What Are Stablecoins, And How Do They Stay Stable?
Reserves, redemption and confidence help explain how stablecoins track a target value, and what can make that link break.
Imagine you want to send someone $100 using a crypto network. If you send an asset whose market price moves sharply, the amount they can exchange for dollars may change before they use it.
A stablecoin tries to solve that problem. It is a crypto token designed to track a reference value, such as one US dollar. The word stable describes the aim. It doesn't guarantee that every trade happens at the target price or that every holder can immediately receive cash.
What is the difference between a token and a dollar?
A dollar stablecoin moves as a token on a digital ledger, a shared record of balances and transfers. It isn't automatically a bank deposit in your name or a dollar issued by a central bank.
The Bank for International Settlements explains that a stablecoin payment transfers the issuer's token. The recipient still depends on the arrangements supporting that token's value. Sending it and exchanging it for money in a bank account are separate steps.
In our $100 example, receiving 100 tokens means the recipient has 100 tokens. Whether those become $100 after redemption, trading costs and transfer fees depends on the particular system.
How can an issuer keep the price near $1?
One model uses reserves, assets set aside to support redemption. An issuer receives money, creates tokens and holds assets intended to cover the tokens it has issued. Creating tokens is called minting. Redemption exchanges tokens back for the reference money.
The SEC staff's explanation of reserve backed stablecoins describes how eligible participants can help keep the market price close to the redemption value. If a token trades below $1, somebody able to redeem it for $1 may buy and redeem it. If it trades above $1, somebody able to create it at $1 may sell new tokens.
That process depends on redemption working. Traders need confidence that the issuer will pay, and the ability to use its service. It isn't a force that pins every exchange price to exactly $1.
Where are the reserves?
Reserves needn't be banknotes in a vault. They can include bank deposits and financial assets that can be sold for cash.
As a concrete example, the issuer Circle says USDC reserves include bank deposits and short term US government debt arrangements. This is Circle describing its own product. Its reserve disclosures and independent assurance reports are evidence about those holdings, rather than a promise that a token has no risk.
The US GENIUS Act became law on 18th July 2025. The Office of the Comptroller of the Currency says in a news release it takes effect on 18th January 2027. Its framework will require permitted payment stablecoin issuers to hold at least $1 of specified reserves for each $1 of tokens outstanding and publish clear redemption policies, including fees. Eligible reserves include cash, certain bank deposits and US Treasury securities with no more than 93 days to maturity. The requirements apply to payment stablecoins and issuers covered by the Act.
The quality of those assets matters. So does liquidity, meaning how readily they can be converted into money. Assets worth enough on paper may still be difficult to sell quickly during market stress.
Can anyone redeem directly with the issuer?
That depends on the coin, the holder's location and the terms. Holding a token doesn't necessarily give you access to the issuer's banking service.
In Circle's USDC terms for holders outside the European Economic Area, direct redemption requires an eligible Circle Mint account in good standing. A holder without one may rely on another service or a market buyer to exchange the tokens.
These are different routes. Selling a token on an exchange gets the market price available there. Redeeming with an issuer uses that issuer's terms and procedures. Neither route should be assumed from the token's name alone.
Are all stablecoins backed in the same way?
No. Some use conventional reserve assets. Others use crypto as collateral, assets committed to support the tokens. Some use algorithms that adjust supply or incentives instead of a pool of conventional reserves.
The BIS distinguishes these different designs. The risks change with the mechanism. Crypto collateral can fall in value. An algorithm still needs people willing to trade under its rules. Putting several designs under one name doesn't make their backing interchangeable.
What happens when confidence breaks?
A token losing its target price is often called a depeg. If holders worry about getting their money back, they may sell or request redemption together.
In an October 2025 speech, Federal Reserve Governor Michael Barr explained why the combination of cash redemption promises and noncash reserves can create runs. Selling reserve assets to meet withdrawals can become difficult under stress. The concern is about the ability to pay people promptly, not just the total value printed in a report.
Barr also noted that stablecoins lack deposit insurance. Calling a product a digital dollar doesn't give it the same protection as an insured bank deposit.
Does the network matter too?
Yes. A stable price target doesn't remove technical or service risks. Circle's developer documentation lists separate USDC contracts on supported blockchains. The network is part of identifying what someone holds and where it can move.
A wallet or exchange must support the relevant token and network. Circle's terms warn about unsupported transfers and network disruptions, and permit blocking addresses in certain circumstances. The ability to hold your own wallet doesn't remove those issuer controls.
For the sender and recipient in our example, there are two jobs to understand: moving the token and turning it into usable money. A stablecoin connects those jobs through reserves, rules and service providers. Each link can affect whether the recipient actually receives the amount they expected.
