What is a stablecoin?

What does a stablecoin actually do?

Most crypto-assets swing in price from hour to hour. That makes them awkward for paying someone, quoting a price or parking money between trades. A stablecoin tries to remove that swing: one token is meant to be worth one unit of something steadier, most often one US dollar.

The US Treasury's 2021 report on stablecoins describes them as digital assets that are designed to maintain a stable value relative to a national currency or other reference assets. The word designed matters. Nothing in the software forces the price to stay at $1; the price stays close to $1 only while enough people trust that each token can be swapped for a dollar.

People use stablecoins to move value between crypto-assets on exchanges, to settle trades on decentralized exchanges, and increasingly to send money across borders, which we cover in stablecoins and cross-border payments.

How does a reserve-backed stablecoin keep its peg?

The common design works like a cloakroom ticket. A customer sends dollars to the issuing company; the company creates ("mints") the same number of tokens and keeps the dollars in reserve. When a customer hands tokens back, the company destroys ("burns") them and returns dollars.

That two-way door is what holds the price. If tokens trade at $0.99 on an exchange, a trader with redemption access can buy them cheaply and redeem them for $1, pushing the price back up. If tokens trade at $1.01, the trader can mint new ones for $1 and sell them. We go deeper on this arbitrage in how stablecoins keep their peg.

What are the main types of stablecoin?

Stablecoins differ mainly in what sits behind the peg. Our guide to fiat-backed, crypto-backed and algorithmic stablecoins walks through each one; the table gives the short version.

What can go wrong with a stablecoin?

The Treasury report puts the central risk plainly: if an issuer does not honour redemptions, or users lose confidence that it can, runs on the arrangement could occur. A run is a rush of holders trying to get out at the same time. Reserves that are partly illiquid, frozen at a failed bank, or simply not there can turn a small wobble into a collapse.

The clearest example is TerraUSD (UST). According to the US Securities and Exchange Commission's 2023 complaint, UST was presented as an "algorithmic stablecoin" whose peg relied on being interchangeable with a sister token, LUNA. In May 2022 UST lost its dollar peg and, the SEC said, UST and its sister tokens fell to close to zero. The full story is in what happened to TerraUSD.

How are stablecoins regulated?

Rules are arriving fast. In the United States, the GENIUS Act was signed in July 2025. The White House fact sheet says it requires 100% reserve backing with liquid assets such as US dollars or short-term Treasuries, monthly public disclosure of what the reserves are, bans issuers from claiming their coins are backed by the US government, and puts holders first in line if an issuer goes bust. We explain the details in the GENIUS Act explained.

In the European Union, the Markets in Crypto-Assets Regulation (MiCA) treats single-currency stablecoins as e-money tokens and basket-backed ones as asset-referenced tokens. ESMA, the EU markets regulator, states that these rules applied from 30 June 2024. See MiCA explained.

1. Find the issuer. A stablecoin always has a company or protocol behind it; its website should name it.

2. Find the reserve reports. Look for regular reserve reports and who checked them — an attestation is narrower than a full audit (see reserves and attestations).

3. Check the licence. Confirm the issuer or platform appears in the official register of your country's regulator, as shown in how to check if a platform is registered.

What mistakes do beginners make with stablecoins?

• Treating a stablecoin like an insured bank deposit. It is a claim on a private issuer or a protocol. Deposit insurance schemes generally do not cover the token itself.
• Chasing high advertised yields. A return has to come from somewhere — lending, trading or token rewards — and each source adds risk. UST was marketed with yields the SEC says reached as much as 20%.
• Ignoring which network the token is on. The same coin can exist on several blockchains; sending it on the wrong network can mean losing it.
• Assuming every "stable" token is reserve-backed. Read what actually backs it before you hold it.