What is a stablecoin, and how does it stay at one dollar?
Stablecoins are crypto tokens built to stay boring: one token, one dollar. Whether they manage it depends on what backs them, who can redeem them and what the law requires.
Education only, not investment, tax or legal advice. Crypto-assets are high-risk — risk disclosure.
The short answer
A stablecoin is a crypto token designed to keep a steady value against a currency, usually the US dollar. Most aim to do this by holding reserve assets such as cash and short-term Treasury bills and letting eligible holders swap tokens for dollars one for one.
Key takeaways
- Stablecoins are digital assets designed to hold a stable value against a national currency or other reference asset; over 99% are dollar-denominated, according to the BIS.
- Most rely on reserves and redemption: new tokens are issued when dollars come in and retired when dollars go out.
- Not all stablecoins are alike: reserve quality and redemption rights vary, and algorithmic designs have collapsed.
- The US GENIUS Act of July 2025 requires at least 1:1 reserves from a defined list of cash-like assets, monthly reserve reports and no interest paid to holders.
- Stablecoins are not bank deposits and are not covered by FDIC deposit insurance.
What is a stablecoin?
A stablecoin is a token on a blockchain that tries to keep the same value as something stable, almost always a national currency. The 2021 US government report on stablecoins defines them as digital assets designed to maintain a stable value relative to a national currency or other reference assets1. In practice that currency is overwhelmingly the dollar: the Bank for International Settlements (BIS) says over 99% of stablecoins are US dollar-denominated3.
Why would anyone want a crypto token that does not go up? Because it moves like crypto but holds value like cash. The same report found that stablecoins in the US were mainly used to trade, lend and borrow other digital assets, and that they are central to decentralised finance, where they serve as trading pairs and collateral1. The BIS also points to their growing use across borders3.
How does a stablecoin keep its value?
Most stablecoins work like a digital voucher backed by a pot of assets. The issuer creates, or mints, new tokens when it receives dollars from a customer or partner1, and puts those dollars into reserves. When an eligible holder hands tokens back, the issuer pays out dollars and destroys, or burns, the tokens.
Figure · Mint, hold, redeem
- 01Dollars incustomer pays issuer
- 02Tokens minted1 token per dollar
- 03Reserves heldcash, T-bills, deposits
- 04Redeemedtokens burned, cash out
The whole design rests on trust that a token can be swapped back for a dollar, which makes redemption the heart of any stablecoin. The 2021 report noted that redemption rights varied widely: who may redeem, whether there are limits on amounts, and whether ordinary users had any direct claim at all1.
What are the main types of stablecoins?
Stablecoins differ mainly in what stands behind each token. The 2021 report found reserves ranging from bank deposits and Treasury bills to riskier assets such as commercial paper, corporate and municipal bonds and other digital assets, and noted designs that try to hold their price by other means, sometimes called synthetic or algorithmic stablecoins1.
Three broad designs
| Type | What backs it | Main weak point |
|---|---|---|
| Reserve-backed | Cash, bank deposits, short-term government debt1 | Depends on the issuer's honesty, custody and reserve quality |
| Backed by other crypto | Other digital assets held as collateral1 | Collateral can fall sharply in value |
| Algorithmic | Rules that swap the coin with a sister token4 | Can spiral if confidence breaks |
The best-known algorithmic failure is TerraUSD (UST). According to the SEC's 2023 complaint announcement, UST was meant to hold its dollar peg by being exchangeable for another token, LUNA; in May 2022 it lost the peg and both tokens fell close to zero4.
What rules do stablecoin issuers have to follow?
Rules have tightened sharply since 2021. In the US, the GENIUS Act became law on 18 July 20252. It makes it unlawful for anyone other than a permitted issuer to issue a payment stablecoin in the US2, and it requires issuers to:
- hold identifiable reserves of at least one dollar for every token outstanding, in assets such as US currency, Federal Reserve balances, demand deposits, Treasury bills with 93 days or less to maturity, certain repurchase agreements and government money market funds2;
- publish the size and make-up of those reserves on their website every month2;
- pay no interest or yield of any kind to holders2.
The Act takes effect on the earlier of 18 months after enactment or 120 days after federal regulators issue final rules7, which means 18 January 2027 at the latest. It also says payment stablecoins are not backed by the US government and are not covered by federal deposit insurance2. From three years after enactment, platforms may not offer US customers payment stablecoins from issuers that are not permitted2. In the European Union, the Markets in Crypto-Assets Regulation (MiCA) sorts stablecoins into e-money tokens and asset-referenced tokens; its rules for both applied from 30 June 2024, ahead of the rest of MiCA on 30 December 20245. Our explainers on the GENIUS Act and MiCA go into detail.
Figure · Key stablecoin milestones
- Nov 2021Treasury report
- May 2022TerraUSD loses its peg
- Jun 2024MiCA token rules apply
- Jul 2025GENIUS Act
What can go wrong with a stablecoin?
The biggest danger is a run. The 2021 report warned that if an issuer fails to honour redemptions, or users simply lose confidence that it will, a self-reinforcing cycle of redemptions and fire sales of reserve assets can follow, harming users and the wider financial system1. It also flagged risks to payment systems and the concentration of economic power1.
There is a quieter problem too. The BIS argues that stablecoins fall short on three tests of sound money: singleness (every dollar is worth a dollar), elasticity (supply can expand to meet large payments) and integrity (resistance to financial crime)3. Because stablecoins do not settle on a central bank's balance sheet, tokens from different issuers can trade at small discounts or premiums to each other depending on how much each issuer is trusted3.
Risk warning
A stablecoin is not a bank account
Crypto assets are on the FDIC's list of products that deposit insurance does not cover6, and the GENIUS Act says payment stablecoins are not insured2. If an issuer or the platform holding your tokens fails, you may wait for, or lose, your money. Read our risk disclosure.
How is a stablecoin different from a bank deposit or a CBDC?
All three are digital dollars on a screen, but the promise behind each is different. A bank deposit is created when a bank lends, as our explainer on how banks create money shows, and is protected by bank regulation and deposit insurance up to set limits6. A stablecoin is a claim on a private issuer and its reserve pool. A central bank digital currency would be a direct claim on the central bank.
Figure · Stablecoin versus bank deposit
Stablecoin
- Claim on a private issuer
- Backed by a reserve pool
- No deposit insurance
- Moves on public blockchains
Bank deposit
- Claim on a bank
- Backed by the bank's assets
- Insured up to limits
- Moves on bank payment systems
What mistakes do beginners make with stablecoins?
Common beginner mistakes
Assuming 'stable' means safe
A stablecoin can lose its peg, as TerraUSD did in 20224. Stability depends on reserves and redemption, not the name.
Treating all stablecoins as the same
Reserves, redemption rights and regulation differ by issuer1. Read the issuer's own reserve reports rather than relying on a token's popularity.
Thinking you can always redeem directly
Some stablecoins give ordinary holders no direct right to redeem, and others limit who may redeem or how much1, so selling on an exchange may be the only way out.
Chasing yield on stablecoins
US-regulated issuers may not pay holders interest2. If someone else offers a return, ask where it comes from and who carries the risk.
Frequently asked questions
Are stablecoins legal in the US?
Yes. The GENIUS Act, enacted on 18 July 2025, created a federal framework for payment stablecoins and limits issuance to permitted issuers2.
Do stablecoins pay interest?
Under the GENIUS Act, permitted issuers may not pay holders interest or yield in any form2. Any return a platform offers on stablecoins it holds for you would be a separate arrangement with its own risks.
Can a stablecoin be pegged to something other than the dollar?
Where can I check what backs a stablecoin?
US issuers covered by the GENIUS Act must publish their reserve composition every month on their website2. Look for those reports, and check who audits or examines them.
Is a stablecoin the same as a digital dollar from the Fed?
No. A stablecoin is issued by a private company. A digital dollar issued by the Federal Reserve would be a central bank digital currency, which the US has not issued.
The bottom line
A stablecoin is a private promise to pay one dollar, kept by a pool of reserves and the ability to redeem. Good reserves and real redemption rights keep the peg; weak ones invite runs. New laws such as the GENIUS Act and MiCA set minimum standards, but a stablecoin is still not an insured bank deposit, so judge each one by what backs it and who stands behind it.
Sources
- Report on Stablecoins — President's Working Group on Financial Markets, FDIC and OCC (U.S. Department of the Treasury), 2021 Primary source
- Public Law 119-27: Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act) — U.S. Congress (via GovInfo), 2025 Primary source
- Annual Economic Report 2025, Chapter III: The next-generation monetary and financial system — Bank for International Settlements, 2025 Primary source
- SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes (Press Release 2023-32) — U.S. Securities and Exchange Commission, 2023 Primary source
- Markets in Crypto-Assets Regulation (MiCA) — European Securities and Markets Authority Primary source
- Understanding Deposit Insurance — Federal Deposit Insurance Corporation (FDIC) Primary source
- Implementing the GENIUS Act for the Issuance of Stablecoins by Entities Subject to the Jurisdiction of the OCC (proposed rule) — Office of the Comptroller of the Currency, Federal Register, 2026 Primary source
How we checked this page: every figure above links to the numbered source it came from. Spotted an error? Tell the desk — see our editorial policy.
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