The stablecoin market has exceeded $200 billion. Major banks, payment networks, and governments are discussing their integration. At the same time, basic questions about how they work and what risks users face still remain unanswered for most market participants.
Why Stablecoin Is Not a Synonym for Reliability
The name is misleading. A stablecoin maintains a peg to the dollar or another asset—but this is not a guarantee against losses and not insurance against systemic failures. The market’s history has provided plenty of examples.
Terra UST in 2022 had billions in circulation—until its algorithmic stabilization mechanism failed and the peg collapsed within days. Even USDC from Circle briefly lost parity in March 2023, when it was revealed that part of its reserves were held at Silicon Valley Bank. Synthetix and Ethena recorded deviations from the peg as recently as 2025.
The difference between ‘a stablecoin holds its peg’ and ‘a stablecoin is safe’ is fundamental. The first is a technical characteristic under normal conditions. The second depends on reserve structure, issuer quality, and market situation.
Three Collateral Models, Three Risk Levels
All stablecoins can be divided by their peg maintenance mechanism, and each model carries a different risk profile.
Fiat-backed is the most common and intuitively understandable structure. USDC and USDT hold dollars or equivalent assets—short-term treasury bills, money market funds—in reserves. Each issued token is theoretically backed by a real asset that can be redeemed. The risk here is not in the algorithm, but in reserve management quality and custodian reliability.
Overcollateralized stablecoins work differently. DAI from MakerDAO is created against collateral of other crypto assets—with excess coverage to compensate for collateral volatility. If the collateral value falls below a threshold, the position is automatically liquidated. The mechanism is more resilient to regulatory pressure but is harder to manage and sensitive to sharp moves in the crypto market.
Algorithmic stablecoins rely on programmatic supply control—without hard collateral. This is a technologically interesting but historically unreliable model. The Terra collapse showed that an algorithm working under normal conditions may fail to withstand a run on reserves in a stress scenario.
Who Holds the Money—and Why It Matters
With fiat backing, the issuer does not keep physical dollars in a vault. Reserves are held by professional custodians—BlackRock, BNY Mellon, and similar institutions. The composition of reserves is determined by the issuer: these can be cash, short-term bonds, or money market instruments.
This is where a risk arises that is not obvious at first glance. When USDC was partially held at SVB and the bank faced a liquidity crisis, Circle technically could not immediately access those funds. The peg briefly shifted—not because the algorithm broke, but because the traditional banking system failed.
Conclusion: the risk of a fiat-backed stablecoin is partly the risk of the custodian and reserve structure, not just the protocol itself.
What Happens During Mass Redemption
Fully backed fiat stablecoins theoretically allow each holder to redeem dollars at any time. In practice, this works as long as reserves are liquid and immediately available.
The shift by issuers from pure cash reserves to treasury bonds increased reserve yields but added a time lag during mass redemption. Bonds must be sold on the market—in panic conditions, this may happen at a discount. This is why the USDC peg shifted during the SVB crisis: the market priced in the risk of delay or partial unavailability of reserves.
The Regulatory Question Remains Open
In the US, the adoption of the GENIUS Act established basic reserve requirements and federal oversight for stablecoin issuers. This is a step toward standardization, but not the end of regulatory uncertainty.
The broader CLARITY Act, which is supposed to regulate both the structure of stablecoins and market infrastructure, is still stalled—including due to the unresolved question of whether stablecoins can pay interest to holders. This is not a technical but a political issue: the banking lobby insists on banning yield, seeing stablecoins as direct competition to deposits.
For businesses considering stablecoins as a payment tool, regulatory uncertainty is an operational risk. Rules may change, and companies that have built processes for one model may find themselves forced to restructure.
What Stablecoins Are Really Better Than Fiat For
Traditional payment systems were built over decades, accumulating layers of infrastructure on top of outdated cores. International transfers between banks can take days and cost significant fees. Operations are limited by banking hours and geographic restrictions.
Stablecoins solve these problems structurally, not cosmetically. A transaction on the XRP Ledger network settles in seconds. A USDC transfer knows no time zones and does not require correspondent banks. Programmability allows payment logic to be embedded directly into smart contracts.
This does not mean stablecoins are ready to replace traditional financial infrastructure—especially where consumer protection and regulatory guarantees are important. But for specific scenarios—cross-border payments, settlements between businesses, payments by AI agents—they already offer measurable advantages.
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