What Is a Stablecoin and How Does It Work?
A stablecoin is a crypto token designed to hold a fixed value, usually one US dollar, backed by reserves and redemption mechanisms. Learn how they work.
By Jonathan West · Updated October 2026
A stablecoin is a crypto token designed to hold a fixed value, usually one US dollar, by being backed by reserve assets and redeemable with its issuer; the peg holds only as long as the reserves are real and redemption works.
A stablecoin is private-issuer money rather than an insured bank deposit, meaning the safety of your funds depends on the issuer's reserve quality and redemption terms.
Category
Core concepts
Difficulty
Beginner
Where you'll see it
Exchange and wallet balances, payment apps, and issuer reserve pages such as Circle's transparency page
First introduced
Not applicable as a single date. The GENIUS Act (Public Law 119-27, enacted July 2025) is the US federal law setting standards for permitted payment stablecoins.
About what is a stablecoin
A stablecoin is a crypto token designed to keep a steady value, most commonly pegged to one US dollar. It achieves this peg by holding reserve assets and allowing direct redemption with the issuer. The peg holds only as long as those reserves are real, liquid, and accessible through timely redemption procedures. Unlike a traditional bank deposit, a stablecoin carries no government deposit insurance if the issuer defaults.
How it actually works
How do stablecoins work to hold a target value like one dollar? The mechanism relies on reserves and direct redemption. When an issuer creates stablecoins, it holds assets backing every outstanding token on at least a 1-to-1 basis. If the token trades below its one-dollar target on secondary trading markets, holders who can redeem with the issuer at par have an incentive to do so, which supports the price. This mechanism functions only while the issuer's redemption process is credible, operational, and supported by liquid reserves.
Under the GENIUS Act (Public Law 119-27, enacted July 2025), a permitted payment stablecoin issuer must maintain identifiable reserves backing outstanding stablecoins on at least a 1-to-1 basis under Section 4(a)(1)(A). Permitted reserve assets are limited. They include U.S. coins and currency, money held at a Federal Reserve Bank, demand deposits or insured shares at insured depository institutions, and Treasury bills, notes, or bonds with maturities of 93 days or less. Permitted reserves also include overnight repurchase agreements, overnight reverse repurchase agreements, and registered government money market funds holding only permitted assets. Section 4(a)(11) states permitted issuers may not pay holders any interest or yield, in cash, tokens, or other consideration, solely for holding, using, or retaining the stablecoin. For more on yield, see our guide to stablecoin yield.
The GENIUS Act requires issuers to publish reserve information, starting with the monthly composition of their reserves on their website. This publication must state the total outstanding stablecoins, the specific composition of reserve assets, the average tenor of holdings, and the geographic custody location for each reserve category. Each monthly report must be examined by a registered public accounting firm, and both the Chief Executive Officer (CEO) and Chief Financial Officer (CFO) must certify it to the regulator. Issuers must publish clear and conspicuous procedures for timely redemption, disclose fees in plain language, and give consumers not less than 7 days' prior notice before changing any fees. Under Section 3(b)(1), digital asset service providers face an unlawful offer or sale ban on non-permitted payment stablecoins beginning 3 years after the date of enactment, as detailed in our guide on the GENIUS Act explained.
Circle's transparency page is one reported example. It says that USDC is always redeemable 1:1 for US dollars, with reserve assets held separately from operating funds at financial institutions for the benefit of USDC holders. Per that disclosure, most of the USDC reserve sits in the Circle Reserve Fund (USDXX), an SEC-registered 2a-7 government money market fund that can hold cash, short-dated U.S. Treasuries, and overnight Treasury repurchase agreements. The remaining reserves are held mainly in cash at large banks. Circle provides weekly reporting on reserve assets alongside token mint and burn flows, daily fund reporting through BlackRock, and monthly third-party assurance from a Big Four accounting firm verifying that reserves exceed USDC in circulation. A stablecoin remains an uninsured asset that depends on the issuer, as explained in our overview of stablecoin regulation.
Example read: the report lists total outstanding tokens, then the amount per reserve category, the average tenor and the custody location. Compare reserves to tokens outstanding, and check that each category is a permitted asset. This page states no rates; live rates are in the crypto converter.
Takeaway: the peg depends on reserves plus redemption. Check the reserve disclosure, the redemption terms and the fees. A stablecoin is private-issuer money, not a bank deposit, so reserve quality and redemption rights matter more than the logo. This page is based on reported sources, the GENIUS Act text and Circle's transparency page; we did no testing of our own.
Start here
- 1Locate the issuer's monthly reserve report and verify that total reserves equal or exceed total outstanding tokens.
- 2Examine the asset breakdown to confirm the backing consists of permitted liquid assets, such as cash, Treasury bills with maturity of 93 days or less, or government money market funds.
- 3Read the issuer's published redemption policy to identify processing procedures and disclosed fees.
- 4Confirm that the issuer gives at least 7 days' advance notice before updating fee schedules.
- 5Check who is able to redeem directly with the issuer. Hold only what you need, in a wallet you control (see [what is a crypto wallet](/learn/what-is-a-crypto-wallet)).
Strengths
- Redemption with the issuer at par is the mechanism intended to keep the price near one dollar, while redemption stays credible and reserves stay liquid.
- Permitted payment stablecoins must back every outstanding token with identifiable, liquid assets on at least a 1-to-1 basis.
- Issuers must publish regular third-party accounting examinations and certified monthly reports detailing reserve compositions.
Common misunderstandings
- Stablecoins carry no government deposit insurance, leaving holders exposed to loss if an issuer defaults.
- The one-dollar peg fails if underlying reserves become illiquid or if the issuer halts timely redemption processing.
Common questions
Is a stablecoin the same as a bank deposit?
No, a stablecoin is not an insured bank deposit. Insured bank deposits sit at insured depository institutions, but supervision of stablecoin issuers provides no government deposit insurance if an issuer defaults. A stablecoin is a digital token backed by private reserves rather than direct government protection.
What backs a stablecoin?
Permitted payment stablecoins are backed on at least a 1-to-1 basis by specific reserve assets. Under the GENIUS Act, permitted reserves include U.S. currency, funds at a Federal Reserve Bank, insured bank deposits, Treasury bills, overnight repurchase agreements, and registered government money market funds. Issuers must publish regular reports detailing these holdings.
Can a stablecoin lose its peg?
Yes, a stablecoin can lose its target price if its reserves or redemption mechanisms fail. The peg depends on the issuer's ability to redeem tokens at par for fiat currency. If reserves become illiquid, or if holders lose the ability to redeem tokens reliably, secondary market trading prices can fall away from the target value.
Do stablecoins pay interest?
Permitted payment stablecoin issuers are explicitly barred from paying interest. Under Section 4(a)(11) of the GENIUS Act, permitted issuers may not pay holders any interest or yield, in cash, tokens, or other consideration, solely for holding, using, or retaining the stablecoin.
How do stablecoins work to stay at one dollar?
Stablecoins aim to hold their value through reserve backing combined with redemption at par. If the token trades below its target, holders who can redeem with the issuer have an incentive to do so, which supports the price, provided the issuer maintains liquid reserves and processes withdrawals.
Sources
- The GENIUS Act (Public Law 119-27), GovInfo
- Circle Transparency and USDC Reserve Reporting
Related guides
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