What are stablecoins and how do they hold their value

Bitcoin and ether change price all the time. For anyone who just wants to move money over a blockchain, that volatility gets in the way. Stablecoins were created to solve this: a token that circulates like any crypto asset but tries to always be worth the same thing, usually one dollar.

The idea sounds simple. The hard part is keeping the promise in every scenario. This article explains how it is supported, why it has failed, and what the latest rules require of issuers.

What a stablecoin is

A stablecoin is a token recorded on a blockchain that promises to keep a fixed value relative to an official currency. The Bank for International Settlements (BIS), the organization that brings together central banks, describes the promise as “always being worth a fixed value in fiat currency” (BIS, Annual Economic Report 2025). Fiat currency is money issued by a state, such as the Brazilian real or the US dollar.

According to the same report, more than 99% of stablecoins are denominated in dollars, and market growth is concentrated in the two largest: Tether’s USDT and Circle’s USDC. The differences between them have an article of their own: USDT vs. USDC: mechanisms, reserves and risks.

In practice, stablecoins serve three purposes: holding a dollar balance inside the crypto environment, paying and transferring value across countries, and acting as the medium of exchange on trading platforms and applications. They run on networks such as Ethereum, where a smart contract controls the creation and destruction of tokens.

The peg promise and what supports it

The peg is the fixed one-to-one relationship between the token and the reference currency. In the most common model, it rests on two mechanisms.

The first is reserves. For every token issued, the issuer holds assets of equivalent value, such as bank cash and short-term US government securities. Circle, for example, says most USDC reserves sit in a money market fund that invests in cash, short-term US Treasury securities and repurchase agreements (Circle, Transparency). Tether states that its tokens are “100% backed” by the company’s reserves (Tether, Transparency).

The second is redemption. Anyone with an account at the issuer can hand in tokens and receive dollars, or deposit dollars and receive new tokens. This creates a floor and a ceiling for the price.

Here is how it works. If the token drops to 99 cents on an exchange, those with redemption access buy it cheap and swap it for one dollar with the issuer. If it rises to 1.01, they deposit one dollar, receive a new token and sell it above par. This arbitrage pushes the price back toward one dollar.

There is an important detail: most people do not deal with the issuer. They buy and sell on exchanges, in the so-called secondary market, where the price can drift from the peg. The BIS notes that stablecoins trade at an “exchange rate” that “may deviate from par” and that many holders are probably not customers of the issuer (BIS, 2025). The promise holds in full for those who can redeem. For everyone else, it depends on those arbitrageurs continuing to act.

The main models

Not every stablecoin works the same way. The three most commonly cited models are:

• Backed by currency and securities. The issuer is a company that holds reserves off-chain, in banks, custodians and funds. This is the USDT and USDC model. Stability depends on the quality of the reserves and on trust in the issuer.
• Backed by other crypto assets. Tokens are created against deposits of crypto assets worth more than what is issued (overcollateralization), to absorb price drops. DAI is the best-known example. Even this design can be affected by third parties: in March 2023, DAI fell below the peg despite remaining overcollateralized, because part of its stability mechanism depended on USDC (Federal Reserve, FEDS Notes, December 2025).
• Algorithmic. They have no equivalent reserves. They try to hold the price by adjusting supply through automatic rules, usually with the help of a second token. This is the model that produced the largest collapse in the sector’s history.

When the peg fails: two episodes

TerraUSD, May 2022

TerraUSD (UST) was an algorithmic stablecoin. According to the BIS, it held its value by adjusting supply through an automatic arbitrage strategy with another crypto asset, Luna, and reached US$ 18.7 billion at its peak, as the third-largest stablecoin (BIS, Annual Economic Report 2022).

When UST fell below one dollar, the report describes “classic run dynamics”: holders destroyed UST to create new Luna and sell it while it still had some value. Luna’s supply exploded, its price collapsed and, in May 2022, UST became worth almost nothing. With no reserves, there was nothing to hand to those who wanted out.

USDC, March 2023

The second case involves a stablecoin with reserves. On the night of March 10, 2023, Circle reported that it could not withdraw US$ 3.3 billion of USDC reserves deposited at Silicon Valley Bank (SVB), a US bank that had been placed into receivership that day. The amount equaled about 8% of the reserves.

According to a note by Federal Reserve economists, USDC traded as low as 86 cents at the worst moment. The price recovered after US authorities announced on March 12 that SVB depositors would be protected, and returned to the peg when Circle resumed redemptions on March 13 (Federal Reserve, 2025). The same note shows that the drop spread to other stablecoins linked to USDC.

The two cases teach different lessons. The first shows that, without reserves, the peg depends on confidence alone. The second shows that even reserves held in safe assets carry risk: the money has to be available at the moment everyone wants out.

The risks for stablecoin users

“Stable” describes the goal, not a guarantee. The main risks are:

• Reserve risk. Reserves may be insufficient, illiquid or invested in assets that lose value. Transparency reports show the situation on a specific date, not at all times.
• Issuer risk. If the company fails, suffers fraud or faces a court freeze, redemption may be delayed or smaller than expected. Stablecoins do not have the deposit insurance that banks have, such as the FGC (Brazil’s deposit guarantee fund).
• Run risk. When many try to exit at the same time, the secondary-market price can fall well below one dollar, as in 2022 and 2023.
• Freeze risk. Issuers of centrally backed stablecoins can block addresses and freeze tokens, on their own decision or by court order. This protects against crime, but can also hit people who did nothing wrong.
• Technology risk. Flaws in the smart contract, in the blockchain where the token circulates or in bridges between networks can cause losses. Tokens sent to the wrong address or network are usually unrecoverable.
• Integrity risk. The BIS considers stablecoins prone to customer-identification failures and attractive to criminal organizations, because they circulate on public networks and can move to wallets outside the issuer’s supervision (BIS, 2025). This explains the regulatory pressure and the freezes.
• Regulatory risk. New rules can restrict where and how each stablecoin is traded. In the European Union, the markets authority (ESMA) told platforms to stop trading, by the end of the first quarter of 2025, tokens of this kind whose issuer was not authorized in the bloc; holding and transferring those tokens remained possible (ESMA, January 2025).

Scams also use stablecoins. Promises of “guaranteed dollar yield” with stablecoins deserve the same suspicion as any promise of guaranteed returns.

What the rules say

In July 2023, the Financial Stability Board (FSB), which brings together G20 financial authorities, published ten recommendations for global stablecoins. A central one is that holders have a robust legal claim and timely redemption at face value when the token is referenced to a single currency (FSB, July 2023). Three jurisdictions show how this became law.

United States: GENIUS Act

The law known as the GENIUS Act (Public Law 119-27) was signed on July 18, 2025. It requires authorized issuers to hold reserves of at least one to one in assets such as cash, deposits, Treasury securities maturing within 93 days, repurchase agreements and government money market funds. It also requires monthly publication of reserve composition, a monthly examination by a registered accounting firm, technical capability to comply with court orders, a ban on paying interest to those who merely hold the token, and priority for holders over the reserves in insolvency (GENIUS Act, official text).

It does not take effect immediately. Under the text, the law becomes effective 18 months after signing or 120 days after regulators issue final rules, whichever comes first. In August 2026, the Treasury Department treated January 18, 2027 as the “expected effective date” (US Treasury, August 17, 2026).

European Union: MiCA

The European crypto-asset regulation, known as MiCA (Regulation (EU) 2023/1114), separates two types of stablecoin. E-money tokens (EMTs) reference a single official currency. Asset-referenced tokens (ARTs) rely on a basket of currencies, commodities or other assets. The rules for both types have applied since June 30, 2024 (MiCA, Art. 149).

For EMTs, the issuer must issue tokens at par value upon receipt of funds and redeem them “at any moment and at par value” at the holder’s request (MiCA, Art. 49). In other words, in the European Union the redemption right applies to all holders, not just large clients.

Brazil: stablecoins in the foreign exchange market

In Brazil, the Central Bank began treating part of the stablecoin transactions carried out by industry firms as foreign exchange. BCB Resolution No. 521, of November 10, 2025, brought into the foreign exchange market, starting February 2, 2026, the “purchase, sale or exchange of virtual assets referenced in fiat currency” carried out by virtual asset service providers. International payments with crypto assets and transfers to or from self-custodied wallets are also included (BCB Resolution No. 521).

In practice, according to the Central Bank, these transactions may only be carried out by providers authorized to operate in foreign exchange, which began sending detailed information about them in May 2026 and must identify the owners of the self-custodied wallets they transact with (Central Bank of Brazil, November 2025). The rule targets the intermediaries. It does not change how the token works or the position of the foreign issuer.

Key takeaways

• A stablecoin is a promise of fixed value. What supports it is the reserves, the right of redemption and arbitrage by those who have access to it.
• Different models have different weaknesses. Algorithmic ones depend on confidence alone; reserve-backed ones depend on the quality and availability of those assets and on the soundness of the issuer.
• The peg has already failed in real situations. Under stress, the market price can fall well below one dollar, and the loss can be total.
• New rules in the US, the European Union and Brazil raise requirements, but they apply in different ways and on different timelines. Before using a stablecoin, it is worth knowing who issues it, where it is regulated and who has the right to redeem it.

To compare the two largest stablecoins on reserves, redemption and freezing, read USDT vs. USDC: mechanisms, reserves and risks.