A fiat-backed stablecoin is a cryptocurrency token designed to be worth exactly one unit of a national currency, such as one US dollar or one euro, because a company holds an equal amount of that currency in reserve. The issuer takes in money, creates tokens on a blockchain, and promises to swap the tokens back for money on request. It is by far the largest kind of stablecoin; the best-known examples are Tether (USDT), USDC and PayPal USD (PYUSD).
Fiat-backed coins are one branch of the collateralized stablecoin family, alongside crypto-backed and commodity-backed designs. They are often grouped with fiat-pegged cryptocurrencies generally, but the defining point is the off-chain reserve held by an identifiable issuer. In the EU they are regulated as e-money tokens, and in the US as payment stablecoins under the GENIUS Act.
Fiat-backed stablecoins in plain terms
Picture a casino. You hand cash to the cashier and get chips. Inside the building, chips move from table to table quickly and nobody counts banknotes. At the end of the night you take your chips back to the cage and get cash. The chips are only trusted because the cage keeps the cash.
A fiat-backed stablecoin is a chip that works on the internet rather than inside one building. The issuer is the cage. People can pass the chips to anyone with a crypto wallet, at any hour, and the reason the chips stay at one dollar is the belief that the cage still holds a dollar for every chip.
How it works
- Onboarding. A business or exchange passes the issuer's know-your-customer checks and opens an account.
- Funding and minting. The customer sends dollars by wire; the issuer adds them to its reserves and mints the same number of tokens to the customer's wallet.
- Circulation. The tokens move peer to peer on blockchains such as Ethereum, Solana and TRON, are traded on exchanges, and are used for payments and trading.
- Redemption and burning. An account holder returns tokens, the issuer burns them and wires dollars back; see stablecoin redemption.
Only the issuer's direct clients mint and redeem; everyone else buys and sells on the secondary market. If the market price slips below $1, those clients buy cheap tokens and redeem them at par, pulling the price back. The mechanics of supply are covered in stablecoin minting and burning.
Issuers and reserves
The issuer earns money mainly from interest on the reserve, since holders are not paid interest; see reserve yield. Reserve practices differ by firm. As examples, Circle says most USDC reserves sit in an SEC-registered government money market fund managed by BlackRock, with the rest in cash at large banks, and publishes weekly holdings and monthly third-party assurance. Tether publishes quarterly attestations by BDO; its reserves are mostly US Treasury bills but have also included gold, bitcoin and secured loans. Tether's published terms set a minimum redemption of $100,000 and a fee of the greater of $1,000 or 0.1%, which shows how direct redemption is often limited to large clients.
Uses
- Trading. Dollar coins are the main unit of account and settlement asset on crypto exchanges.
- Payments and remittances. Businesses use them to move dollars across borders outside banking hours; see stablecoin payments and cross-border stablecoin payments.
- Dollar access. In countries with high inflation or capital controls, people hold dollar coins as a savings substitute.
- Settlement between firms. Payment companies use them to prefund payout partners and settle with each other; see stablecoins for settlements.
Regulation
The US GENIUS Act, signed on 18 July 2025, limits issuance of payment stablecoins to permitted issuers: subsidiaries of insured banks, federally qualified nonbank issuers supervised by the Office of the Comptroller of the Currency, and state-qualified issuers with no more than $10 billion outstanding. It requires one-for-one reserves in cash, deposits, Treasury bills of 93 days or less, overnight repo and government money market funds; monthly published reserve reports examined by an accounting firm; a clear redemption policy; the technical ability to freeze or burn tokens under lawful orders; and no interest paid to holders. It also states that such coins are not securities. The Act takes effect on 18 January 2027, the date the OCC's final rule of October 2026 also takes effect. Before this, US issuers relied on state money transmitter licences or New York trust charters from the NYDFS.
In the EU, MiCA has applied to stablecoins since 30 June 2024. Issuers of e-money tokens must be a credit institution or an electronic money institution, must issue and redeem at par at any time without a redemption fee, and may not pay interest.
Risks and criticism
The main risks are reserve quality, bank failure and runs. In March 2023 USDC fell well below $1 for a weekend after Circle disclosed $3.3 billion held at Silicon Valley Bank. Issuers can also freeze addresses, which aids law enforcement but means holders depend on a company's decisions; see stablecoin freezing. Central banks have warned that large stablecoins could pull deposits from banks and spread dollarisation in emerging markets. Comparisons with state digital money are covered in CBDCs and stablecoins.