Section II: Fiat Stablecoins

The dominant stablecoin model emerged from brutal market selection. USDT and USDC, which currently have about a quarter of a trillion dollars in circulation, survived multiple crypto winters by embracing a simple truth: stability requires tangible assets, not algorithmic promises.

These stablecoins maintain their peg through arbitrage mechanisms that create profit opportunities whenever price deviates from $1. When a stablecoin trades below $1, arbitrageurs buy the discounted tokens and redeem them from the issuer for exactly $1 worth of backing assets, pocketing the difference. Conversely, when price rises above $1, authorized participants can mint new tokens by depositing $1 of collateral with the issuer, then sell these tokens at a premium. This continuous arbitrage activity pulls the price back toward parity, but only if the underlying reserves and redemption mechanisms remain credible. Combined with strong reserve management, this mechanism has proven to be the winning formula for achieving both scale and institutional adoption.

USDT

USDT is a stablecoin issued by Tether and the most widely adopted stablecoin globally, with $187 billion in circulation as of early 2026. Since its 2014 launch, Tether faced early challenges around transparency and banking relationships, but the company has since achieved much better compliance and publishes quarterly attestations, which are third-party verifications of its reserves conducted by accounting firm BDO Italia.

Tether generates most of its revenue from yield earned on U.S. Treasury bills, reverse repos, and money market funds. This business model proved highly profitable in 2024, delivering $13 billion in net profit. The company has been reinvesting these profits into long-term growth areas including AI, renewable energy, and communications infrastructure. Tether also maintains approximately $10 billion each in Bitcoin and gold reserves on its balance sheet.

USDC

USDC is a stablecoin issued by Circle, a publicly traded company on the NYSE (CRCL). As the second most widely used stablecoin, USDC has $75 billion in circulation and Circle has established a strong reputation for transparency and regulatory compliance in the U.S.

Circle maintains its reserves primarily in the BlackRock-managed Circle Reserve Fund, a government money market fund, along with cash holdings. The company has demonstrated its commitment to transparency by publishing monthly assurance reports conducted by Deloitte since 2022.

Unlike Tether, Circle reported relatively modest profits of $156 million in 2024. This is partly explained by the revenue-sharing arrangement between Circle and Coinbase for USDC interest income: each platform retains 100% of the interest generated by USDC held on its own platform, while they split the interest from off-platform USDC holdings equally.

PYUSD

PayPal USD (PYUSD) is a stablecoin issued in collaboration between PayPal and Paxos. PYUSD can be used on PayPal or Venmo, and it is issued on Ethereum, Solana, and Arbitrum. There are no fees for transactions within PayPal. PYUSD is much smaller than USDT and USDC and currently has $1.4 billion in circulation.

EUR Stablecoins

EUR stablecoins remain negligible compared to their USD counterparts, representing less than 1% of the total stablecoin market. The two largest EUR stablecoins are EURC (Circle) with approximately $220 million in circulation and EURS (Stasis) with around $120 million. This disparity stems from the U.S. dollar's global dominance in international trade and finance, which naturally extends to crypto where USD-denominated assets have broader acceptance across centralized exchanges, decentralized exchanges, and DeFi protocols. The EU's MiCA regulation, discussed below, has compounded this structural advantage by creating additional compliance barriers that deter both issuers and users.

Regulations

While fiat-backed stablecoins are issued on permissionless blockchains, the assets themselves operate under existing financial regulations. They can be frozen if illegal activity is suspected, and Know Your Customer (KYC) protocols are required for both redemptions and new issuances. This hybrid model, combining blockchain efficiency with regulatory compliance, has enabled stablecoins to achieve both scale and institutional adoption while remaining subject to evolving regulatory frameworks across different jurisdictions.

United States

In the U.S., stablecoins are now governed by The GENIUS Act, which was signed into law in July 2025 and establishes a comprehensive regulatory framework for USD stablecoins. Only "permitted issuers" may issue stablecoins to U.S. people, specifically subsidiaries of insured banks, federally qualified issuers supervised by the Office of the Comptroller of the Currency, or state-qualified issuers (capped at $10 billion outstanding). Issuers must maintain strict 1:1 reserves in approved assets (USD cash, bank deposits, short-term Treasuries, and similar instruments), publish monthly reserve reports with independent accounting examinations, and comply with tailored Bank Secrecy Act and anti-money laundering obligations including customer identification and sanctions compliance.

The law requires issuers to maintain technical capabilities to block or freeze tokens pursuant to lawful orders, prohibits paying interest on the stablecoins themselves, and bars marketing that implies U.S. government backing. Foreign-issued stablecoins are generally prohibited unless Treasury deems the home country's regulatory regime comparable and the issuer meets additional U.S. requirements. The framework becomes effective by January 18, 2027 (or 120 days after final regulations), with a three-year phase-out period after which U.S. digital asset service providers cannot offer non-compliant payment stablecoins. Importantly, compliant stablecoins are not classified as securities or commodities, and stablecoin holders receive priority claims on reserves in issuer insolvency proceedings.

In September 2025, Tether announced the launch of USAT, a new U.S.-regulated stablecoin designed to comply with GENIUS Act. USAT will leverage Anchorage Digital as the federally regulated issuer and Cantor Fitzgerald as the reserve custodian.

European Union

Under the EU Markets in Crypto-Assets (MiCA) regulation, single-currency stablecoins are classified as e-money tokens (EMT) and subject to stringent reserve requirements designed to ensure liquidity and systemic stability. Standard EMT issuers must hold at least 30% of their reserves as deposits with EU-authorized credit institutions, with the remainder in high-quality liquid assets. However, "significant" tokens, those with higher systemic risk and potential monetary policy impact, face elevated requirements, including a 60% deposit floor and enhanced supervision by the European Banking Authority. This tiered approach reflects regulators' concern about redemption runs and contagion effects from larger stablecoin operations.

The framework also incorporates operational safeguards and concentration limits to prevent over-reliance on single institutions. Issuers must distribute deposits across multiple EU banks (often requiring six or more banking partners for significant EMTs), maintain formal liquidity management policies, conduct regular stress testing, and keep reserves segregated with detailed reporting to supervisors. Notably, while euro-denominated EMTs face no usage restrictions, non-EUR stablecoins are subject to means-of-exchange caps, if their daily transaction volume exceeds 1 million transactions or €200 million in any EU currency area, issuers must halt new issuance until compliance is restored. This regulatory architecture effectively anchors stablecoin liquidity to the EU banking system while maintaining supervisory control and limiting systemic exposure.

Circle achieved full MiCA compliance in July 2024 through a French Electronic Money Institution license, allowing both USDC and EURC to operate in the EU. Circle chose to comply to gain mainstream acceptance and regulatory clarity. Despite complying, Circle has also critiqued certain MiCA reserve requirements, particularly high bank deposit mandates, as introducing unnecessary bank risk, showing Circle supports the framework's clarity and market access while advocating for refinements to specific prudential details.

Tether chose not to comply with MiCA and exchanges had to delist or restrict USDT in the EU. The company said that it wouldn't comply primarily because the requirements for stablecoins to hold at least 60% of reserves in EU bank deposits creates "systemic risk" and makes both stablecoins and banks less safe than holding short-term U.S. Treasuries. Tether believes that bank deposits are inherently more fragile since banks re-lend them (citing the SVB/USDC incident as evidence), while Treasuries offer superior safety and liquidity as reserve assets. Additionally, Tether views MiCA's bank concentration limits and operational requirements as adding unnecessary complexity and risk, while the broader EU restrictions on non-euro stablecoin usage are seen as hostile to dollar-denominated stablecoins' everyday use in Europe.

De-pegging risks

Despite their robust stabilization mechanisms, fiat-backed stablecoins still face de-pegging risk, the failure to maintain 1:1 parity with the underlying asset. This risk is fundamentally tied to reserve-confidence shocks, where doubts about reserve quality or accessibility can trigger a crisis of confidence. When users lose faith in a stablecoin's backing, they rush to sell their holdings for BTC, ETH, or fiat currencies, creating intense selling pressure that pushes the token's market price below $1 until redemptions and arbitrage activities restore parity.

The March 2023 U.S. banking crisis (also discussed in Chapter VII's Curve section) provided a clear example of this dynamic. After Circle disclosed that approximately $3.3 billion of USDC's cash reserves was held at the failing Silicon Valley Bank, the stablecoin fell as low as $0.87 on March 11, 2023. This episode demonstrated how interconnected stablecoins are with legacy banking infrastructure and how external banking issues can directly impact stablecoin stability. The price recovered after the joint Treasury/Fed/FDIC statement on March 12, 2023 backstopped deposits and Circle resumed redemptions on March 13.

USDT experienced its most severe de-pegging crisis in October 2018 with intraday lows as low as $0.86 amid a perfect storm of banking and confidence issues. The crisis was precipitated by reports that Noble Bank, a key banking partner that had serviced Tether and Bitfinex in Puerto Rico, was seeking a buyer and had lost clients, with both Tether and Bitfinex reportedly looking elsewhere for banking support.

These episodes illustrate how banking infrastructure problems create feedback loops. Concerns about redemption capacity can fuel panic selling, effectively creating digital bank runs. These crises only resolve once normal banking relationships and redemption processes are restored. The interconnected nature of stablecoin reserves with incumbent banking systems means that external financial sector stress can directly threaten the stability mechanisms these tokens rely upon.

Use Cases

Stablecoins have become core crypto plumbing, accounting for more than 50% of global crypto transaction value each year. Visa estimates approximately $5.7 trillion in stablecoin settlement volume in 2024, after adjusting for artificial volume from bots and fake trades designed to inflate activity metrics. This massive scale demonstrates that stablecoins have evolved far beyond their origins as trading instruments to become genuine payment and transfer infrastructure. They have proven especially valuable in regions where legacy financial systems are inadequate, restricted, or unreliable.

Trading and Arbitrage

Trading and arbitrage remain the dominant applications, with arbitrage activity highly concentrated among a small set of professional firms. Market makers maintain capital reserves in USDT and USDC, positioning themselves to quickly capitalize on price differences across centralized exchanges, decentralized exchanges, and different geographic regions.

Cross-Border Payments and Remittances

Beyond trading, cross-border payments and remittances represent one of stablecoins' most transformative applications. The cost advantages are substantial: sending a $200 remittance from Sub-Saharan Africa costs approximately 60% less using stablecoins compared to traditional fiat-based methods. This dramatic cost reduction makes stablecoins attractive to migrant workers and underbanked populations. Strong adoption has followed in Latin America and Sub-Saharan Africa, where stablecoins provide both a hedge against local currency volatility and practical access to USD-denominated value. Geographic adoption data shows these regions experiencing over 40% year-over-year growth in retail and professional-sized stablecoin transfers.

Store of Value in High-Inflation Regions

Stablecoins also serve as a critical store of value in regions facing economic instability or high inflation. They allow individuals and businesses to preserve purchasing power when local currencies become unreliable. This use case has proven especially significant in countries experiencing monetary instability, where stablecoins often trade at premiums reflecting users' willingness to pay for stability and faster money movement. Turkey leads the world in stablecoin trading volume as a percentage of GDP. Meanwhile, countries across the Middle East and North Africa are seeing stablecoins capture larger market shares than traditionally dominant cryptocurrencies like Bitcoin and Ethereum.

Institutional Adoption

The institutional adoption of stablecoins has reached new heights. Banks and financial institutions increasingly integrate them into operations for liquidity management, settlement mechanisms, and as entry points into cryptocurrency markets. Major payment processors including Stripe, Mastercard, and Visa have launched products enabling users to spend stablecoins through conventional payment rails. This infrastructure has enabled cross-border investment applications through tokenized assets. Investors now swap into stablecoins to access tokenized U.S. Treasury funds like Franklin's BENJI, BlackRock's BUIDL, and Ondo's OUSG, enabling 24/7 settlement capabilities. (These tokenized treasuries are discussed in more detail in Section II of this chapter.)

Looking Forward

While trading and arbitrage continue to dominate global stablecoin flows, the infrastructure is expanding into broader economic applications. The significant growth in retail usage across high-inflation economies, combined with emerging institutional applications through tokenized assets, signals an important shift. Stablecoins are transitioning from primarily serving sophisticated financial players toward becoming genuine alternatives to incumbent banking systems, especially in regions where legacy infrastructure fails to meet local needs.