What stablecoins are, and what actually backs each one

A stablecoin is a token designed to be worth the same as something else, usually one dollar. The idea sounds dull, and it is by some distance the most heavily used product in the entire sector: as of August 2026 USDT and USDC alone add up to more than $257 billion in market capitalisation.

The usual mistake is treating them as a single category. "A stablecoin is a digital dollar" is a sentence that hides the only question that matters: what sits on the other side, who holds it, and who verifies it. The answer changes completely from one issuer to the next, and the differences only become visible on the day a lot of holders want out at once.

This guide compares the real reserves, using figures the issuers publish themselves, and works through the episodes of lost parity that teach the most. Data as of 28 August 2026.

The three models, and why they are not interchangeable

Fiat collateral

The issuer receives dollars, holds them somewhere, and issues one token for each dollar received. When somebody redeems, the token is burned and the dollar returned. This is the model behind USDT, USDC, PYUSD and the overwhelming majority of the market by volume.

The risk here is neither market risk nor code risk: it is counterparty and custody risk. You are relying on the reserves existing, on their being liquid, and on the bank holding them not failing. That is precisely the risk that materialised with USDC in March 2023, and we will come back to it.

Crypto collateral, overcollateralised

There are no dollars behind it. There are crypto assets deposited in contracts at a value higher than the stablecoin issued. This is the model behind DAI and its successor USDS in the Sky ecosystem. You deposit $150 worth of ETH and can generate 100 DAI; if the collateral falls below a threshold, the system liquidates it automatically.

The nature of the risk changes. You are not depending on a bank, you are depending on liquidations working at the worst possible moment — which is exactly when the network is congested and everybody is attempting the same thing at once. You are also depending on the quality of the smart contract code that runs it.

Algorithmic

There is not enough collateral. The peg is held together by an incentive mechanism: when the token trades below a dollar, the protocol offers arbitrage to burn it in exchange for another asset it issues itself. It works for as long as the market believes it will work.

This category has a track record and it is not ambiguous. We return to it with the numbers from the Terra collapse.

The numbers as of August 2026

Source: DefiLlama, 28 August 2026. The concentration is the most telling figure of all: two issuers account for the overwhelming majority of the market.

What actually backs each one

This is where the comparison stops being generic. These are Tether's reserves according to its attestation of 31 March 2026, against a total of $191.77B:

Reported reserve ratio: 104.54%. In its Q2 2026 report, published on 31 July 2026, Tether reported total assets of $187.75B against roughly $184.6B of USDT in circulation — an excess reserve buffer of $4.11B, which had shrunk by almost half over the quarter — plus more than 146 tonnes of gold (fourteen more than the previous quarter), net operating profit of $1.50B, and a $2.38B reduction in its secured lending exposure.

Read that table carefully. Around 22% of the reserves — gold, secured loans and crypto assets — are not cash equivalents. They may be perfectly sound assets and still be difficult to turn into dollars quickly, and their value tends to fall in exactly the moments when redemption requests spike. That is the point, not accounting solvency on a quiet day.

USDC works differently. According to Circle's transparency page, with data as of 24 August 2026, the reserves consist of cash and equivalents at top-tier financial institutions, short-dated US Treasury bills and overnight Treasury repos. Most of it sits in the Circle Reserve Fund (USDXX), a government money market fund registered with the SEC under rule 2a-7 and managed by BlackRock.

Worked example: minting and redeeming 1,000 USDC

The process matters because it explains where the peg actually comes from.

Minting. A client with an institutional account at Circle wires $1,000. Circle credits the deposit, mints 1,000 USDC on whichever network the client chooses — Ethereum, Solana, Base — and those $1,000 enter the reserves, mostly into the BlackRock-managed Circle Reserve Fund. USDC supply rises by exactly 1,000 units. All of it is verifiable on chain.

Redemption. The client returns the 1,000 USDC to Circle. The contract burns them, supply falls by 1,000, and Circle wires $1,000 back to the client's bank account.

Why that anchors the price. If USDC trades at $0.995 on the open market, anyone with mint and redeem access can buy at $0.995, redeem at $1 and keep the spread. That arbitrage pushes the price back. The peg is not held up by a promise, it is held up by an economic incentive that only works while redemption is operational. Break redemption and you break the peg, which is precisely what happened in March 2023.

What a retail user actually does. You do not mint or redeem directly. You buy on an exchange and pay its fee. On published fee schedules as of August 2026, buying 1,000 USDC as a taker on Coinbase Advanced (0.60% in the $0–$10,000 tier) costs $6; on Kraken at the 0.80% base tier, $8; on Binance at 0.100%, $1. On a $1,000 trade the gap between platforms is $7, more than most people save optimising anything else. I go through this in how to choose a safe exchange.

The depegs worth knowing

Terra / UST. UST was algorithmic: it held its peg through a mint-and-burn mechanism against LUNA. Between 7 and 13 May 2022 the peg broke, and the arbitrage meant to repair it became the engine of destruction, because every UST redeemed created new LUNA. LUNA supply went from 343 million on 9 May to 6.53 trillion within a week — an increase of 1,908,651%. UST reached $0.044. Between UST, which had peaked around $18.7B, and LUNA, worth roughly $41B at its high, more than $40 billion evaporated.

USDC and Silicon Valley Bank. On 10 March 2023 the FDIC took over Silicon Valley Bank, where Circle held $3.3B of USDC reserves. This was not a design problem or a code problem: part of the cash was in a bank that had ceased to exist on a Friday afternoon. USDC fell to $0.87 and regained parity in about three days, once it became clear the deposits would be covered. The lesson is specific: with a fiat-collateralised stablecoin, your risk includes the health of the particular banks holding the money.

DAI above the peg. On 12 March 2020, amid a general market collapse, Ethereum congestion prevented liquidation auctions from attracting competitive bids: $8.32M of collateral was liquidated for 0 DAI. The resulting scarcity pushed DAI to $1.11. It is the perfect illustration that a stablecoin can fail upwards, and that the risk in an overcollateralised design is not that the collateral is missing but that the machinery converting it into dollars seizes up.

• Do not assume "stablecoin" means "no risk". It means "designed not to move", which is a different thing.
• Do not keep your entire working balance with a single issuer if the amount matters to you.
• Do not confuse an attestation with an audit, or a quarterly report with continuous verification.
• Do not chase yield on stablecoins without identifying exactly where that yield comes from.

MiCA: what has changed in practice across the EU

Regulation (EU) 2023/1114 entered into force on 29 June 2023, and Titles III and IV — the stablecoin titles — have applied since 30 June 2024. It distinguishes two figures: EMTs (e-money tokens), referenced to a single official currency, whose issuer must be a credit institution or an electronic money institution, and ARTs (asset-referenced tokens), referenced to baskets of currencies, commodities or crypto assets.

The requirements are concrete. Minimum capital of €350,000 or 2% of average reserve assets, whichever is greater; segregated 1:1 backing; at least 30% of an EMT's reserves in bank deposits, rising to 60% for significant issuers; and for those significant issuers — more than 10 million holders, more than €5bn issued, more than 2.5 million daily transactions or more than €500M a day — 3% own funds and supervision by the EBA. There is also a cap on non-euro-denominated EMTs used as a means of payment: 1 million transactions or €200M a day, beyond which the issuer must halt new issuance. It does not apply to trading, custody or on-chain B2B settlement.

The verifiable effects as of August 2026:

• Circle obtained an electronic money institution licence in France (from the ACPR) in July 2024 and became the first global issuer compliant with MiCA.
• Authorised EMTs as of July 2026: USDC and EURC (Circle, France), EURI (Banking Circle, Luxembourg), EURCV (Société Générale-Forge, France), EURe (Monerium), EURD (Quantoz, Netherlands) and EUROe (Membrane Finance, Finland).
• Authorised ARTs: none to date.
• Tether has not obtained EMT authorisation. USDT was delisted from EU-regulated platforms — Coinbase, Crypto.com, Bitstamp — in late 2024. Holding it in on-chain self-custody remains lawful.
• Titles II and V, covering service providers, have applied since 30 December 2024. National transitional periods ran on into 2026 in several member states, and by mid-2026 they had closed: only entities authorised by a national competent authority, or passporting in from another member state, may serve EU clients. Always check the relevant national register before trusting a platform.

The United States: the GENIUS Act still has no teeth

The GENIUS Act, the first federal law written specifically for payment stablecoins, passed the Senate on 17 June 2025 by 68 votes to 30, the House on 17 July by 308 to 122, and was signed on 18 July 2025. It is in force, but its application depends on the rulemaking beneath it.

And that is where it pays not to get ahead of the facts: as of August 2026 that rulemaking is still only a proposal. The Treasury published the regulation in the Federal Register on 18 August 2026, with a comment period running to 19 October 2026. The compliance deadline is the earlier of two dates: 18 months from enactment, meaning 18 January 2027, or 120 days after final rules. Section 3(b)(1) does not apply until 18 July 2028.

Running alongside it, the joint SEC and CFTC interpretation of 17 March 2026 included stablecoins as one of the five categories in its crypto-asset taxonomy, separate from digital securities. The broader market-structure bill, the CLARITY Act, is still pending: through the House on 17 July 2025, out of the Senate Banking Committee on 14 May 2026, with a cloture vote expected on 15 September 2026 that requires 60 votes and reconciliation.

The upshot is that in 2026 the two largest jurisdictions have taken different routes. Europe already requires a licence and has reshaped its market through delistings; the United States has a statute but not yet a rulebook. Whichever applies to you, the checkable facts are the same: the list of authorised issuers, the register your platform appears in, and the attestations the issuer publishes.

Tax is a separate matter again, and it is not settled by either regime. Whether holding, spending, swapping or earning yield on a stablecoin creates a taxable event depends entirely on where you are resident, and the answers differ sharply between countries. Check your own rules and take professional advice. For the rest of the framework, the detail is in crypto regulation and in the difference between a token and a coin.

Frequently asked questions

Sources and references

1. Tether — transparency and attestations
2. Circle — Transparency and stability
3. Regulation (EU) 2023/1114 (MiCA) — full text on EUR-Lex
4. Federal Register — GENIUS Act regulations on payment stablecoin issuance (18 August 2026)
5. SEC — Joint clarification on crypto assets (17 March 2026)
6. CFTC — Press release 9198-26
7. DefiLlama — stablecoin market capitalisation
8. ESMA — European Securities and Markets Authority

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