What is fiat-backed stablecoin?

A token whose issuer holds cash and short-term government debt one-for-one against tokens outstanding, and redeems tokens for currency on demand.

This is the dominant design, covering the largest tokens in circulation, and its risk is not market movement but the issuer: where reserves sit, who can freeze balances, and whether redemption is available to you or only to institutional partners. Under the European Union's MiCA regulation, issuers of such tokens must redeem at par on request (source: Regulation (EU) 2023/1114, Title IV). Reserve composition is published in the issuer's own periodic reports.

Balances on most of these tokens can be frozen by the issuer at the address level, which is part of what makes them acceptable to supervisors and worth knowing before treating one as cash.

How it works

The model is a warehouse receipt. Institutional partners send currency to the issuer, the issuer mints an equivalent number of tokens, and those tokens circulate. To take currency back out, an authorized party returns tokens and the issuer burns them.

What holds the price near par is arbitrage rather than a promise. If the token trades below a dollar, someone who can redeem at par buys it cheaply and redeems for the difference. That mechanism only works while redemption is actually functioning and available at scale, which is why a depeg is a statement about redemption plumbing rather than about the reserves alone.

Three things distinguish one of these tokens from another:

• What the reserves are. Bank deposits, Treasury bills, repurchase agreements, and money market funds carry different risks, and the mix is published in the issuer's own attestation or audit reports.
• Who can redeem. Most issuers deal only with verified institutional counterparties above a minimum size. Retail holders sell on an exchange instead, which is not the same guarantee.
• What the issuer can do to your balance. Contracts for the major regulated tokens include a freeze or blacklist function, exercised in response to law enforcement requests.

Regulation is converging on the first of these. MiCA requires par redemption at any time without charge and prohibits paying interest on holdings (source: Regulation (EU) 2023/1114).

Example

Illustrative arithmetic on the arbitrage. Suppose the token trades at $0.995 while redemption at par is working. Buying $10 million of it costs $9.95 million and redeeming returns $10 million, a $50,000 gross profit before costs. That trade is what pulls the price back. When redemption is paused or the queue lengthens, the trade stops working and the discount can persist and widen.

Why it matters when you buy

Most crypto trading pairs are quoted in one of these tokens, so holding one is usually unavoidable, and which one you hold is a choice about issuer risk rather than about price. Check which tokens your venue actually supports at the exchange pages and, in the European Economic Area, what is permitted at the jurisdiction pages.

Related terms

stablecoin — the wider category, e money token — the European Union's classification, depeg — when the price separates from par, redemption — the mechanism holding the peg, mica — the regulation setting the terms, treasury bill backing — the common reserve asset.

Questions

Can I redeem a stablecoin directly with the issuer?

Usually not as an individual. Issuers typically require a verified institutional account and a minimum redemption size, so retail holders exit by selling on an exchange.

Can my stablecoin balance be frozen?

For the major regulated tokens, yes. The contracts include a blacklist function used in response to legal orders, and a frozen balance cannot be moved or sold.

Do I earn interest on a stablecoin balance?

Not from the token itself, and under MiCA issuers are prohibited from paying interest on e-money tokens. Any yield you are offered comes from a separate product with its own risks; see yield bearing stablecoin.