What Is a Stablecoin? How the $1 Peg Works

What is a stablecoin, in plain English?#

A stablecoin is a crypto token built to hold a steady price. The U.S. Treasury described stablecoins in 2021 as a type of digital asset generally designed to maintain a stable value relative to the U.S. dollar^[1]. The Bank for International Settlements (BIS) puts it as tokens that live on decentralised ledgers and promise to always be worth a fixed amount in ordinary currency, such as one dollar^[2].

That makes stablecoins different from most tokens. NIST notes that when tokens are redeemable for, pegged to or derived from underlying assets, their value is intended to come from outside the token itself^[3]. A stablecoin is meant to be worth $1 because something backs it — not because people expect its price to rise. For the basics of tokens in general, start with what a crypto token is.

How does a stablecoin try to stay at $1?#

Most stablecoins work like an IOU from a company. The BIS explains that most are issued by a single, central entity, and that the issuer's pool of reserve assets and its capacity to meet redemptions in full are what back the promise^[2]. In principle, a holder who redeems a coin with the issuer gets a dollar back.

Some designs tried to skip the reserves. The SEC described TerraUSD (UST) as an "algorithmic stablecoin" that supposedly maintained its peg by being interchangeable for another token^[4]. That difference matters a great deal when things go wrong, as the table shows.

Reserve-backed vs algorithmic stablecoins
Question	Reserve-backed stablecoin	Algorithmic stablecoin
What supports the $1 value?	A pool of reserve assets held by the issuer	Trading rules that swap the coin for another token
Who can redeem for $1?	Holders who meet the issuer's redemption policy	No one has a claim on dollar reserves
What can break it?	Reserves that are too small, risky or hard to sell quickly	A loss of confidence in the linked token
Real-world example in this note	Payment stablecoins under the U.S. GENIUS Act	TerraUSD (UST), which depegged in May 2022

Sources: BIS^[2], SEC^[4], GENIUS Act^[5]. Simplified; real designs vary.

What does U.S. law require of stablecoin issuers?#

In the U.S., the Guiding and Establishing National Innovation for U.S. Stablecoins Act — the GENIUS Act — became law on July 18, 2025^[5]. It defines a payment stablecoin as a digital asset used, or designed to be used, as a means of payment or settlement, whose issuer is obligated to convert, redeem or repurchase it for a fixed amount of money and represents that it will keep a stable value^[5]. The Act takes effect on the earlier of 18 months after its July 18, 2025 enactment or 120 days after the federal stablecoin regulators issue final rules; in September 2026 the Federal Reserve was still at the proposal stage for its own rules^[6]. Rules differ by country; this section covers the U.S. law only.

Key requirements for permitted payment stablecoin issuers (GENIUS Act)

Reserves: At least 1 to 1 against coins outstanding^[5]
Allowed reserve assets include: U.S. coins and currency, Federal Reserve balances, insured bank demand deposits, Treasury bills, notes or bonds maturing in 93 days or less^[5]
Redemption: Must publish a policy with clear procedures for timely redemption^[5]
Disclosure: Must publish the monthly composition of reserves on its website^[5]
Interest: May not pay holders any form of interest or yield^[5]

Two parts of the law are easy to miss. First, reserves may include short-dated Treasury securities, yet the issuer may not pay holders any interest or yield. Second, the law says plainly that payment stablecoins are not backed by the full faith and credit of the United States, not guaranteed by the U.S. government, and not subject to FDIC deposit insurance^[5].

The SEC's 2026 interpretation lists a payment stablecoin issued by a permitted issuer as one of the categories of crypto assets that are not securities^[7]. That tells you which agency's rules apply. It does not make the coin risk-free.

Why can a stablecoin lose its $1 peg?#

A stablecoin is only as good as the belief that it can be redeemed. The BIS notes that stablecoins trade in secondary markets at an "exchange rate" that can deviate from par — that is, from exactly $1^[2]. The Treasury's 2021 report flagged the potential for destabilizing runs as a key risk^[1]. A run is when many holders rush to redeem at once, fearing that late redeemers will get less.

The arithmetic of a run explains why fear spreads. If reserves cover every coin, early and late redeemers get the same dollar. If reserves fall even slightly short, each early redemption at $1 leaves less behind for everyone else.

Worked example

Worked example: a run on two hypothetical issuers

Each issuer has 100 million coins outstanding and pays $1 per coin to anyone who redeems. One holds $100 million in reserves; the other holds $96 million. The issuers and figures are invented to show the arithmetic.

Issuer	Reserves per coin at start	After 30% of coins redeem at $1	After 60% of coins redeem at $1
Fully reserved (1 to 1)	$1.0000	$1.0000	$1.0000
Short of reserves (0.96 to 1)	$0.9600	$0.9429	$0.9000

Figures computed in code from the stated inputs; rounded to the nearest cent or tenth.

Real collapses can be faster and deeper. The SEC reports that in May 2022, UST depegged from the U.S. dollar, and the price of it and its sister tokens plummeted to close to zero^[4]. Even a fully reserved coin can wobble on trading platforms if holders doubt the reserves, cannot redeem directly, or the reserves cannot be sold quickly — a liquidity problem.

Nov 2021
U.S. Treasury-led working group publishes its stablecoin report, warning of runs and payment disruptions^[1].
May 2022
Algorithmic stablecoin UST depegs and falls close to zero^[4].
Feb 2023
SEC charges Terraform Labs and its CEO with defrauding investors^[4].
Jul 2025
GENIUS Act becomes U.S. law, setting reserve and disclosure rules^[5].
Mar 2026
SEC interpretation listing permitted payment stablecoins as non-securities takes effect^[7].

Is a stablecoin the same as dollars in a bank?#

No, even when the reserves are solid. A bank deposit at an FDIC-insured bank is covered up to $250,000 per depositor, per insured bank, for each account ownership category^[8]. Payment stablecoins are expressly not covered by FDIC deposit insurance^[5].

Insured bank deposit vs payment stablecoin (U.S.)
Feature	Insured bank deposit	Payment stablecoin
Government insurance	FDIC, up to $250,000 per depositor, per bank, per ownership category	None
Backed by the U.S. government?	Insurance is provided by the FDIC	No — the law says it is not backed by the full faith and credit of the U.S.
Interest from the issuer	Depends on the account	Prohibited for permitted issuers
Where it is held	At the bank	On a blockchain, in a wallet or with a platform

Sources: FDIC^[8]; GENIUS Act^[5]. If a platform offers "rewards" on stablecoins, that is not the issuer paying interest; read the platform's terms carefully.

What are stablecoins actually used for?#

They began mainly as a way to move money in and out of crypto. The BIS says stablecoins emerged as an on- and off-ramp to the crypto ecosystem, and as a way to make transactions on a blockchain without the volatility of other crypto assets^[2].

Whether stablecoins can do more than that is debated. The BIS argues they perform poorly against the tests a currency must pass to be the mainstay of the monetary system^[2]. For a beginner, the practical question is narrower: if you hold one, who exactly owes you a dollar, what backs that promise, and what happens if many people ask at once? Read the short stablecoin definition and our note on the risks of crypto investing.

What mistakes do beginners make?#

Treating a stablecoin as a savings account
It is not insured, and permitted U.S. issuers may not pay interest. Any "yield" offered on a stablecoin comes from somewhere else — and carries that party's risk.
Assuming every coin called "stable" has reserves
Algorithmic designs can have no dollar reserves at all. Check what backs the coin and whether the issuer publishes its reserve composition.
Ignoring the price on the platform
A stablecoin can trade at $0.97 or less even if it is meant to be worth $1. At that price, 5,000 coins are worth $4,850, not $5,000.
Forgetting the platform risk
A sound coin held on a failing platform can still be out of reach. Know whether you or a company controls the keys.

What else do beginners ask?#

Are stablecoins safe?

Designed to be steadier than most tokens, but not safe like an insured deposit. Their value depends on the issuer's reserves and redemption policy, and the BIS notes they can trade away from $1^[2].

Do stablecoins pay interest?

Under the GENIUS Act, permitted payment stablecoin issuers may not pay holders any form of interest or yield^[5]. Third parties may offer rewards, which carry their own risks.

Are stablecoins regulated in the U.S.?

A federal framework exists but is still phasing in. The GENIUS Act, signed in July 2025, sets reserve, redemption and disclosure rules for payment stablecoin issuers^[5], and takes effect 18 months after enactment or 120 days after regulators issue final rules, whichever comes first^[6]. Rules differ by country.

What happened to TerraUSD?

The SEC says UST, an algorithmic stablecoin, depegged from the dollar in May 2022 and fell close to zero, along with its sister tokens^[4].

What is the bottom line?#

A stablecoin is a promise that a token will be worth a fixed amount, usually $1, and the promise is only as strong as the reserves and redemption rights behind it. U.S. law sets reserve and disclosure rules for permitted issuers once the GENIUS Act takes effect, but it also makes clear that these coins are not insured or government-backed. Read the reserve reports and know who holds your keys before treating any stablecoin as cash.