What stablecoins are and how they work

A digital token designed to hold a steady value

A stablecoin is a digital token, recorded on a blockchain, that is designed to keep a steady value against a currency, usually the US dollar. The GENIUS Act defines a payment stablecoin as a digital asset used for payment or settlement whose issuer is obligated to redeem it for a fixed amount of money and represents that it will keep a stable value. The definition excludes national currencies, deposits (including deposits recorded on a blockchain) and securities.^[1]

Stablecoins are commonly grouped into three designs:

• Fiat-backed: an issuer holds cash, Treasury bills and similar assets in reserve and promises to redeem each token for one dollar. USDC and PYUSD are examples. Circle reports that USDC reserves are bank deposits plus Treasuries and overnight repurchase agreements, held directly or in the Circle Reserve Fund, a money market fund managed by BlackRock.^[2]
• Crypto-collateralized: tokens are created against deposits of other crypto assets, usually worth more than the tokens issued, under rules enforced by software. DAI and USDS from Sky are examples; Sky publishes on-chain dashboards rather than auditor reports on its reserves.^[3]
• Synthetic: the dollar value is engineered with trading positions rather than held in cash. Ethena describes its USDe as "a synthetic dollar, backed with crypto assets and corresponding short futures positions" and says it is "not the same as a fiat stablecoin."^[4]

Only the first design can become a permitted payment stablecoin under the GENIUS Act, which limits reserves to cash, deposits, short-term Treasuries, certain repurchase agreements and government money market funds.^[1]

How minting and redemption work

1. Mint: an eligible customer (typically an exchange, fintech or institution) wires dollars to the issuer. The issuer adds the dollars to its reserves and creates (mints) the same number of tokens on a blockchain.
2. Circulate: the tokens move between wallets, exchanges and apps 24/7 without the issuer's involvement in each transfer.
3. Redeem: a customer returns tokens to the issuer, which destroys (burns) them and pays dollars from the reserves. Under GENIUS, issuers must publish a redemption policy with clear procedures for timely redemption and disclose all redemption fees in plain language, with at least 7 days' notice before fees change.^[1]

Most holders never deal with the issuer. They buy and sell on exchanges or in apps, so the price they get depends on market liquidity as well as on redemption.

Reserves and attestations

Under GENIUS, an issuer must hold identifiable reserves of at least $1 for every $1 of tokens outstanding. It must publish the composition of its reserves monthly, have that monthly report examined by a registered public accounting firm, and have its CEO and CFO certify the report's accuracy to its regulator. Issuers with more than $50 billion outstanding that are not SEC reporting companies also need annual audited financial statements.^[1]

An attestation is an accountant's report on specific claims, such as the reserve balance on stated dates. It is narrower than a full financial-statement audit. Circle, for example, publishes monthly examination reports on USDC reserves.^[5]

How stablecoins differ from tokenized deposits and CBDCs

Why the peg can break: two real examples

A stablecoin's market price stays near $1 only while holders believe they can redeem, or sell, at that price. Doubts about the reserves, the issuer's banks, or the design itself can push the price down.

• USDC, March 2023. When Silicon Valley Bank failed, Circle disclosed that $3.3 billion of roughly $40 billion in USDC reserves was held there.^[8] USDC traded as low as about 87 cents over the weekend.^[9] It returned to $1 after Treasury, the Federal Reserve and the FDIC announced on March 12, 2023 that all SVB depositors would be protected.^[10][8] The reserves were in the end fully available, but holders could not know that in the moment.
• TerraUSD (UST), May 2022. UST was an algorithmic design with no cash reserves; its value depended on a companion token, LUNA. It lost its peg in May 2022 and never recovered. The SEC alleged that the collapse wiped out more than $40 billion in market value.^[11] In 2024, Terraform Labs and its founder agreed to pay more than $4.5 billion following a jury verdict in the SEC's case.^[12]

The two cases are different. USDC's dip reflected a temporary question about access to reserves at a failed bank. UST had no dollar reserves to fall back on.