What is a stablecoin and how does it hold its peg?

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 more than 99 percent of the time. 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.

How a reserve-backed stablecoin works

The mainstream model is straightforward. An issuer such as Circle or Tether accepts dollars from a customer, holds those dollars in reserve assets, and mints an equal number of tokens on a public blockchain. When a customer wants dollars back, the issuer burns the tokens and wires the cash. As long as the reserves are genuinely there, genuinely liquid and genuinely worth at least as much as the tokens outstanding, every holder can be paid at par.

The reserve mix is the whole game. Short-dated US Treasury bills and overnight repurchase agreements 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 or loans to affiliates, 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, when Circle disclosed that a portion of its cash sat at the collapsing Silicon Valley Bank, is the cleanest example of why the composition of reserves matters even for a well-run issuer.

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. The loop worked while confidence held and collapsed in May 2022 when it did not, wiping out roughly $40 billion in 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. Overcollateralized designs such as MakerDAO’s DAI, which is backed by more than a dollar of crypto and real-world assets per token, sit between the two models and have held up better, but they remain a niche relative to the reserve-backed giants.

The market today

Stablecoins are the largest use case in crypto by transaction volume, and the supply has grown past $250 billion, with Tether’s USDT and Circle’s USDC holding the overwhelming majority of that between them. That scale has made stablecoin issuers meaningful buyers of US government debt: Tether alone has reported holding more Treasury bills than many sovereign nations. It is also why banks, card networks and payment companies stopped treating stablecoins as a competitor to be ignored and started building on them, from Visa’s stablecoin settlement pilots to Stripe’s acquisition of the stablecoin infrastructure company Bridge and the string of bank-issued or bank-partnered tokens announced through 2025 and 2026.

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 are worth knowing because they now define what an institution can 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 instead.
• 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, 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 law took effect on a delayed schedule, with the operative date set as the earlier of 18 months after enactment or 120 days after the regulators publish their final rules, so the market spent 2026 watching those rulemakings. The European Union’s MiCA regime, in force for stablecoins since mid-2024, imposes a comparable reserve and licensing structure and has already forced exchanges to delist tokens whose issuers did not comply.

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.

The risks that remain are operational rather than conceptual: issuer solvency and reserve quality, the ability of an issuer to freeze funds (a compliance feature to a regulator and a counterparty risk to a holder), smart contract and bridge security when tokens move between chains, and the concentration of the market in two private companies. Those are the questions to put to any issuer or custodian before a stablecoin goes on a balance sheet.