Stablecoin 101: how stablecoins work and why they matter

A stablecoin is a digital token designed to hold a fixed value, almost always one US dollar, and to move over a public blockchain at any hour of the day. That is the whole idea. Everything else, from the $300bn now in circulation to the laws being written in Washington, London and Brussels, follows from it.

This explainer covers what a stablecoin is, what sits behind it, why the money is flowing in, and where the risks are.

What a stablecoin is

Bitcoin proved that value could be sent across the internet without a bank in the middle. It also proved that most people do not want to be paid in something that can lose a fifth of its value in a week. A stablecoin keeps the first property and drops the second: it is a token on a blockchain that the issuer promises to redeem for a fixed amount of ordinary currency, one token for one dollar, on demand.

The two largest are Tether's USDT and Circle's USDC. On 3 September 2026 the total value of stablecoins in circulation stood at roughly $302bn, with USDT at about $183bn and USDC at about $74bn, so the two between them account for close to nine tenths of the market. The total has more than doubled since the end of 2023, when it was around $124bn, though it has drifted down a little from a mid-year peak above $310bn.

Because the token lives on a blockchain, it inherits the blockchain's properties. It can be sent to anyone with a wallet address, at any time, without asking a bank to open. A transfer on Solana confirms in well under a second and on Ethereum in around 15 seconds. It can also be held in a piece of software, which means it can be programmed: released when a condition is met, split between several recipients, or swapped for another token automatically.

What is behind the dollar

The promise only holds if the issuer can actually pay out. The mainstream design, and the one every serious regulator now insists on, is full reserve backing: for every token issued, the issuer holds at least one dollar of high-quality liquid assets, and it publishes evidence to prove it.

Circle is the clearest example. USDC reserves are held as cash at regulated banks and as short-dated US Treasury bills and overnight repurchase agreements in the Circle Reserve Fund, a US government money market fund run by BlackRock, with a target mix of around 80 per cent Treasuries and 20 per cent cash. Holdings are disclosed weekly and Deloitte attests monthly that reserves exceed the tokens in circulation. Tether attests quarterly through BDO and holds a broader mix that includes secured loans, gold and bitcoin alongside Treasuries, which is why its reserves attract more scrutiny even as the gap with Circle has narrowed.

The reserve model is also the business model. An issuer collects the interest on the Treasury bills while paying nothing to the token holder, so a rise in short-term rates flows straight to the issuer's profit. That is why stablecoin issuers have become significant buyers of US government debt, and why the US Treasury has taken such a close interest in the sector.

There is a second family of designs, algorithmic stablecoins, which try to hold the peg through code and incentives rather than reserves. TerraUSD was the largest; it collapsed in May 2022 and took about $40bn of value with it. Regulators in every major market have since written that model out of their definitions of a permitted stablecoin, and this explainer does the same.

Why the money is flowing in

Three uses account for most of the demand. The first is crypto trading itself. Exchanges need a dollar that can sit on the same rails as the tokens being traded, and stablecoins are that dollar. This was the original use and it still dominates transaction counts.

The second is dollar access in countries where holding dollars is hard. In Argentina, Nigeria, Turkey and much of the developing world, a stablecoin is the simplest way for a person or a small business to hold a dollar balance and move it without a correspondent bank. This is where most of the retail growth has come from.

The third, and the one that now interests banks and payment companies, is settlement. Moving a stablecoin is cheaper and faster than moving a dollar through the correspondent banking system, especially at the weekend and into emerging-market corridors. Visa reported that it was settling about $4.5bn a year in stablecoins by January 2026. Stripe bought the stablecoin infrastructure firm Bridge for $1.1bn and now accepts stablecoin payments in more than 100 countries. Mastercard bought BVNK for $1.8bn to own the same layer. Stablecoin payment volume outside crypto trading is estimated at around $390bn a year, and business-to-business use grew more than sevenfold in 2025. Set against total global payment flows that is still only about 1 per cent, a share that has not moved in three years, so the growth is real but the base is small.

The rules catching up

For most of their existence stablecoins operated without a purpose-built law anywhere. That has changed in the space of two years.

In the United States the GENIUS Act, signed in July 2025, creates a federal licence for payment stablecoin issuers, requires one-to-one backing with cash and short-term Treasuries, redemption at par, and regular disclosure. The Office of the Comptroller of the Currency published its proposed implementing rules in March 2026 and is aiming for final rules by November; the FDIC and Treasury have issued theirs. The Act takes effect on the earlier of 18 January 2027 or 120 days after the final rules are out.

In the European Union the Markets in Crypto-Assets regulation, MiCA, has governed stablecoins since 30 December 2024, and the transitional period for unauthorised tokens ended on 1 July 2026. Tether chose not to seek authorisation, citing the rule that a large share of reserves must be held as bank deposits, and USDT has been removed from the main regulated exchanges in the European Economic Area. USDC and Circle's euro token EURC are authorised and remain listed, alongside euro tokens from bank-backed issuers such as AllUnity.

In the United Kingdom the Financial Conduct Authority will regulate ordinary stablecoin issuers and the Bank of England will regulate any that become systemic. The Bank dropped its proposed per-person holding limits in favour of a temporary issuance cap of £40bn per systemic stablecoin, set backing at 70 per cent short-term gilts and 30 per cent unremunerated deposits at the Bank, and published its joint approach with the FCA on 30 June 2026.

What can go wrong

The central risk is a run. If holders doubt the reserves they will redeem at once, and an issuer whose reserves are not instantly liquid will fail to pay. USDC briefly traded at 87 cents in March 2023 when $3.3bn of its cash was caught in the collapse of Silicon Valley Bank; it recovered within days, but the episode is the reason every new regime specifies exactly which assets count as reserves.

The second risk is that the token is only as good as the chain and the wallet holding it. Lose the private key and the dollars are gone; send to the wrong address and there is no chargeback. The third is regulatory. A token authorised in one jurisdiction may be delisted in another, as European USDT holders have discovered.

None of that has slowed the growth. Stablecoins matter because they are the first form of money that behaves like the rest of the internet: always on, borderless and programmable. The next three explainers in this series look at what that means in practice: how stablecoin settlement works across borders, what banks are building in response, and how the fees behind every payment are actually made up.