Stablecoins Explained: The Bridge Between Fiat and Crypto

A stablecoin is a crypto token meant to hold a steady value against a reference asset, almost always the US dollar, usually because an issuer promises to swap it back for dollars. It bridges the two worlds by moving on public blockchains like crypto while being priced like cash. What the holder owns, though, is a claim on a private company or a piece of software, not a bank deposit, and the terms of that claim decide how "stable" it is.

Key takeaways

The Federal Reserve put the market at about $320 billion in May 2026, concentrated in two issuers and mostly used for crypto trading.
Direct redemption at $1 is usually limited to verified customers (Tether sets a $100,000 minimum); most holders exit by selling at the market price.
Payment stablecoins carry no FDIC or NCUA insurance, and once the GENIUS Act applies, issuers may not pay holders interest; platform "rewards" are a separate company's promise.
The Act takes effect no later than January 18, 2027; the primary federal regulators' implementing rules were still proposals as of October 13, 2026.

What makes a token a stablecoin

US law now defines the most common kind. Under section 2 of the GENIUS Act (Public Law 119-27, signed July 18, 2025), a "payment stablecoin" is a digital asset used or designed for payment or settlement, whose issuer must convert or redeem it for a fixed amount of monetary value (a national currency, or a bank deposit in one) and says it will keep a stable value against that amount. National currency itself, bank deposits (including tokenized deposits) and securities are excluded.

Two parts do the work: an issuer obliged to redeem, and a fixed amount of money as the reference, not gold or another token. Designs lacking either fall outside these rules; section 14 orders a Treasury study of such "non-payment stablecoins".

The Federal Reserve's Financial Stability Report of May 8, 2026 put the total at about $320 billion, with growth slowing as crypto prices fell. On the DefiLlama stablecoin dashboard, the Fed's data source, supply was about $313 billion on October 12, 2026, with USDT (Tether) and USDC (Circle) holding roughly four-fifths.

Four designs at a glance

Designs differ in what stands behind the $1 target and who, if anyone, must honor it. Labels vary: the President's Working Group report on stablecoins (November 2021) called DAI "algorithmic", while its own documentation calls it collateral-backed, so the table's questions matter more than the label.

Design	What backs the target	Who must redeem	Main weak point
Fiat-backed	Cash, Treasury bills and similar reserves held by the issuer	The issuer, for eligible customers	Reserve quality and access; issuer and bank failure
Crypto-collateralized	More crypto collateral than tokens issued, locked in smart contracts	No company; the protocol liquidates collateral	Fast collateral price falls; code risk
Commodity-backed	A physical asset such as gold	The issuer, in the commodity or its market value	Not stable in dollars; tracks the commodity
Algorithmic	A mechanism linked to another token, with little or no outside collateral	Nobody owes a fixed dollar amount	Confidence spirals, as with TerraUSD in 2022

Fiat-backed

The issuer takes in dollars, creates tokens and invests the money; redemption reverses this. USDT and USDC lead. Section 4(a) of the Act will require permitted issuers to hold at least 1:1 reserves in cash-like assets such as currency, deposits at insured banks and short-term Treasury bills.

Crypto-collateralized

Users lock crypto in a smart contract and borrow new stablecoins worth less than the collateral. The Maker protocol whitepaper describes DAI, now part of the Sky protocol alongside USDS, as a "collateral-backed cryptocurrency soft-pegged to the US Dollar"; vaults below their liquidation ratio are sold in automated auctions. The cushion works only if collateral sells before it is worth less than the debt.

Commodity-backed

These track an asset, not a currency. Paxos says each PAX Gold token is backed by one fine troy ounce of London Good Delivery gold held in LBMA vaults. Its dollar price moves with gold, and since it does not redeem for a fixed amount of money, it falls outside the Act's payment-stablecoin definition.

Algorithmic

According to the SEC's February 16, 2023 announcement of charges against Terraform Labs, TerraUSD (UST) was meant to hold its peg by being interchangeable for a sister token, LUNA, and was marketed as paying "as much as 20 percent interest" through the Anchor Protocol. In May 2022 UST and its sister tokens fell close to zero, with no reserve to redeem against.

What people use them for

The main use is inside crypto markets. The Fed's May 2026 report called stablecoins "mostly used to facilitate crypto-trading activities", and the BIS Annual Economic Report 2025, chapter III says they emerged as an on- and off-ramp to crypto. Traders park dollar value and move funds between platforms outside banking hours; the 2021 Working Group report notes their central role in decentralized finance (DeFi).

The BIS adds that stablecoins now serve as a cross-border payment tool for emerging-market residents lacking access to dollars. A Federal Reserve FEDS Note of March 30, 2026 sketches the route: a sending bank converts dollars into a stablecoin and sends it straight to a receiving bank abroad, which credits local currency. It cautions that converting in and out may cost more than the on-chain transfer, that the receiving bank may still need a large bank to absorb foreign-exchange risk, and that adoption "is not guaranteed at all".

A worked cross-border comparison

The World Bank's Remittance Prices Worldwide, Issue 54 reports a transfer's total cost, fees plus exchange-rate margin, as a share of the amount sent. In Q3 2025 the global average was 6.36% for $200 and 4.08% for $500; from the United States, 5.04% and 3.44%.

Stablecoin route cost = A x f_on + n + A x f_off + w

A     = amount sent in dollars
f_on  = fee or spread to buy the stablecoin with dollars
n     = blockchain network fee, in dollars
f_off = fee plus exchange-rate spread to sell it for local currency
w     = flat withdrawal fee to the recipient's account

Illustrative example, hypothetical assumptions, not provider quotes. Low-cost case: f_on 0%, n $0.05, f_off 0.5%, w $0. High-cost case: f_on 1.5%, n $2.00, f_off 2.0%, w $1.00.

Route	Cost to send $200	Cost to send $500
Global average remittance, Q3 2025	$12.72 (6.36%)	$20.40 (4.08%)
Average from the US, Q3 2025	$10.08 (5.04%)	$17.20 (3.44%)
Stablecoin route, low-cost assumptions	$1.05 (0.53%)	$2.55 (0.51%)
Stablecoin route, high-cost assumptions	$10.00 (5.00%)	$20.50 (4.10%)

With cheap ramps on a low-fee network, the stablecoin route costs roughly 8% to 15% of the average remittance; with high-cost assumptions, about the US average at $200 and $3.30 more at $500. Here the two conversions, not the network fee, decide the result, but on a congested network a $15 fee alone would exceed the $12.72 global average at $200. The recipient needs a verified account with a local service that buys the stablecoin, and according to the FTC, crypto payments typically are not reversible.

What holders get and do not get

A claim, but not always a direct one

A fiat-backed token is an issuer's promise, often owed only to customers it has verified. Circle's USDC Terms (last updated December 12, 2025) allow redemption with Circle only through a Circle Mint account, at 1 USD per USDC, subject to any fees. Tether's fee page (checked October 13, 2026) lists a $100,000 minimum redemption, a fee of the greater of $1,000 or 0.1%, and a $150 verification fee. Everyone else gets dollars by selling at the market price.

No deposit or brokerage insurance

Section 4(e) of the Act says payment stablecoins are not backed by the US government or covered by FDIC or NCUA insurance, and makes claiming otherwise unlawful. The FDIC's July 28, 2022 fact sheet says it does not insure assets issued by non-bank entities such as crypto companies. SIPC says it does not protect any digital or crypto asset that does not qualify as a security, and the Act's definition excludes securities.

No interest from the issuer

Section 4(a)(11) bars permitted and foreign issuers from paying "any form of interest or yield" solely for holding, using or retaining a payment stablecoin. Circle's terms already say USDC pays holders no interest or reserve returns. The OCC's proposed rule of March 2, 2026 would presume a violation, unless rebutted, when an issuer pays an affiliate or related third party that pays holders.

Why platform "yield" is a different product

When an exchange, app or lending program pays a return on stablecoins, the money comes from lending the coins, DeFi or platform revenue, and the holder adds that platform's risk to the token's. The SEC's January 12, 2023 charges over Gemini Earn describe customers lending crypto to Genesis for interest; in November 2022 Genesis halted withdrawals, holding about $900 million from 340,000 investors.

Risks and tax basics

Depegs and runs

When holders doubt the backing, they sell and the price falls below $1. After Circle said $3.3 billion of reserves, around 8%, was stuck at the failed Silicon Valley Bank in March 2023, USDC traded as low as 86 cents before recovering, according to a Federal Reserve FEDS Note of December 17, 2025.

Value of holding = tokens x market price
Loss from a depeg = tokens x (1.00 - market price)

Illustrative example. A holder with 1,000 tokens bought at $1.00 who must sell at $0.97 receives $970, a $30 or 3% loss; at the 86-cent trough the same sale returns $860, a $140 loss. A small holder cannot redeem around the loss without an approved account and, at Tether, $100,000. Only a sale before any recovery locks the loss in, and no one knows whether a recovery will come.

Issuer, custodian and freeze risk

A token is only as sound as its issuer and its reserve banks, and holding through an exchange adds another company that must stay solvent. Issuers can also block addresses: Circle's terms let it block USDC addresses it links to illegal activity, freeze USDC at addresses it custodies or under a legal order, and end redemption rights for users who deal with a blocked address. Tether's terms (last updated February 26, 2026) allow freezing where law requires or Tether, in its sole discretion, deems it prudent. The Act requires permitted issuers to be able to block, freeze and reject unlawful transactions.

Code and chain risk

The 2021 Working Group report lists smart-contract vulnerabilities, cybersecurity and network congestion among the risks. Support can change too: Tether's terms say it stopped redeeming USDT on certain blockchains from September 1, 2025.

Regulatory status

Section 20 makes the Act effective on the earlier of January 18, 2027 or 120 days after the primary federal regulators issue final rules. They had published only proposals as of October 13, 2026, and 120 days from any rule finalized now ends after January 18, 2027, so that date applies. From July 18, 2028, digital asset service providers generally may not offer US persons payment stablecoins from non-permitted issuers, with limited exceptions such as qualifying foreign issuers.

Tax treatment

The IRS digital assets page names stablecoins as digital assets, so selling one for dollars, swapping it for another token or paying with it is a disposal that goes on the return, even when the gain or loss is near zero. Under the 2026 Instructions for Form 1099-DA, a broker using the optional method for "qualifying stablecoins" need not report a customer's designated sales if their gross proceeds stay at or below $10,000 for the year. That threshold changes what the broker files, not what the taxpayer must report.

Frequently asked questions

Are payment stablecoins securities?

Not those from permitted issuers once the Act is effective: section 17 removes them from the securities laws' definitions. Before then, an SEC interpretation of March 23, 2026 adopts the April 2025 staff view that offers of fully reserved, one-for-one redeemable dollar stablecoins are not securities offerings. Other stablecoins, including yield-bearing ones the staff did not address, may be securities depending on the facts.

How is a tokenized money market fund different from a stablecoin?

A tokenized fund share is still a fund share: a security, outside the Act's payment-stablecoin definition, that can pass interest on to investors, which a payment stablecoin issuer may not do. Some dashboards count such tokens as stablecoins, which inflates totals.

Does moving stablecoins between my own wallets count as a taxable transaction?

Not by itself. The IRS lists transfers between wallets or accounts the taxpayer owns or controls among transactions that do not require a "Yes" on the digital asset question. The exception is a transfer fee paid in a digital asset, which the IRS treats as a digital asset transaction.

Can a US bank issue its own stablecoin?

Yes, through a subsidiary. The Act's permitted issuers include an insured depository institution's subsidiary approved under section 5, alongside federal and state qualified issuers. Procedures for Fed-supervised banks were still a Federal Reserve proposal published on September 29, 2026.

Are stablecoins legal tender?

No. The Act's definition excludes national currency, and Tether's terms state that its tokens are not legal tender; their value rests on the issuer or protocol.

Before using a stablecoin

Identify the design and the issuer, and whether it is, or plans to be, permitted under the GENIUS Act.
Read who can redeem, the minimum and the fee; below the minimum, the exit is a market sale.
Confirm the blockchain is supported, and send a small test amount first.
Treat any return as the paying platform's own promise, and read who borrows the coins.
For a transfer abroad, price both conversions and the withdrawal fee, then compare with a remittance quote.