A stablecoin is a crypto token designed to keep a steady value, usually one US dollar or one euro, by holding reserves such as cash and short-term government bonds. Stablecoins move on blockchains like any crypto-asset, but without the price swings, which makes them the main way to hold dollars or euros on-chain.
The two largest are Tether’s USDT and Circle’s USDC. Since 2024 and 2025, they are also the first crypto-assets with dedicated laws on both sides of the Atlantic: MiCA in the European Union and the GENIUS Act in the United States. This guide explains how stablecoins work, their history, what they are used for, how they are regulated, the risk of losing the peg and how to use them safely.
What are stablecoins, in simple terms?
Imagine a digital voucher worth exactly one dollar, which you can send to anyone in the world in minutes, at any hour, for a small fee. The company that issues the voucher keeps one real dollar (or an equivalent safe asset) in reserve for every voucher in circulation, and promises to blockchain, where users swap tokens directly from their own wallets without handing custody of their funds to a company.">swap it back. That is a fiat-backed stablecoin.
The value of a stablecoin rests entirely on that promise: the quality of the reserves, the honesty of the issuer and the ability of holders to redeem. When doubts appear, the price can slip below its target. This is called a depeg.
How do stablecoins work?
Fiat-backed stablecoins
Most stablecoins work like this. When a client sends $1 million to the issuer, the issuer creates (“mints”) 1 million tokens. When a client returns tokens, the issuer destroys (“burns”) them and pays out dollars. If the market price drops to $0.99, traders can buy tokens cheaply and redeem them for $1, which pushes the price back up. This arbitrage keeps the price close to the peg, as long as redemptions work. Reserves are usually invested in US Treasury bills, repurchase agreements, money market funds and bank deposits.
Crypto-backed stablecoins
Some stablecoins are backed by other crypto-assets locked in smart contracts, with more collateral than the tokens issued (for example $150 of ether for $100 of stablecoins). DAI, now continued as USDS by the Sky protocol, is the best-known example. If collateral falls in value, it is sold automatically to protect the peg.
Algorithmic stablecoins
These try to hold their value through code and incentives rather than full reserves. The most famous, TerraUSD (UST), collapsed in May 2022 along with its sister token LUNA, wiping out tens of billions of dollars. Without full reserves, tokens of this kind cannot qualify as regulated stablecoins under MiCA or the GENIUS Act.
Commodity-backed tokens
A smaller group tracks the price of a commodity, mainly gold, with each token tied to a quantity of metal held in a vault.
USDT and USDC: the two giants
Tether (USDT)
Tether (USDT) launched in 2014 and is the oldest and largest stablecoin. It is issued by Tether, a company led by Paolo Ardoino. According to its reports, its reserves are mostly US Treasury bills, with other assets including gold and bitcoin. Tether’s record is mixed: on 15 October 2021, the US Commodity Futures Trading Commission fined it $41 million, finding that USDT had been fully backed by fiat reserves on only 27.6% of the days in a sample from 2016 to 2018. Tether publishes quarterly attestations and said in March 2026 that it had hired a Big Four firm for its first full audit. It did not seek MiCA authorisation for USDT; in January 2026 it launched USAT, a separate token issued in the US by Anchorage Digital Bank under the GENIUS Act framework.
USD Coin (USDC)
USD Coin (USDC) launched in September 2018 and is issued by Circle, a US company listed on the New York Stock Exchange since June 2025. Most of its reserves sit in a money market fund managed by BlackRock, the rest as cash in large banks, and a Big Four accounting firm checks every month that reserves exceed the tokens in circulation. In July 2024, Circle received an electronic money institution licence in France, which makes USDC and its euro token EURC compliant with MiCA.
A short history of stablecoins
- 2014: launch of Tether, first issued under the name Realcoin, then renamed.
- 2017: the MakerDAO project launches DAI, a stablecoin backed by crypto collateral.
- September 2018: launch of USDC.
- October 2021: CFTC fine against Tether over its reserve statements.
- May 2022: collapse of the algorithmic stablecoin TerraUSD.
- March 2023: USDC loses its peg for a weekend after Silicon Valley Bank fails.
- 30 June 2024: MiCA’s rules on stablecoins start to apply in the EU.
- 17 January 2025: ESMA tells EU platforms to stop offering non-compliant stablecoins by the end of March 2025.
- 18 July 2025: the GENIUS Act is signed into law in the United States.
What are stablecoins used for?
- Trading: they are the main currency on crypto exchanges, used to move in and out of positions without going back to a bank.
- Payments and transfers: sending dollars abroad in minutes, including on weekends, often for less than a bank wire.
- Saving in a strong currency: in countries with high inflation, dollar stablecoins are a way to hold dollars.
- wallet.">Decentralised finance: stablecoins are the base asset for lending and trading in DeFi.
- Business settlement: payment companies and banks increasingly use them to settle transactions between themselves.
How stablecoins are regulated
In the EU: MiCA and e-money tokens
The EU’s Markets in Crypto-Assets regulation, MiCA, applies to stablecoins since 30 June 2024. A token that tracks a single official currency, such as USDC or EURC, is an e-money token (EMT). Its issuer must be an authorised bank or electronic money institution and publish a white paper. Holders have a claim on the issuer and can redeem at par, at any time and free of charge. Issuers may not pay interest. At least 30% of the funds received must be kept as deposits in banks, and the rest invested in highly liquid, low-risk assets in the same currency, with stricter rules for tokens designated as significant. Since early 2025, EU platforms have stopped offering non-compliant stablecoins such as USDT to European clients, although holding them remains legal. Our guide MiCA explained covers the full regulation.
In the US: the GENIUS Act
The Guiding and Establishing National Innovation for U.S. Stablecoins Act, or GENIUS Act, passed the Senate on 17 June 2025 and the House on 17 July 2025, and was signed on 18 July 2025. It requires payment stablecoins to be backed 100% by liquid assets such as dollars and short-term Treasuries, with the reserve composition published every month. Only approved issuers may issue them: subsidiaries of insured banks, nonbanks supervised by the Office of the Comptroller of the Currency, or state-regulated issuers with up to $10 billion in circulation. Issuers cannot pay interest, cannot claim government backing, and holders get priority if the issuer fails. As of October 2026, regulators have proposed implementing rules but not finalised them all. The law takes effect on 18 January 2027 at the latest, or 120 days after the final rules if that comes sooner.
Depeg and other risks
- Reserve risk: if reserves are lost, frozen or worth less than claimed, the token can fall. In March 2023, Circle revealed that $3.3 billion of its reserves were stuck at the failed Silicon Valley Bank; USDC fell to about $0.88 before recovering within days.
- Design risk: algorithmic models can enter a death spiral, as TerraUSD showed in May 2022.
- Redemption gap: direct redemption is often limited to verified business clients. Retail users sell on an exchange, at the market price of the moment.
- Freezing: issuers can freeze tokens at an address, for example at the request of authorities.
- Platform and code risk: a stablecoin is only as safe as the exchange, wallet or DeFi protocol that holds it.
- No deposit insurance: stablecoins are not bank deposits and are not covered by FDIC insurance or EU deposit guarantee schemes.
How to use stablecoins safely
- Prefer regulated tokens. In the EU, use MiCA-compliant e-money tokens; in the US, check the issuer’s licences and reserve reports.
- Read the reserve reports. Look for monthly reports from an independent accounting firm and a clear redemption policy.
- Buy on a regulated platform. Our guide how to buy crypto explains how to choose one.
- Check the network before sending. The same stablecoin exists on several blockchains; sending on the wrong network can lose your funds. Test with a small amount, such as $10.
- Be wary of high yields. Platforms offering high returns on stablecoins take risks with your money. Ask where the yield comes from.
- Do not keep large sums for long. A stablecoin is a tool for moving and using money, not a bank account.
Key takeaways
- Stablecoins are crypto tokens pegged to a currency, mostly the US dollar, and backed by reserves.
- USDT (Tether) is the largest; USDC (Circle) is the main MiCA-compliant dollar token.
- In the EU, MiCA has regulated e-money tokens since 30 June 2024; in the US, the GENIUS Act was signed on 18 July 2025 and takes effect by January 2027.
- A stablecoin can lose its peg, as USDC did briefly in March 2023 and TerraUSD did for good in May 2022.
- Check the issuer, the reserves and the network, and never treat a stablecoin as an insured deposit.
