Stablecoins in market plumbing

Stablecoins are the cash leg of the digital asset market: most trading pairs, OTC settlements, margin accounts and DeFi loans are denominated in them. Supply is highly concentrated: two issuers, Tether (USDT) and Circle (USDC), account for most of it, so the conduct and reserves of a couple of firms matter to the whole market. A professional needs to understand how stablecoins hold their value, how that value can break, and what it means to use them as settlement money and collateral.

Three designs

The categories blur at the edges. A crypto-collateralized coin that holds large amounts of USDC as collateral inherits USDC's risks, as March 2023 showed. A synthetic dollar depends on derivatives exchanges where its hedges sit. "Stable" describes the target, not a guarantee.

Reserves and attestations

For fiat-backed coins, the questions are what the reserve holds, where, and how it is verified. Large issuers typically hold short-dated US Treasury bills, overnight repurchase agreements (repos) backed by Treasuries, money market fund shares and bank deposits. Tether also holds assets such as gold and bitcoin alongside its Treasury holdings. Circle holds most USDC reserves in a registered government money market fund and the rest as bank cash.

Issuers publish reserve attestations: an accounting firm reports on the issuer's statement of its reserves at a given date, monthly or quarterly. An attestation is narrower than a financial statement audit, for the same reasons explained for proof of reserves in the lesson Counterparty risk and proof of reserves: it covers a point in time and a specific subject matter, not the issuer's overall solvency or controls. Points to check:

• Composition and maturity: share of cash and short Treasuries versus longer or riskier assets.
• Concentration: how much sits at any single bank or custodian.
• Legal structure: whether reserves are held in a segregated account, trust or fund for holders, or are simply assets of the issuer.
• Frequency and assurance level: monthly or quarterly, attestation or audit.

Primary and secondary markets

Stablecoins live in two markets. In the primary market, approved customers, usually institutions that have passed the issuer's onboarding, mint new tokens by sending dollars to the issuer and redeem tokens for dollars. Everyone else uses the secondary market: buying and selling on exchanges, OTC desks and DEXs.

The peg holds through arbitrage between the two. If USDC trades at 0.995 dollars on an exchange, an approved customer can buy 10 million tokens for 9.95 million dollars and redeem them with Circle for 10 million, earning 50,000 dollars minus costs. That buying pushes the price back toward 1.00. Above 1.00 the trade runs the other way: mint at par and sell.

Anything that slows the arbitrage weakens the peg: minimum redemption sizes, fees, onboarding requirements, banking hours, and redemption queues. When arbitrage is blocked, secondary prices can move far from par even if the reserves are intact. On 10 October 2025, during a market crash, the synthetic dollar USDe traded at about 0.65 dollars on one large exchange while staying close to 1.00 on venues where it could be redeemed or swapped directly; the problem was local liquidity, not the backing.

Depeg case: UST, May 2022

TerraUSD (UST) was an algorithmic stablecoin with no dollar reserves. Its peg relied on a swap with the Terra network's second token, LUNA: one UST could always be burned for one dollar's worth of newly minted LUNA. Demand came largely from the Anchor protocol, which paid about 19.5% a year on UST deposits; before the collapse, about 14 billion of the roughly 18 billion dollars of UST in circulation, some three quarters, sat in Anchor.

In early May 2022, large withdrawals from Anchor and from a key liquidity pool pushed UST below 1.00. Holders swapped UST for LUNA, which took LUNA's supply from about 350 million to about 6.5 trillion tokens within five days and drove its price to nearly zero, which in turn destroyed confidence in UST. The Luna Foundation Guard had built a reserve of about 80,000 BTC to defend the peg, and it was spent within days. UST fell to around 10 cents, and about 45 billion dollars of market value disappeared in a week. Terra's founder, Do Kwon, pleaded guilty to fraud charges in the US in August 2025 and was sentenced to 15 years in prison in December 2025.

The lesson: a peg defended only by a token whose value depends on confidence in the same system is reflexive. When confidence falls, the defense mechanism accelerates the fall.

Depeg case: USDC and Silicon Valley Bank, March 2023

USDC was fully reserved, yet it still lost its peg. On Friday 10 March 2023, California regulators closed Silicon Valley Bank (SVB). That evening Circle disclosed that 3.3 billion dollars of USDC's roughly 40 billion dollars of reserves were deposited there. Because US banks were closed for the weekend, approved firms could not redeem, and one large exchange suspended conversions of USDC into dollars. On the secondary market USDC fell to about 0.87 to 0.88 dollars on Saturday 11 March. DAI, which then held a large share of USDC as collateral, also lost its peg.

On Sunday 12 March, US authorities announced that all SVB depositors would be protected. USDC was back near 1.00 by Monday 13 March, when banks reopened and redemptions resumed.

The lessons: high-quality reserves are not enough if a material share sits as uninsured deposits at one bank; redemption that works only during banking hours leaves weekend gaps in a market that trades around the clock; and stablecoins that hold other stablecoins inherit their risks.

Stablecoins as settlement and collateral

Stablecoins do several jobs in market plumbing:

• Quote and settlement currency on exchanges and in OTC trades, settling around the clock in minutes.
• Margin and collateral at exchanges and prime brokers, usually with a small haircut, and in DeFi lending (covered in the lesson Lending, borrowing and liquidations).
• Treasury and cross-border transfers between firms in different countries and banking systems.

Each job carries risks that a policy should address:

Regulation: a pointer

The international baseline comes from two sets of standards. The FSB's High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements (final report, July 2023) ask that issuers hold reserves at least equal to the coins outstanding, in conservative, high-quality and highly liquid assets, segregated from the issuer's own assets, and give every holder a robust legal claim with timely redemption at par. CPMI and IOSCO guidance (July 2022) applies the Principles for Financial Market Infrastructures to stablecoin arrangements that are systemically important as payment systems.

National laws follow the same lines. For example, the EU's MiCA regulation and the US GENIUS Act both require fiat-backed stablecoin issuers to be licensed, hold high-quality liquid reserves and redeem at par; other jurisdictions have their own regimes. The international principles for stablecoin regulation are covered in the lesson Stablecoin regulation: global principles.

Exam focus: the three stablecoin designs and their main risks; why concentration in a few issuers matters; what reserves usually hold and the limits of attestations; primary (mint and redeem) versus secondary markets and how arbitrage maintains the peg; why frictions in redemption can cause depegs even with intact reserves; the UST collapse mechanism and its reflexivity; the USDC and SVB depeg (3.3 billion dollars at SVB, low around 0.87, recovery after 12 March 2023); risks and controls when stablecoins serve as settlement asset and collateral.