value falls below the minimum, anyone can trigger a sale of part of it to repay the debt. No company holds dollar reserves; the code enforces the peg (Wikipedia: Dai).

Think of it as a pawn shop run by software: you leave $150 of valuables to borrow $100, and if the valuables lose enough value, the shop sells them before the loan goes underwater. MakerDAO rebranded as Sky in August 2024 and its flagship stablecoin is now called USDS. During the market stress of March 2020, DAI reportedly traded as high as $1.11 before returning to $1.00, a reminder that even over-collateralized designs can wobble.

Algorithmic: the extinct experiment

Algorithmic stablecoins try to keep a peg through code and incentives with little or no real reserve. Terra's UST is the best-known case. It was meant to hold its peg through a "burn and mint" relationship with a companion token, LUNA. UST began losing its peg on May 9, 2022, and within about a week fell to roughly 10 cents while LUNA dropped to virtually zero from an all-time high of $119.51. Estimates of the value wiped out range from about $40 billion to $45 billion (Wikipedia: Terra). Terraform founder Do Kwon later pleaded guilty to fraud charges and was sentenced to 15 years in prison in December 2025.

The lesson is simple: a dollar peg needs something real behind it, because a reflexive design can spiral when confidence breaks. The mechanism that was supposed to restore the peg instead flooded the market with the companion token.

A short timeline of stablecoins

Date	Event
July 2014	Realcoin, later renamed Tether, announced; first tokens issued October 6, 2014
September 2018	USDC launches through Centre, a joint venture of Circle and Coinbase
February 23, 2021	New York Attorney General announces an $18.5 million settlement with Bitfinex and Tether
May 2022	Terra's UST loses its peg and collapses
March 11, 2023	USDC briefly loses its peg after Circle discloses $3.3 billion of reserves at Silicon Valley Bank
June 30, 2024	MiCA rules for asset-referenced and e-money tokens begin to apply in the EU
June 29, 2025	BIS annual report concludes stablecoins fail key tests for use as the core of the monetary system
July 18, 2025	GENIUS Act signed into US law

Sources: Wikipedia summaries of Tether, USDC, Terra, and MiCA; New York Attorney General; BIS; govinfo.gov.

Who is using them

Stablecoins started as a tool for crypto traders and still serve that role. Traders park value between trades without leaving the crypto system, and exchanges use stablecoins as the common currency for quoting prices. Beyond that, the BIS says demand also comes from accessibility, an alternative to the existing financial system, access to foreign currencies, and cross-border payments. It notes that stablecoins have been used as on-ramps and off-ramps to crypto and, more recently, as a cross-border payment instrument for residents of emerging markets who lack dollar access (BIS Annual Economic Report 2025).

Real users include:

• Crypto traders moving between assets without cashing out to a bank.
• Workers sending money home, who may find a dollar token cheaper or faster than a transfer service on some routes. For the scale of the market, see countries that send the most remittances.
• Savers in countries with unstable currencies, who hold digital dollars as a hedge against local inflation. Countries with the highest inflation rates shows where that pressure is greatest, and countries with the most cryptocurrency users shows where adoption is highest.
• Businesses settling invoices across borders without waiting for banks.
• Decentralized finance (DeFi) users lending, borrowing, and trading against dollar-denominated tokens. See how DeFi works for the mechanics.

A caveat about costs: the blockchain leg of a transfer can be cheap and fast, but the on-ramp (turning local money into the token) and the off-ramp (turning it back) are where fees, delays, and legal risk usually sit. A "30-second transfer" is only as fast as its slowest conversion step.

Why central banks and regulators care

Stablecoin issuers hold large sums in short-term government debt. The BIS says the Treasury holdings of major stablecoins are "on par with large jurisdictions and government money market funds." It also reports evidence that a $3.5 billion increase in stablecoin market capitalization can depress Treasury yields by around 2.5 to 5 basis points, with redemption episodes producing effects up to three times larger. For readers unfamiliar with how bond prices respond to demand and rates, see how bond prices move with interest rates.

The BIS also tests stablecoins against three properties it expects of money, and concludes they fall short:

• Singleness. Each token is a liability of a particular issuer, so different stablecoins can trade at different prices, and the BIS points to "substantial deviations from par."
• Elasticity. Issuers cannot expand their balance sheets at will because new supply requires full upfront payment, unlike a bank that can create deposits when it lends.
• Integrity. Pseudonymity and weak know-your-customer controls make stablecoins attractive to criminals, in the BIS's words, so policing them is difficult.

The BIS concludes that stablecoins "cannot be the mainstay of the future monetary system" and may "at best serve a subsidiary role." Reasonable people disagree with that verdict, but it shows the official starting point. Other concerns in the report include threats to monetary sovereignty, "stealth dollarisation" in countries with weak currencies, and fire-sale risks in safe asset markets if a large issuer faced mass redemptions. Readers who want the background on how central banks defend a currency can read how central banks work, and the dollar's global position is covered in why the US dollar is the world's reserve currency.

The big issuers compared

Issuer	Token	Notes
Tether	USDT	Announced in 2014; about $184.6 billion issued at the end of Q2 2026, per Tether reports summarized by Wikipedia
Circle	USDC	Announced May 15, 2018; Circle listed on the NYSE on June 5, 2025
Sky (formerly MakerDAO)	DAI and USDS	Crypto-collateralized; USDS supply of about $21 billion in early 2026, self-reported by the Sky Frontier Foundation

Tether (USDT)

Tether is older and larger than its competitors. It was announced as Realcoin in July 2014 and renamed Tether that November. Its history is also the most contested. In an investigation announced February 23, 2021, the New York Attorney General found that Tether had claimed its coins were "backed one-to-one by U.S. dollars in reserve," while from at least mid-2017 it had no banking access and at times held no reserves at that ratio. Bitfinex and Tether agreed to pay $18.5 million and to publish categorized disclosures about their backing (New York Attorney General). In October 2021 the US Commodity Futures Trading Commission fined Tether $41.6 million for inaccurate claims about full backing, per the CFTC order as summarized by Wikipedia.

Disclosure has improved since then. Tether began publishing quarterly attestations by the accounting firm BDO Italia in July 2022. A reported 49.6% of its reserves were in commercial paper in May 2021; commercial paper was later reduced to zero and replaced with Treasury bills. At the end of 2023 its reserves included about $63 billion in US Treasuries, and its Q2 2024 attestation showed nearly $98 billion. For June 30, 2026, Tether reported assets of about $187.8 billion against liabilities of $183.6 billion (Wikipedia: Tether). An attestation is a snapshot reviewed by an accountant, not a full audit, which is a weaker form of assurance.

USDC (Circle)

USDC was announced on May 15, 2018 and launched in September 2018 through Centre, a joint venture of Circle and Coinbase. In August 2023 the two companies dissolved Centre, giving Circle full governance of USDC. Circle went public on the New York Stock Exchange on June 5, 2025, which subjects it to public company reporting (Wikipedia: USD Coin). Its reserve holdings are disclosed weekly with monthly third-party assurance, and the reserve is held in cash-like assets rather than commercial paper.

Sky, DAI, and USDS

The Sky ecosystem is governed by token holders rather than by a company. That gives users no single issuer to fail or to freeze an account, but it moves the risk to smart contract security, oracle accuracy, and governance decisions made by token holders.

What can go wrong

Four categories of risk matter most.

Risk	What it means	Real example
Issuer and reserve risk	Reserves are smaller or riskier than claimed	Tether's 2021 settlements over claims of full backing
Depeg and run risk	Price falls below $1 as holders rush to redeem	USDC on March 11, 2023; Terra's UST in May 2022
Freeze and sanctions risk	An issuer disables tokens in specific wallets	Tether reported freezing over $4.4 billion in tokens linked to illicit activity by April 2026
Smart contract and collateral risk	Code bugs or collateral crashes break the peg	DAI reportedly trading at $1.11 in March 2020 stress

The USDC depeg

The most instructive recent case is USDC in March 2023. After Circle revealed that $3.3 billion, about 8% of its reserves, was held at Silicon Valley Bank, which was failing, USDC temporarily lost its dollar peg on March 11, 2023. It regained the peg four days later. The wobble showed that a stablecoin with sound reserves can still slip off its peg when a single bank counterparty is in doubt (Wikipedia: USD Coin). It is also a reminder that where the reserves sit matters as much as what they are: the dollars behind a crypto token still live in the ordinary banking system.

Not the same as a bank deposit

A bank deposit is automatically insured to at least $250,000 at each FDIC-insured bank, and the FDIC lists crypto assets among the products it does not insure (FDIC). The GENIUS Act similarly does not treat compliant payment stablecoins as FDIC-insured bank deposits, according to commentary summarized by Wikipedia. What the Act does provide is a legal priority: holders' claims on reserve assets must rank senior to the claims of non-stablecoin creditors in an insolvency, under section 4(a)(7)(B).

Freezes and sanctions

Fiat-backed stablecoins are controlled by a company, and companies can be ordered by courts or regulators to freeze funds. Tether reported freezing $4.2 billion in tokens linked to illicit activity by February 2026 and more than $4.4 billion by April 2026, and in April 2026 it supported an OFAC freeze of about $344 million in crypto. That is useful for law enforcement, and it also means a stablecoin can be disabled in your wallet even though it sits on a public blockchain. The anti-money-laundering side of this is covered in AI and blockchain compliance.

The regulatory picture: GENIUS Act and MiCA

Regulation arrived quickly after 2022, and the details differ from what many summaries claim.

United States, GENIUS Act. Signed into law on July 18, 2025 as Public Law 119-27, after the Senate passed it 68 to 30 on June 17 and the House 308 to 122 on July 17. According to the text on govinfo.gov (govinfo.gov):

• A permitted issuer must hold reserves "on an at least 1 to 1 basis." Eligible reserves include US currency and balances at a Federal Reserve Bank, insured bank deposits, Treasury bills and other Treasury securities with 93 days or less to maturity, certain overnight repurchase agreements, and government money market funds that invest only in those assets.
• Issuers must publish their monthly reserve composition on their website, a registered public accounting firm must examine that report, and the chief executive and chief financial officer must certify it.
• Issuers may not pay holders "any form of interest or yield" solely for holding the stablecoin.
• Permitted issuers include subsidiaries of insured banks and federally or state-qualified nonbank issuers. Banks are not the only eligible issuers, but nonbank issuers must qualify through the Act's approval process.
• It becomes unlawful for any other person to issue a payment stablecoin in the United States, and the restriction on digital asset service providers offering non-permitted stablecoins to US persons begins three years after enactment.

Critics, including consumer groups and some state prosecutors, argue the law lacks sufficient consumer protections and does not require issuers to return stolen funds to fraud victims.

European Union, MiCA. The Markets in Crypto-Assets Regulation entered into force in June 2023. Its rules for asset-referenced and e-money tokens began to apply on June 30, 2024, and the regulation applied in full from December 30, 2024 (ESMA). Per the BIS, more than 60 percent of responding jurisdictions in a 2023 survey had or were developing stablecoin frameworks.

One notable convergence: the GENIUS Act, MiCA, and a Hong Kong bill all prohibit regulated issuers from paying yield to holders, which is a deliberate attempt to keep stablecoins from competing directly with bank deposits.

Common misconceptions

"Stablecoins are risk-free dollars." They are claims on an issuer or a smart contract, and each has failure modes described above. The BIS points to the "frequent inability" of stablecoins of various kinds to maintain par convertibility.

"They are regulated like banks." Not in the United States under the GENIUS Act, which creates a separate regime for payment stablecoin issuers, with its own reserve rules and its own regulators.

"A peg is a promise." It is a market price. A promise to redeem at $1 is what supports the peg, but the price on an exchange can differ, as USDC's four-day depeg showed.

"Decentralized means safe." A crypto-collateralized coin has no single issuer to fail, but it has code, oracles, and collateral prices that can.

Frequently asked questions

Q: Is USDC safer than USDT? A: They have different risk profiles, and neither is risk-free. USDC's issuer is a US public company that publishes monthly reserve information, while Tether has a longer record of regulatory disputes, including the 2021 settlements, but is far larger and has improved its disclosures. Reserve quality, redemption terms, and regulatory status all matter, and a licensed advisor can address your circumstances.

Q: What happens to my stablecoins if the issuer goes bankrupt? A: It depends on the issuer's terms and the law that applies. Under the GENIUS Act, stablecoin holders' claims on reserve assets must rank senior to the claims of non-stablecoin creditors, which is meant to improve recovery odds, but the Act is new and untested. Outside regulated structures, holders may be ordinary creditors in a bankruptcy that can take years to resolve.

Q: Can a stablecoin lose its peg and become worthless? A: Yes, and in the case of Terra's UST it happened. Fiat-backed coins with sound reserves have usually recovered from temporary depegs, as USDC did in four days in March 2023. A permanent collapse is most likely when reserves are missing or when a design relies on confidence alone.

Q: Why do stablecoins matter if I never use crypto? A: Stablecoin issuers are large holders of short-term Treasury debt, so a sudden wave of redemptions could in theory force sales in a market that many other investors rely on. Stablecoins also affect how dollars circulate outside the banking system, a concern for central banks in countries where residents prefer dollars to the local currency.

Q: Should I use stablecoins or just hold dollars in a bank account? A: They serve different purposes. A bank account offers deposit insurance of at least $250,000 per insured bank, and stablecoins do not. Stablecoins offer round-the-clock transfers and access to the crypto system. Whether the trade-off makes sense depends on what you need, and this is general background, not personal advice.

Q: Do stablecoins pay interest? A: Regulated US issuers cannot pay holders interest or yield solely for holding a stablecoin under the GENIUS Act. Yields offered elsewhere, such as through DeFi lending, come from lending the coins to someone else and carry the borrower's, platform's, and smart contract's risk.

The takeaway

Stablecoins matter because they turn dollars into software. They can move at any hour, settle on a public ledger, and plug into programs that move money automatically. They also inherit the oldest problem in money: a promise to hold a value is only as good as whoever is holding the reserves. The past decade supplies cases of each outcome, from Terra's collapse to USDC's four-day wobble to Tether's long path from regulatory settlement to quarterly attestations. The GENIUS Act and MiCA try to make the sound version the only legal version, and the BIS doubts that even that can make stablecoins the core of the monetary system. What to watch next is whether regulated issuers can stay stable under stress, and whether banks, card networks, and central banks absorb the technology or compete with it.

Sources

• Bank of England, "What are stablecoins and how do they work?".
• Bank for International Settlements, Annual Economic Report 2025, chapter on stablecoins, June 29, 2025.
• Public Law 119-27 (GENIUS Act), text on govinfo.gov.
• New York Attorney General, Bitfinex and Tether settlement, February 23, 2021.
• Circle, USDC transparency page (reserve categories as of October 15, 2026).
• ESMA, MiCA overview.
• FDIC, deposit insurance.
• Wikipedia summaries of Stablecoin, Tether, USD Coin, Dai, and Terra, used for market figures that cite FATF, BIS, CFTC, and company reports.

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