What is a stablecoin and how does it work?

A stablecoin is a crypto token designed to keep a steady price, usually one US dollar. It gives people a way to hold and send dollars on a blockchain without the price swings of bitcoin or ether. Most stablecoins hold their value because an issuer keeps reserves and promises to swap each token for one dollar.

How does a stablecoin keep its price?

There are three main designs.

• Fiat-backed. A company issues tokens and holds matching reserves in cash and short-term government debt. Large customers can hand tokens back for dollars, which keeps the market price close to $1. Tether's USDT and Circle's USDC work this way. The guide to USDT and USDC compares them.
• Crypto-backed. A smart contract, a program stored on a blockchain, issues tokens against deposits of other crypto worth more than the tokens created. The contract sells the collateral if its value falls too far. Dai is the best-known example.
• Algorithmic. Software tries to hold the price by expanding and shrinking supply, with little or no reserve behind it. TerraUSD used this approach and collapsed in May 2022, wiping out the token and its sister coin Luna within days.

What are stablecoins used for?

Their first use was trading. Stablecoins let traders move in and out of other cryptocurrencies without sending money back to a bank.

They are also used to send money across borders, to hold dollars in countries where the local currency is losing value, and as the working currency of DeFi, where they are lent, borrowed and pooled.

What are the risks?

The central risk is the issuer. If reserves are smaller, riskier or harder to sell than claimed, the token can lose its peg, meaning it trades below $1. Even well-reserved coins have slipped. USDC briefly fell below a dollar in March 2023 when part of its reserves was held at Silicon Valley Bank, which had just failed.

A stablecoin is not a bank deposit, and holders are not covered by deposit insurance. Issuers can also freeze tokens at specific addresses, for example at the request of law enforcement. Critics warn that a loss of confidence could trigger a run, with everyone trying to redeem at once.

How are stablecoins regulated?

In the United States, the GENIUS Act became law on July 18, 2025. It requires permitted issuers of payment stablecoins to back every token at least one for one with assets such as cash, bank deposits and short-dated Treasury bills, to publish the make-up of their reserves each month, and not to pay holders interest. As of October 2026, federal agencies were still writing the detailed rules, with a Treasury proposal open for comment until October 19.

The European Union regulates stablecoins under MiCA. Rules differ by country and continue to change. A government-issued digital currency is a different thing, covered in the guide to CBDCs.