Glossary
Stablecoin: a token that promises a fixed value
The word "stable" describes a goal, not a guarantee. A stablecoin can trade below its target price, and some have lost almost all of their value.
A stablecoin is a crypto token that promises to always be worth a fixed amount of an ordinary currency, usually one US dollar. That promise is only as strong as the issuer's reserves and its ability to pay everyone who wants to cash out.
Quick answer
A stablecoin is a crypto token that promises to always be worth a fixed amount of fiat currency, such as one dollar. The issuer's reserves and its capacity to meet redemptions back that promise [1]. Market prices can still fall below the target.
Key points
- A stablecoin promises a fixed value, usually $1; the promise depends on reserves and on the issuer paying redemptions in full [1].
- How much backing stablecoins actually hold varies in practice, and some with no backing assets have lost their value completely [2].
- If the market price slips to $0.95, selling 500 tokens returns $475, a 5% loss before fees (calculated).
On this page
What does stablecoin mean?#
Most crypto prices move a lot from day to day. A stablecoin is designed to do the opposite. The Bank for International Settlements (BIS) describes stablecoins as crypto tokens that live on decentralised ledgers and promise to always be worth a fixed amount in fiat currency, for example one dollar [1]. A ledger here means a blockchain or a similar shared record.
The UK Financial Conduct Authority (FCA) uses Tether (USDT) as its example and says a stablecoin's value is linked to stable assets like the US dollar or gold [2]. In practice the dollar dominates: a BIS chart shows that over 99% of stablecoins are US dollar-denominated [1].
People mostly use stablecoins inside crypto markets. A 2021 report by US financial regulators found they were primarily used to facilitate trading, lending or borrowing of other digital assets [3]. That is why you meet them on exchanges as a place to park money between trades.
| Design | What is supposed to hold the value | Weak point |
|---|---|---|
| Reserve-backed | A pool of reserve assets the issuer holds, such as bank deposits or government bills | Riskier or smaller reserves than claimed, or an issuer that does not pay redemptions |
| Backed by other assets | Other assets, which can include other crypto | Those assets can lose value, so the reserve may not cover every token |
| Algorithmic | Rules that increase or decrease the supply of tokens as demand changes | Nothing outside the system to pay holders if confidence breaks |
Three common designs. Sources: reserve types from the 2021 US report on stablecoins [3]; the algorithmic supply mechanism as described in the EU's MiCA regulation [4].
Is a stablecoin always worth $1?#
No. Stablecoins are bought and sold on markets, and BIS notes that they trade at an "exchange rate" that can deviate from par, meaning from the $1 target [1]. BIS also says stablecoins of various kinds frequently fail to live up to their promise of par convertibility [1].
The worst outcome is a collapse. The FCA warns that some so-called stablecoins have no assets backing them and have lost their value completely after delinking from the assets they were meant to match [2]. TerraUSD (UST) is the clearest case in our sources: the Federal Reserve says it had a market value of about $18 billion before it collapsed in May 2022, and that it largely lacked assets to back its value [5]. The full story is in our explainer on stablecoins.
A run is how a small slip can become a large one. The 2021 US report warned that if an issuer fails to honour redemptions, or users simply lose confidence that it will, runs could harm users and the wider financial system. It added that even the prospect of a stablecoin not performing as expected could start a self-reinforcing cycle of redemptions and fire sales of reserve assets [3].
Who regulates stablecoins?#
Rules are new and differ by region. In the EU, the MiCA regulation does not use "stablecoin" as a legal term. A token that aims to keep a stable value by referencing one official currency is an e-money token, and one that references anything else, or a mix, is an asset-referenced token [4]. MiCA's recitals say holders of e-money tokens should always have a right of redemption at par value [4].
In the US, the GENIUS Act, enacted on July 18, 2025, created a federal framework for what it calls payment stablecoins [6]. The US Treasury's notice on the Act says permitted issuers must publish the monthly composition of their reserves [6]. None of our sources says either framework makes a stablecoin an insured deposit or makes any named stablecoin safe. For how crypto rules work more widely, see crypto regulation basics.
Frequently asked questions#
Is a stablecoin the same as dollars in a bank?
No. A stablecoin is a claim on an issuer, not a bank deposit. The FCA says crypto is largely unregulated in the UK, so Financial Services Compensation Scheme cover is highly unlikely [2]. Before you leave money on a platform, read how to check a crypto exchange.
Do stablecoins pay interest?
The rules point the other way. MiCA's recitals say issuers and service providers should not grant interest to e-money token holders [4], and the GENIUS Act bars permitted issuers from paying interest or yield just for holding the coin [6]. A high advertised return on a "stable" token is a reason for more questions: TerraUSD was marketed with interest of up to 20%, according to the SEC's charges [7].
Are stablecoins less risky than other crypto?
They are designed to move less, but they carry their own risks: reserves, redemptions, runs and the platform you hold them on. The FCA's general warning applies: be prepared to lose all the money you put into crypto [2].
The bottom line#
A stablecoin is a promise of a fixed value, backed by whatever the issuer holds. Before using one, find out who issues it, what backs it and how you would get money out, and remember that the market price can sit below $1. Read our stablecoins explainer for more detail and the risk disclosure before you buy any crypto.
Sources
- III. The next-generation monetary and financial system (BIS Annual Economic Report 2025).
- Crypto: The basics | FCA (InvestSmart).
- Report on Stablecoins (President's Working Group on Financial Markets, FDIC and OCC), November 2021.
- Regulation (EU) 2023/1114 of the European Parliament and of the Council of 31 May 2023 on markets in crypto-assets (MiCA).
- 4. Funding Risks (Financial Stability Report, November 2022), Box 4.1 Digital Assets and Financial Stability.
- GENIUS Act Implementation (Advance Notice of Proposed Rulemaking), Federal Register, 19 September 2025.
- SEC Charges Terraform and CEO Do Kwon with Defrauding Investors in Crypto Schemes.
Education only. This page is not investment, tax or legal advice. Trading and crypto can lose you money. See our risk disclosure.
