Stablecoins: what supports the promise of a dollar
A stablecoin targets a steady value. Reserves, redemption and market prices explain what supports that promise.
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In March 2023, USDC traded below one dollar after Silicon Valley Bank failed while holding part of Circle’s reserves. The token still moved, but buyers doubted what they could recover. The episode, studied by the Federal Reserve, shows what “stable” means here: a target value, rather than an assured market price. [1]
A stablecoin is a token designed to track a reference, often a currency. Understanding it means connecting three things: the assets backing it, the redemption terms and the price someone will pay for it. Those three can diverge.
The token and its reserves live in different places
The token is recorded on a blockchain. In a model backed by conventional currency reserves, the supporting assets remain with financial institutions. Circle publishes reserve information and monthly attestations; this model does not describe every stablecoin. [2]
That separation explains part of their appeal: the token can move on a network separate from the accounts holding the reserves. It also explains why a successful transfer says little about the issuer’s financial strength.
Redemption connects the two sides
Direct USDC redemption with Circle depends on the holder’s eligibility and Circle Mint account terms. Holding the token does not automatically give someone access to that service. A user may instead sell through a platform, at its price and under its fees and conditions. [3]
Consider a hypothetical repayment for dinner. You receive a stablecoin but want money in your bank account. The token transfer does not finish that journey. Conversion and the bank payment still have to happen.
The market price has a life of its own
A seller and buyer may agree on a price different from the intended value. Redemption at that value helps bring prices together, but access and timing matter. The BIS highlights the tension between the promise of parity and liquidity risk. [4]
Three amounts then matter: the balance received, what a platform offers in exchange and what arrives after fees. The token’s name cannot replace that calculation.
A useful payment reaches the recipient’s goal
Stablecoins allow transfers between compatible services. The practical conditions still matter: the right token, the right network and a recipient able to receive it. Blockchain processing time does not necessarily cover identity checks or a bank withdrawal.
Transfer figures require similar care. A volume of tokens moved is not, by definition, a volume of purchases of goods and services. A comparison with a card network needs to explain what was counted on each side.
Understand the promise before using it
Start with the purpose: holding a digital balance, paying for a service or repaying someone. Then examine the issuer, reserves and exit route. Regulation or an attestation tells you something about that framework; it does not make every product interchangeable.
For the dinner repayment, the transfer is useful only if the recipient receives something they can use on the agreed terms. The token’s target value is part of that answer. The service that makes it usable provides the rest.
Read more: USDC reserves · paying with a stablecoin card
Sources
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