What is a stablecoin and how does it hold its peg? Reserves, GENIUS Act rules and the 2026 market

Who this is for: Treasurers, allocators, founders and policy staff who need to understand how a dollar stablecoin holds its peg, how its issuer makes money, what the GENIUS Act and MiCA now require, and which questions to ask before putting one on a balance sheet.

A stablecoin is a cryptocurrency built to do the one thing Bitcoin and Ethereum were never designed to do: stay still. Each token is meant to be redeemable for a fixed amount of a reference asset, and in practice that asset is the US dollar in the overwhelming majority of cases. The idea is simple. The engineering, the reserve management and the regulation around it are where the detail lives, and those details are what separate a stablecoin an institution can hold from one it cannot.

The category stopped being a crypto curiosity some time in 2025. Issuers are now among the largest buyers of short-dated US government debt, card networks and banks settle real volume in stablecoins, and the United States and the European Union have written them into law. This guide explains how a reserve-backed stablecoin works, why other designs failed, what the market looks like in October 2026, what the GENIUS Act and MiCA demand of issuers, how the economics of a $1 billion issuer change when rates move or a run starts, and how to evaluate any stablecoin before relying on it.

Stablecoins by the numbers

How a reserve-backed stablecoin works

The mainstream model has four moving parts: an issuer, a reserve, a token contract on one or more blockchains, and a redemption promise. An issuer such as Circle or Tether accepts dollars from an approved customer, places those dollars in reserve assets, and mints an equal number of tokens. When a customer wants dollars back, the issuer burns the tokens and wires the cash. As long as the reserves are there, liquid and worth at least as much as the tokens outstanding, every holder can be paid at par.

1. Minting. A verified customer (an exchange, market maker or corporate) wires dollars to the issuer. The issuer credits the reserve and mints tokens to the customer’s wallet, normally the same business day.
2. Circulation. Tokens move peer to peer on public chains. Most holders never touch the issuer; they buy and sell the token on exchanges or receive it as payment. The secondary market price floats around $1.00 and arbitrageurs keep it there, because any discount can be bought and redeemed at par.
3. Reserve management. The issuer invests the reserve in short-dated government debt, repo and bank deposits, collects the interest, and publishes a monthly reserve report examined by an accounting firm.
4. Redemption. A verified customer sends tokens back, the issuer burns them and wires dollars. Under the Federal Reserve’s September 2026 proposal, supervised issuers would be required to process redemptions within two business days.

Why the reserve mix is the whole game

Short-dated US Treasury bills and overnight repurchase agreements collateralised by Treasuries are the gold standard because they can be sold in size on any business day without moving the price. Bank deposits are next, with the caveat that a bank can fail. Anything longer-dated, less liquid or riskier than that, such as commercial paper, corporate bonds, loans to affiliates or crypto assets, introduces the possibility that the reserves are worth less than par on the day everyone wants out at once.

USDC’s brief depeg in March 2023 is the cleanest example of why composition matters even for a well-run issuer. Circle disclosed that about $3.3 billion of its cash sat at Silicon Valley Bank as that bank collapsed, and USDC traded below 90 cents over a weekend until regulators guaranteed SVB deposits. The token was fully backed on paper the whole time; the market was pricing the chance that one slice of the reserve would be impaired. Circle’s response, which the GENIUS Act later turned into law for everyone, was to move the bulk of the reserve into an SEC-registered government money market fund (the Circle Reserve Fund) and keep the remaining cash at the largest, most heavily supervised banks.

Where the money is made

Holders earn nothing. The issuer keeps the interest on the reserve, which is why stablecoins became one of the most profitable businesses in financial services during the 2023 to 2026 rate cycle. Circle’s second quarter 2026 results, published August 5, 2026, show the structure: $701 million of total revenue, of which $668 million was reserve income, earned on an average USDC circulation up 25 percent year over year that ended the quarter at about $72 billion. Net income from continuing operations was only $48 million, because Circle shares much of that reserve income with distribution partners, Coinbase above all. Tether, with no comparable distribution deal and a smaller cost base, reported $1.5 billion of net operating profit for the same quarter and more than $10 billion of net profit for 2025.

That economics explains most of the strategy in the market. Issuers compete to get their token into exchanges, wallets and payment apps because every dollar of circulation is a dollar of reserve earning the bill rate. Binance’s $100 million investment in Circle on September 22, 2026, paired with a five-year agreement to promote USDC, is a distribution deal. Paxos’s Global Dollar Network, which Arbitrum joined on October 5, 2026, shares USDG reserve income with partners. And the yield OKX Money advertised on October 6, 2026 (up to 10 percent on USDG balances) is a partner-funded rewards programme, not issuer interest, which is exactly the line the GENIUS Act rules are trying to draw. The companion guide on stablecoin yield versus tokenized money market funds covers that distinction.

The three families of stablecoin design

Not every token that calls itself a stablecoin works the way USDT and USDC do. The useful way to sort them is by what stands behind the peg.

Supply figures are from DefiLlama as of October 6, 2026. The last row is not a stablecoin in the legal sense but it sits on the same lists and competes for the same institutional cash, which is why the GENIUS Act’s ban on issuer-paid interest pushed yield-seeking balances toward products like it. Our guide to tokenized real-world assets covers that category.

Why algorithmic stablecoins keep failing

A second family of designs tried to hold the peg with code rather than cash. TerraUSD (UST) was the largest. It maintained its dollar value through an arbitrage loop with a sister token, LUNA, that could be minted and burned to absorb demand. If UST traded below $1, arbitrageurs could burn it for $1 of newly minted LUNA and pocket the difference; if it traded above, they could burn LUNA to mint UST. The loop worked while LUNA had a market value far larger than UST’s supply and while confidence held. In May 2022 both conditions broke at once: large UST sales pushed the token below par, the arbitrage minted LUNA faster than the market could absorb it, LUNA’s price collapsed toward zero, and the “backing” evaporated. Roughly $40 billion of combined value disappeared in about a week.

The lesson institutions took from it is that a peg with no external asset behind it is a confidence game, and confidence is exactly the thing that disappears in a crisis. The GENIUS Act codified that lesson by defining a payment stablecoin as something redeemable for a fixed amount of fiat and requiring 1:1 reserves in specified assets, which excludes unbacked algorithmic designs from the licensed category entirely.

Overcollateralised designs sit between the two models. MakerDAO’s DAI, now joined by its successor USDS under the Sky brand, is backed by more than a dollar of crypto collateral and real-world assets per token and is governed by token holders rather than a company (see how DAO governance works). Together USDS and DAI held about $11.6 billion on October 6, 2026, the largest alternative to the reserve-backed giants but under 4 percent of the market. Ethena’s USDe, at about $5.0 billion, is a synthetic dollar whose backing is a hedged trading position rather than a reserve, with the position’s yield passed to stakers. It has held its peg since launch, but its stability depends on derivatives exchanges and on futures funding staying positive, a market condition rather than a guarantee.

The market in October 2026

Stablecoins are the largest use case in crypto by transaction volume and the fastest-growing pool of dollar liquidity outside the banking system. DefiLlama put total supply at $307.6 billion on October 6, 2026. USDT alone was $184.2 billion, or 59.9 percent, and USDC was $74.3 billion, so the top two accounted for about 84 percent of everything in circulation. Other trackers differ by a few percent depending on which tokens they count (a Bloomberg report relayed by CoinDesk cited $292.5 billion on September 24, 2026), but none disagree about the giants.

The growth has made issuers meaningful buyers of US government debt. The Institute of International Finance’s Global Debt Monitor, published September 23, 2026, estimated that issuers had added roughly $200 billion of short-dated Treasuries since 2023 and were buying bills faster than Japan, still the largest single foreign holder of US debt, with a path to about $400 billion by 2030; a San Francisco Fed paper released September 28, 2026 reached similar conclusions. Tether’s own 2025 profit announcement put its Treasury holdings at about $141 billion, and a March 2026 reserve report put total assets backing USDT at roughly $191.8 billion. Citi has projected global stablecoin issuance of $1.9 trillion to $4 trillion by 2030, a range wide enough to show how uncertain the forecasts are.

Who is building on them

Banks, card networks and payment companies stopped treating stablecoins as a competitor to be ignored and started building on them. Some concrete examples, all from 2026:

• Stripe, which bought the stablecoin infrastructure company Bridge for $1.1 billion in 2024, said on October 1, 2026 that stablecoin card spending on its programmes reached about $1.2 billion in September 2026, triple the year before, and that it would expand stablecoin cards to more than 100 countries by year end, mostly on USDC.
• SoFi began settling its Mastercard card programme, with more than $25 billion of expected annual volume, in its own SoFiUSD stablecoin (reported September 24, 2026). Visa’s settlement pilot reached a $7 billion annualised run rate in April 2026 across nine blockchains.
• State Street and Galaxy launched a GENIUS-aligned money market fund for stablecoin reserves on June 16, 2026, JPMorgan filed for its JLTXX tokenized fund in May 2026, and Morgan Stanley and ProShares launched reserve funds. The reserve itself has become a product asset managers compete to run.
• Bank of North Dakota launched the Roughrider Coin stablecoin on Solana on October 2, 2026, the first state-owned bank to issue one (CCS coverage).
• Circle launched its own blockchain, Arc, on September 16, 2026 with USDC as the native gas token, and announced a $400 million acquisition of Singapore’s Tazapay on September 8, 2026 to extend USDC into emerging-market payment corridors.

Crypto Coin Show’s research report, Stablecoins after GENIUS, draws on 29 founder interviews to trace what changed between 2025 and 2026. The pattern is consistent: issuers are becoming payment companies, and payment companies are becoming issuers.

What the GENIUS Act changed

Until 2025 the United States had no federal law that said what a stablecoin was or who could issue one. The Guiding and Establishing National Innovation for US Stablecoins Act, signed on July 18, 2025, fixed that for the category it calls payment stablecoins. The core provisions define what an institution can now expect from a compliant dollar token:

• Every token must be backed one for one by reserves held in cash, insured bank deposits, Treasury bills with 93 days or less to maturity, overnight repos backed by Treasuries, or government money market funds.
• Issuers must publish the composition of their reserves every month, with the report examined by a registered public accounting firm, and larger issuers face annual audits.
• Issuers may not pay interest or yield to holders simply for holding the token. This is the provision that pushed yield-bearing products toward tokenized money market funds.
• Issuance is limited to licensed entities: subsidiaries of insured banks, federally chartered nonbank issuers supervised by the OCC, or state-chartered issuers under a state regime deemed substantially similar to the federal one, with a $10 billion ceiling for the state path.
• Issuers are treated as financial institutions under the Bank Secrecy Act, so anti-money-laundering, sanctions screening and the ability to freeze or seize tokens on lawful order are mandatory.

The rulemaking, and the missed deadline

The law gave regulators one year, to July 18, 2026, to write implementing rules, and set the operative date as the earlier of January 18, 2027 or 120 days after final rules. Regulators missed the deadline. By July 19, 2026 they had issued ten proposed rules but finalised none: four from Treasury (general implementation, the “substantially similar” state standard, foreign issuer registration and anti-money-laundering), two from the OCC, one each from the FDIC and the National Credit Union Administration, and one interagency proposal. The FDIC had moved first in December 2025; a customer identification proposal followed in June 2026. Treasury’s main proposal, opened for comment in August 2026, confirms that no entity may issue a payment stablecoin in the United States without a federal or state licence once the law is operative.

The Federal Reserve followed on September 24, 2026 with two proposals for the issuers it supervises, published in the Federal Register on September 29, 2026 with a 60-day comment window. The first sets reserve, capital and risk standards: full backing with permitted assets, a tiered operational-risk capital charge of 2 percent on the first $20 billion of tokens outstanding, 1.5 percent on the next $30 billion and 1 percent above $50 billion, redemption within two business days, and monthly reports certified by the chief executive and chief financial officer. If reserves fall short the issuer must notify the Fed and either remediate or liquidate and redeem. The second sets out the application process for Fed-supervised banks.

The yield question is where the fight is. The OCC’s proposal, which the Fed said it was aligning with, treats certain arrangements in which a third party pays holders for keeping balances as presumptively prohibited interest, while leaving room for rewards structured like card incentives. Banking trade groups argued through 2026 that exchange rewards turn payment tokens into deposit substitutes, and the same dispute helped stall the CLARITY Act market structure bill, which CoinDesk described in September 2026 as having failed. Where the final line lands determines whether exchange rewards on USDC and USDG survive. For the broader US map, see SEC versus CFTC.

MiCA and the rest of the world

The European Union’s Markets in Crypto-Assets Regulation entered into force in June 2023 and its stablecoin provisions have applied since mid-2024, forcing exchanges serving EU customers to delist tokens whose issuers were not authorised; the transitional period for other crypto service providers ended July 1, 2026. MiCA is stricter than the GENIUS Act in one respect that matters: issuers must hold at least 30 percent of reserves as bank deposits (60 percent for tokens designated significant), with a 35 percent cap on any single sovereign and a ceiling on deposits at any one bank of 1.5 percent of that bank’s assets. Circle argued in the MiCA review consultation, which closed September 30, 2026, that the deposit minimums should become liquidity rules, citing its own SVB experience. The European System of Central Banks pushed the other way on September 22, 2026, proposing that significant stablecoins hold 40 percent of reserves maturing within one day and 60 percent within five working days, and that the yield ban extend to lending and staking built on e-money tokens. More than 50,000 Europeans had signed a petition against the rewards restrictions by October 1, 2026. Our MiCA guide covers the regime in full.

Freezes, sanctions and the counterparty question

Every major fiat-backed stablecoin contract includes a function that lets the issuer block specific addresses and, in Tether’s case, reissue frozen tokens on lawful order. Regulators see this as a compliance feature and insist on it: the GENIUS Act makes the technical ability to freeze a licensing condition. Holders should see it as a counterparty exposure. Tether said on September 28, 2026 that it had supported nearly $550 million of Iran-linked USDT freezes in 2026 and cooperated in more than 2,900 investigations, including over 1,600 involving US law enforcement. Three days earlier, on September 25, 2026, Circle and Tether both froze funds linked to a large hack of the exchange Bitget. Tether’s statement came the same day Senate Democrats published a report calling USDT a lifeline for the Iranian regime, which shows how political the freeze question has become for the largest issuer.

For an institution the implications are threefold. A stablecoin balance is an unsecured claim on the issuer, not an insured deposit. The issuer can act on that balance without your consent if a court or regulator tells it to. And the issuer’s jurisdiction and banking relationships determine how exposed your balance is to someone else’s enforcement action, which is why issuer domicile and the choice of custodian (see our custody guide) belong in the same conversation.

Why institutions actually use them

For a treasury or trading desk the appeal has little to do with crypto exposure. A stablecoin settles in minutes, at any hour, across borders, with finality, and it can sit in the same wallet as a tokenized Treasury fund or a tokenized share so the cash leg and the asset leg of a trade move together. That is why stablecoins show up as the settlement currency in nearly every tokenization pilot, why cross-border payment firms are routing corporate flows through them, and why the debate among large asset managers has shifted from whether to hold them to which issuer, which chain and which custodian.

Trading desks use them as the collateral and settlement asset for the basis trade and for exchange margin; on Binance alone, monthly USDC volume rose from the $20 billion to $40 billion range to consistently above $80 billion between December 2024 and September 2026 as USDC-quoted pairs grew from 140 to 329. Payment companies use them to settle card programmes and cross-border payouts without waiting for correspondent banks. Emerging-market users hold them as dollar savings, which is the story behind Circle’s Tazapay deal, Tether’s $20 million investments in Argentina’s Ualá and Brazil’s Mercado Bitcoin, and the US administration’s reported interest (Bloomberg via CoinDesk, September 24, 2026) in joint ventures to promote dollar stablecoins abroad and create Treasury demand. Software agents are starting to use them too, as the guide on AI agents and crypto payments explains. The IMF and the BIS have warned about the other side: in countries with current-account deficits, easy access to dollar tokens can accelerate capital flight in a stress period, which is why several emerging-market regulators are moving slower than Washington would like.

How we got here: a timeline

Worked example: a $1 billion issuer, a rate cut and a run

How to evaluate a stablecoin: a checklist

• What is in the reserve, and how fresh is the disclosure? A good answer is a monthly report examined by a named accounting firm showing cash, T-bills under 93 days, Treasury repo and government money market funds, and little else. Tether’s KPMG audit (August 2026) and Circle’s dashboard (September 24, 2026) set the current standard.
• Who holds the reserve and where? Look for a government money market fund or segregated accounts at large, supervised banks, and count the exposure to each; the SVB episode was a $3.3 billion exposure to one bank.
• Is the issuer licensed, and under which regime? A US payment stablecoin needs a federal or state licence by January 18, 2027; in the EU, MiCA authorisation. A token without either will be hard to hold or list in those markets.
• Can I redeem directly, how fast, and at what minimum? Direct redemption at par is what holds the peg. The Fed’s proposal would require two business days. Find out whether you qualify as a redemption customer or depend on exchanges.
• What is the freeze policy? Every major issuer can block addresses. Read the terms for when they will, which courts they answer to, and how a frozen balance is resolved.
• How healthy is the issuer’s own business? Circle earned $48 million of net income on $668 million of reserve income in Q2 2026 after distribution costs; a sharp rate cut squeezes that. Tether’s profits are larger but it is private with a shorter disclosure history.
• Which chains and bridges does the token live on? Native issuance on a chain is safer than a bridged wrapper. Check the issuer’s own list of supported networks.
• What does the secondary market say? A deep token trades within a few basis points of par on major venues at all hours. Persistent discounts or thin order books are warning signs.
• Is any yield offered coming from the issuer or a third party, and will it survive the rules? Issuer-paid interest is banned in the US and EU; partner rewards are under active rulemaking in both. Price in the chance they shrink.

Risks and open questions

Reserve and counterparty risk. The GENIUS Act narrows the reserve menu but does not eliminate bank failure risk, and MiCA actually mandates bank exposure. Whether the Fed’s proposed 2 percent capital buffer is enough against an operational failure or a stranded deposit will only be answered in the next stress event.

Concentration. Two companies hold about 84 percent of the market as of October 2026. A problem at either would be a problem for the whole crypto market and a growing slice of payments. Tether’s size, offshore history and the scrutiny of its role in sanctions evasion make it a particular focus in Washington, even as it completes audits.

Yield and bank disintermediation. The unresolved fight over third-party rewards in the US and the ESCB’s push to ban yield on lending and staking in the EU will decide whether stablecoins remain payment instruments or become deposit substitutes. Final rules in both jurisdictions are due within 12 months.

Rate sensitivity and the Treasury market. Issuer revenue moves one for one with front-end yields, so a cutting cycle compresses the business just as competition intensifies. Issuers holding $200 billion of bills are also now large enough that a mass redemption would mean forced bill sales into a stressed market, a channel the IIF and the San Francisco Fed both flagged in September 2026.

Implementation gaps. If final GENIUS rules are not in place by January 18, 2027 the law takes effect anyway. Foreign issuer comparability, the state-regime standard and the treatment of existing tokens during transition are all still proposals.

What to watch next

Glossary

Payment stablecoin

The GENIUS Act’s legal term for a digital asset redeemable for a fixed amount of fiat currency and used for payments, excluding deposits and securities.

Reserve

The pool of assets an issuer holds against tokens outstanding. Under GENIUS it must be cash, insured deposits, short Treasury bills, Treasury repo or government money market funds.

Attestation

An accounting firm’s examination of a reserve report at a point in time. Less thorough than a full audit, which covers a whole year of financial statements.

Depeg

When a stablecoin’s market price moves materially away from its target, usually below $1.00, because the market doubts redemption at par.

Redemption

Returning tokens to the issuer in exchange for the underlying fiat. Direct redemption is normally available only to verified institutional customers.

Mint and burn

Creating new tokens when cash comes in (mint) and destroying them when it goes out (burn), so that supply always equals reserves.

Repo (repurchase agreement)

A short-term loan secured by Treasuries. Overnight Treasury repo is a core reserve asset because it is liquid and collateralised.

Treasury bill

US government debt maturing in one year or less. GENIUS restricts reserves to bills with 93 days or less remaining.

Algorithmic stablecoin

A design that tries to hold a peg through supply adjustments and a sister token rather than external reserves. TerraUSD is the best-known failure.

Overcollateralised stablecoin

A token backed by more than $1 of collateral locked in smart contracts, such as DAI and USDS, so the peg can absorb collateral price falls.

Synthetic dollar

A token such as USDe whose value is maintained by a hedged trading position (long collateral, short futures) rather than a cash reserve.

Freeze function

Code in the token contract that lets the issuer block an address from sending tokens, used to comply with sanctions and court orders.

MiCA

The EU’s Markets in Crypto-Assets Regulation, whose stablecoin rules for e-money tokens and asset-referenced tokens have applied since mid-2024.

Tokenized money market fund

Shares of a regulated government money fund issued as blockchain tokens, such as BUIDL or USYC. They pay yield and are securities, not payment stablecoins.

Why it matters

Stablecoins are the first crypto product that the rest of the financial system has decided it needs. A $307 billion pool of dollar tokens that settles around the clock, holds about $200 billion of Treasury bills and is now written into US and EU law is no longer an experiment; it is a new layer of the dollar system run, for the moment, by two private companies. The GENIUS Act and MiCA have settled the first-order questions of what backs a token and who may issue one. The second-order questions, about yield, concentration, bank disintermediation and what happens to the Treasury market when issuers shrink, will be decided by the rules finalised over the next year and by the first real stress test of a licensed issuer.

For anyone who holds, builds on or regulates these tokens, the discipline is the same as it was before the laws: look at the reserve, look at the redemption path, look at who can freeze your balance, and treat the token as a claim on a specific company rather than as a dollar. The law now makes that information easier to get. It does not make the judgement unnecessary.

Sources

1. DefiLlama: Stablecoins dashboard, October 6, 2026
2. Federal Reserve Board: Requests public comment on two proposals related to Board-supervised payment stablecoin issuers under the GENIUS Act, September 24, 2026
3. Federal Reserve Board: FOMC statement, September 16, 2026
4. US Treasury: Daily Treasury Bill Rates, October 5, 2026
5. Circle: USDC transparency and reserve composition, September 24, 2026
6. Circle: Binance invests $100 million in Circle and renews commercial agreement for five years, September 22, 2026
7. Circle: Circle launches Arc mainnet, September 16, 2026
8. Tether: Tether has supported nearly $550 million in Iran-linked USDT freezes, September 28, 2026
9. ESMA: Markets in Crypto-Assets Regulation (MiCA), accessed October 6, 2026
10. Cointelegraph: Fed proposes new capital, redemption rules for stablecoin issuers, September 24, 2026
11. Cointelegraph: US Treasury moves forward with rules on GENIUS Act after July deadline, August 17, 2026
12. Cointelegraph: Federal agencies miss GENIUS Act deadline, July 19, 2026
13. Cointelegraph: Tether completes first full financial audit, receives clean KPMG opinion, August 13, 2026
14. CoinDesk: Tether says it completed long-promised Big Four audit, August 13, 2026
15. Cointelegraph: Circle Q2 revenue falls short of Wall Street estimates, August 5, 2026
16. CoinDesk: Binance deal gives Circle a boost in stablecoin race with Tether, September 26, 2026
17. Cointelegraph: Circle urges EU to revise stablecoin reserve rules in MiCA review, October 2, 2026
18. CoinDesk: European central banks push to expand stablecoin yield ban, September 22, 2026
19. Cointelegraph: SoFi tie-up shows stablecoins can provide alternative settlement rail, September 24, 2026
20. Crypto Coin Show: Stablecoin issuers now hold more US Treasuries than Japan (IIF and San Francisco Fed data), October 1, 2026

Disclosure: This guide is for education only and is not investment, legal or tax advice.