Stablecoins are digital tokens backed 1:1 by reserves. Here's how they work, what the GENIUS Act requires, the real risks, and why businesses settle on them.
Daniel Lev8 min read
A stablecoin is a digital token issued by a private company and backed by reserves, so each token can be redeemed for one unit of a currency such as the US dollar. Most hold cash and short-term US Treasuries. Under the GENIUS Act, signed July 18, 2025, US issuers need 1:1 reserves and monthly public reserve reports, and they can't pay interest. Stablecoins aren't FDIC insured, so the issuer and its reserves matter most.
Stablecoins have moved from crypto trading into mainstream payments. This guide answers the questions we hear most from heads of payments, finance, and product: what stablecoins are, how they keep their value, how US law treats them, where the risks sit, and why companies use them.
A stablecoin is a digital token designed to hold a fixed value, usually $1, because a company called an issuer backs it with reserves. You can send it over a blockchain, which is a shared digital ledger that records who owns what.
Stablecoins differ from cryptocurrencies like bitcoin, whose prices move with demand. A stablecoin is designed to hold its value. That steadiness makes it a practical way to move dollars between payment networks.
Most stablecoins track the US dollar. Two dominate the market:
Total stablecoin supply was about $297 billion on Nov. 11, 2026, according to CoinGecko's stablecoin tracker. USDT accounted for about $182 billion and USDC for about $71 billion.
Stablecoins keep a stable value because the issuer holds $1 in reserves for every token and will swap tokens back for dollars. Creating tokens is called minting. Swapping them back is called redemption.
A bank teller is a useful comparison. You hand a teller $10, and your checking account shows $10 more. To get the cash back, you withdraw it.
Stablecoins work the same way:
Direct minting and redemption usually run through business accounts with the issuer. Circle's USDC terms commit to redeeming one USDC for $1, subject to its terms and any fees. Most individuals buy and sell through an exchange or payments provider instead.
Redemption is also what holds the price near $1. If a token trades at 99 cents, firms can buy it cheaply and redeem it for a full dollar. That buying pushes the price back up.
Interest rates don't change the peg. One token still redeems for $1. Rates change how much the issuer earns on the Treasuries in its reserves.
In this short video, I walk through how stablecoins work and why they've grown so quickly.
Stablecoins come in four main types: fiat-backed, crypto-collateralized, algorithmic, and commodity-backed. Fiat-backed stablecoins are by far the most common, and US law now regulates them as payment stablecoins.
| Type | How it holds its value | Example | Risk profile |
|---|---|---|---|
| Fiat-backed | Cash and short-term government debt, held 1:1 | USDC, USDT | Depends on reserve quality, custody, and oversight |
| Crypto-collateralized | Other crypto assets locked up, worth more than the tokens issued | DAI | Collateral can fall fast; software risk |
| Algorithmic | Software adjusts supply, often with a sister token; few or no reserves | TerraUSD (UST) | Highest; can collapse in a run |
| Commodity-backed | Physical assets such as gold, held in custody | Paxos Gold (PAXG) | Tracks the commodity's price, so it isn't a dollar substitute |
Algorithmic designs carry the clearest warning. TerraUSD was designed to hold its peg through an exchange mechanism with a sister token called LUNA. In May 2022, it lost its peg, and the SEC said UST's price fell close to zero.
Businesses use stablecoins to move dollars across borders faster, settle on weekends, and keep less cash tied up in transit. For most companies, stablecoins sit underneath the payment as the way money settles.
Traditional cross-border payments pass through a chain of correspondent banks. Each hop can add a fee, a foreign exchange (FX) markup, and a delay. Sending a remittance costs an average of 6.36% of the amount sent, according to the World Bank's Remittance Prices Worldwide database.
We learned how slow bank rails can be firsthand. When we first started Coinflow, we needed to wire money to fund our regulated European business. Our bank held the wire and asked for more information, which was reasonable. My co-founder and I ended up walking to a Chase branch and spending about 90 minutes completing the wire in person.
A stablecoin transfer goes straight to the recipient's wallet, with no branch visit and no chain of banks. That's why remittance companies now use stablecoins to settle transfers between countries.
Operators cite four benefits most often:
Savings aren't automatic, though. The Bank for International Settlements (BIS) found anecdotal evidence of lower costs on some corridors, but noted in its 2025 Annual Economic Report that lower costs and faster speeds aren't guaranteed.
See how Félix raised its acceptance rate to 99.14% while instant settlement cut the capital it had been fronting.
Read the case study →In the US, stablecoins used for payments are regulated under the GENIUS Act, which was signed into law on July 18, 2025. It's the first federal framework for payment stablecoins.
According to Gibson Dunn's summary of the Act, its core rules include:
GENIUS Act rules take effect by Jan. 18, 2027, 18 months after enactment, or earlier if regulators finalize their rules sooner. As of November 2026, the Office of the Comptroller of the Currency (OCC) has issued its final rule, effective Jan. 18, 2027. The Federal Reserve, FDIC, NCUA, and Treasury rules are still at the proposal stage, according to Mayer Brown's analysis.
Other regions have their own rules. In the European Union, the Markets in Crypto-Assets Regulation (MiCA) has applied to stablecoin issuers since June 30, 2024.
Stablecoins are only as safe as their issuer and reserves, and they aren't FDIC insured. A poorly backed token can fail.
On deposit insurance, the FDIC proposed in April 2026 that bank deposits backing a stablecoin's reserves be insured only as the issuer's corporate deposits. Under that proposal, coverage wouldn't pass through to individual stablecoin holders. Holder protection comes from the 1:1 reserve rule and public disclosure.
Operators should weigh three risks:
USDC's March 2023 depeg shows how a depeg can play out. Circle couldn't withdraw $3.3 billion of reserves, about 8% of the total, from Silicon Valley Bank when it failed. USDC traded as low as 86 cents that weekend, per a Federal Reserve research note. It fully recovered on Monday, March 13, after a federal backstop announcement the night before and once Circle resumed redemptions.
A tokenized deposit is a bank deposit recorded as a digital token, while a stablecoin is a claim on the company that issued it. They can look the same in an app, but their legal structures differ.
| Feature | Stablecoin | Tokenized deposit |
|---|---|---|
| Who issues it | A licensed stablecoin issuer | A bank |
| Where the money sits | Reserves held apart from any one bank's balance sheet | On the issuing bank's balance sheet |
| What you hold | A claim on the issuer, redeemable 1:1 | A bank deposit |
| FDIC coverage | None for holders | Insured like other deposits, up to the limit |
A tokenized deposit is still a deposit, so the bank's usual protections apply. A stablecoin depends on its reserves, held 1:1 and disclosed monthly under the GENIUS Act.
JT, our Head of Marketing, explains the difference in this video.
No. Customers can pay with the cards, bank transfers, and digital wallets they already use, and the business's payments provider handles stablecoin settlement behind the scenes.
Here's what each side sees:
Customers never have to open a crypto wallet or buy tokens.
Consumer tools that help people buy crypto with a card solve a different problem. For a business accepting payments, the goal is faster settlement with no change to how customers pay.
Coinflow is payments infrastructure that gives businesses one connection to every payment network. Customers pay with cards, Apple Pay, Google Pay, ACH, SEPA, PIX, and more through one API, with pay-ins in 160+ countries.
Underneath, funds move on a regulated, dollar-denominated settlement layer your customers never see. That's how we deliver settlement at T+5 seconds on card pay-ins and real-time payouts, 24/7/365.
A business shouldn't have to track GENIUS Act rulemaking or reserve accounting to accept a payment. We handle the settlement mechanics, banking relationships, and compliance screening, so your team sees money that has already settled.
Talk to our team about settling card and bank payments in seconds while your customers pay the way they already do.
Talk to our team →No. A central bank digital currency (CBDC) is issued by a central bank and is a direct liability of that bank. A stablecoin is issued by a private company and backed by the reserves it holds.
Yes, stablecoins can lose their peg, usually when holders doubt the reserves or can't redeem. USDC fell to 86 cents in March 2023 and recovered by the following Monday. TerraUSD lost its peg in May 2022 and fell close to zero.
Issuers can't pay interest or yield to holders under the GENIUS Act. Some third-party platforms offer rewards programs, and regulators have kept authority to address arrangements that evade the ban.
USDC is a dollar stablecoin issued by Circle and backed by US dollar-denominated assets. Circle commits to redeem one USDC for $1, subject to its terms and any applicable fees.
A stablecoin transfer typically settles in seconds to minutes, at any hour, including weekends. International bank wires often take longer because they hop between correspondent banks. Converting between stablecoins and bank balances depends on the rails and provider involved.
This content is for informational purposes only and does not constitute financial, legal, or investment advice.
Daniel is the CEO and Co-Founder at Coinflow, connecting traditional payment rails with stablecoin technology to enable instant global settlement for trusted, cross-border commerce.
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