Stablecoins, in depth

A stablecoin is a blockchain token engineered to hold a steady value by tracking a reference asset — almost always the U.S. dollar, one token to one dollar. It is the piece of the crypto world built not to move in price. In effect, a stablecoin combines the instant settlement and global reach of a blockchain with the stability of a fiat currency, and that combination is why it has become the plumbing for a growing share of digital payments and trading.

How a stablecoin actually holds its value

The dominant model is simple and worth understanding. A fiat-backed stablecoin is issued by a company that promises to redeem each token for one dollar. To make that promise credible, the issuer holds a reserve — for the well-run ones, cash and short-term U.S. Treasuries — equal to every token in circulation, and publishes regular attestations of what it holds. When you buy in, the issuer mints new tokens against new reserves; when you redeem, it burns tokens and releases the cash. The peg holds because anyone can, in principle, swap a token for a real dollar, and arbitrageurs profit from closing any gap. The strength of the peg therefore rests entirely on the quality and sufficiency of the reserves and the issuer’s willingness and ability to honor redemptions.

What people use them for

Stablecoins earned their place by solving real friction in moving money:

Transfer money instantly and cheaply. Value can move globally in minutes for a fraction of a cent, sidestepping the fees and multi-day delays of wire transfers and card processing — around the clock, including weekends.
Sit out crypto volatility. Traders use stablecoins as a safe harbor — a way to lock in value or move between volatile assets like Bitcoin without cashing all the way back to a bank.
Hold reliable dollars in emerging markets. In places where local currencies lose value and U.S. bank accounts are hard to open, a dollar-pegged token is a way to hold digital dollars and protect purchasing power.
Automate payments. Because stablecoins live on programmable networks, they can drive smart-contract logic — conditional payouts, automated escrow, and faster treasury workflows — without a human in the loop.

The three kinds you’ll encounter

Not all stablecoins are built the same way, and the differences matter:

Fiat-backed (reserve-backed). Backed one-to-one by cash and cash-equivalents held by the issuer. This is the mainstream, and the model regulators are building around.
Crypto-collateralized. Backed by other crypto assets locked in a smart contract, and deliberately over-collateralized to absorb price swings in the collateral. More decentralized, but more complex.
Algorithmic. Attempts to hold the peg through supply-and-demand mechanisms rather than hard reserves. This is the design that has failed most spectacularly — when confidence goes, there is nothing underneath to redeem against. Treat “algorithmic stability” as a warning label, not a feature.

The rules — finally taking shape

For years stablecoins operated in a regulatory gray zone. That changed in 2025 with the GENIUS Act, the first federal framework for payment stablecoins in the United States. Broadly, it requires issuers of dollar-pegged payment stablecoins to hold high-quality liquid reserves fully backing every token, to disclose those reserves on a regular basis, to honor redemptions, and to meet licensing and anti-money-laundering obligations. The practical effect is a clearer line between regulated, fully-reserved stablecoins and everything else — and a reason to prefer the former.

Tax treatment is separate and easy to overlook. The IRS treats digital assets, including stablecoins, as property (Notice 2014-21). That means converting, swapping, or spending a stablecoin can be a taxable event — even when the dollar value barely moves — and any yield earned is generally taxable income. Inside a self-directed retirement account, the ordinary prohibited-transaction and custody rules apply as well.

The risks to weigh

De-peg risk. The peg is a target, not a promise. Well-reserved tokens have held it closely; weaker ones have broken and not recovered.
Reserve and issuer risk. A stablecoin is only as good as what backs it and who stands behind it. Opaque or low-quality reserves are the core danger.
Custody and smart-contract risk. Keys can be lost or stolen, and code can have bugs. Qualified custody mitigates this but does not erase it.
Regulatory change. The framework is new and still developing; supported tokens and requirements will evolve.
Not insured. Stablecoins are not bank deposits and are not FDIC-insured. Holding one is exposure to an issuer, not a bank.

How Investor Services custodies stablecoins

On the platform, stablecoins are held through qualified digital-asset custody in the account’s name — you never hold the private keys personally. Purchases, transfers, conversions, and any yield settle into the account, and balances and cost basis are recorded for reporting. You can hold stablecoins in a dedicated Stablecoin Account for settlement and treasury, or, where eligible, as one holding among many in a self-directed account. Either way, favor regulated, fully-reserved, dollar-backed tokens with transparent reserves, and know your redemption rights before you hold size.

Sources and further reading: Bank of England, “What are stablecoins and how do they work”; Stripe, “Why stablecoins are important”; J.P. Morgan Global Research on stablecoins; McKinsey on tokenized cash and next-generation payments; Investopedia’s stablecoin overview; and reporting on the 2025 GENIUS Act. This guide is general educational information, not investment, legal, or tax advice.

Sources include the Internal Revenue Service and U.S. Department of Labor. This guide is general information, not tax or legal advice; confirm specifics with a qualified professional.

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