What Backs Stablecoins? USDC, USDT, PYUSD and USDe Explained

Last verified: 2026-08-23

When a stablecoin trades at $1, the price tells you very little about what would happen if billions of dollars of holders wanted out at the same time.

For a fiat-backed stablecoin, the answer sits mostly in the reserve. The issuer has created a dollar-denominated liability and holds assets against it. Those assets can be cash in bank accounts, Treasury bills, overnight repurchase agreements, money-market funds or, depending on the issuer, a broader portfolio. The quality of the backing depends not only on whether the assets are worth at least as much as the tokens outstanding, but also on whether they can be turned into cash quickly and whether they are legally available to meet redemptions.

A stablecoin can therefore be solvent on paper and still have a liquidity problem. It can hold high-quality assets and still offer limited direct redemption to ordinary holders. It can publish frequent reserve reports without having audited financial statements. And a token can target one dollar without holding fiat reserves at all.

The largest products illustrate most of these models. Circle's USDC uses a reserve concentrated in bank deposits, short-dated U.S. Treasuries and overnight Treasury repo. Tether's USDT is backed by a larger and more varied portfolio with substantial U.S. government exposure. Paxos says PYUSD reserves are held entirely in dollar deposits, U.S. Treasuries and cash equivalents and in segregated, bankruptcy-remote accounts. Ethena's USDe is explicitly different: it uses crypto assets and corresponding short derivatives positions to create a synthetic dollar exposure.

All of them can trade around $1. The route to that price is different.

What “fully backed” should mean

Start with a simple example. An issuer has 10 billion tokens outstanding. Each token promises one dollar of value. The issuer therefore has $10 billion of stablecoin liabilities.

If the issuer holds $10 billion of cash or assets that can reliably be converted into $10 billion of cash, the stablecoin is fully reserved in the basic accounting sense. If it holds $9 billion, there is a shortfall. If it holds $10.5 billion, there is a $500 million buffer.

The arithmetic is easy. The difficult part is deciding how much confidence to place in the assets.

Reserve asset — Why an issuer may hold it — What matters in a redemption event

Cash deposits — Immediate liquidity and access to payment rails — Bank concentration, deposit availability and operational access

Short-term U.S. Treasury bills — Low credit risk, deep market and interest income — Market liquidity, remaining maturity and settlement

Overnight Treasury repo — Cash-like investment secured by government securities — Counterparty, collateral and ability to unwind promptly

Government money-market fund — Portfolio of cash, Treasury bills and repo under a regulated fund structure — Fund liquidity, custody and redemption mechanics

Gold — Diversification and potential appreciation — Price volatility and time/cost required to liquidate at scale

Secured loans — Higher yield — Borrower credit, collateral and whether the loan can be repaid or sold quickly

Crypto assets — Collateral or investment exposure — Large price swings during the same stress that may drive redemptions

How USDC's reserve works

Circle reported $72.7 billion of USDC in circulation on Aug. 20. Its public reserve page says USDC is backed by highly liquid dollar-denominated assets and breaks the reserve into bank deposits, overnight Treasury repo and U.S. Treasuries with maturities of less than three months.

The majority of the reserve can be held through the Circle Reserve Fund, an SEC-registered Rule 2a-7 government money-market fund managed by BlackRock. Circle says the fund can hold cash, short-dated U.S. Treasuries and overnight Treasury repurchase agreements, while BNY serves as custodian. The remainder is held in cash, primarily at large regulated financial institutions.

There are several reasons for that structure. Cash is immediately useful for redemptions, but leaving tens of billions of dollars as ordinary bank deposits creates bank-concentration risk and gives up the yield available on government securities. Very short Treasury bills and overnight repo can earn interest while remaining assets that institutional markets can normally convert into cash quickly.

Circle publishes reserve holdings weekly together with issuance and redemption activity. It also says a Big Four accounting firm provides monthly assurance that reserve value equals or exceeds USDC in circulation. Circle's own financial statements are audited separately by Deloitte.

How USDT's backing differs

Tether's reserve is much larger and historically has contained a wider range of assets than USDC's.

Tether's disclosures show U.S. Treasury bills and other U.S. government-backed instruments as the dominant part of its reserve, alongside cash and other assets. The company has also disclosed positions such as gold, Bitcoin and secured loans. Those additional assets do not automatically make the reserve inadequate; they change its risk and liquidity profile.

In its first-quarter 2026 attestation, Tether reported $191.77 billion of assets against $183.54 billion of liabilities, leaving an $8.23 billion reported surplus at March 31. Tether said proprietary investments made through Tether Investments are funded from excess capital and profits and are segregated from the reserves backing USDT.

Worked example

Tether's reported Q1 2026 asset surplus

Total assets: $191.768 billion

Total liabilities: $183.536 billion

Difference: $8.232 billion

$8.232B ÷ $183.536B = about 4.5% more assets than liabilities at March 31, 2026.

The percentage is useful as a snapshot, not as a stress test. It does not tell us that every reserve asset could fall by 4.5% simultaneously without affecting redemption, because different assets behave differently and liabilities can change after the reporting date.

Tether's transparency record also changed materially in 2026. The company continued publishing reserve attestations and in August announced that KPMG U.S. had completed an audit of Tether International's financial statements for the year ended Dec. 31, 2025. KPMG issued an unqualified opinion, meaning it concluded that the statements presented the company's financial position fairly in all material respects under U.S. GAAP.

That audit gives the market more information about Tether as a company. It does not eliminate the need for frequent reserve reporting. Stablecoin supply and reserve holdings can move considerably between annual audit dates.

Audit and attestation are not interchangeable

An audit of financial statements evaluates whether those statements fairly present the financial position and results of a company under an applicable accounting framework. The work is broad and usually annual.

A reserve attestation is narrower. Management makes specific assertions about the reserves or token liabilities at a specified time, and an independent accounting firm examines those assertions under attestation standards.

— Reserve attestation — Financial-statement audit

Typical scope — Specified reserve balances and liabilities — Company financial statements as a whole

Typical frequency for major stablecoins — Monthly or quarterly — Annual

Useful for — Checking a recent reserve claim — Understanding the wider financial position and accounting

Limitation — Narrower than a full audit — Can become stale for a stablecoin whose supply moves daily

PYUSD: similar assets, different legal structure

Paxos says PayPal USD is backed 100% by U.S. dollar deposits, U.S. Treasuries and cash equivalents. It publishes a reserve-composition report each month and a separate independent attestation. Attestations published since February 2025 have been issued by KPMG.

What makes the Paxos disclosure particularly useful is that it describes the treatment of customer assets if the issuer itself fails. Paxos says customer reserve assets are kept in segregated, bankruptcy-remote accounts and would not be available to satisfy Paxos' general creditors in an insolvency.

Consider two hypothetical issuers. Each has $10 billion of tokens and $10 billion of Treasury bills. One holds the securities in accounts clearly segregated for token holders. The other holds them as general corporate assets alongside the rest of its balance sheet. The securities may be identical, but the legal path from those securities to a holder's redemption claim can be very different if the company fails.

A $1 redemption promise does not mean every holder redeems directly

Stablecoin prices are kept close to $1 partly because certain institutions can move between the token and the issuer's primary market.

Circle, for example, says Circle Mint allows exchanges, institutional traders, banks and other large financial institutions to redeem USDC directly for dollars. It is not available to individuals or small businesses. Retail users normally sell through an exchange, wallet or other intermediary.

Suppose USDC is quoted at $0.995 on an exchange while direct redemption remains available at $1. An eligible institution can buy discounted USDC and redeem it. That trade creates demand for the token and tends to pull the market price back toward the redemption value.

Worked example

Illustrative redemption arbitrage

10,000,000 tokens bought at $0.995 = $9,950,000

Redeemed at $1.00 = $10,000,000

Gross spread = $50,000

The trade is only attractive if fees, settlement time, funding cost and the risk that redemption fails are worth less than $50,000.

This is why a stablecoin peg is not maintained by reserves alone. The market also needs confidence that redemption is functioning and that participants with access to the primary market can arbitrage deviations.

What happens if 20% of holders redeem at once?

Imagine a stablecoin with $100 billion outstanding faces $20 billion of redemptions over several days. The issuer needs $20 billion in cash or assets it can turn into cash quickly enough to meet those requests.

If most of the portfolio is bank cash, Treasury bills and overnight Treasury repo, the issuer has several sources of short-term liquidity. If a large part sits in private loans, long-duration securities or volatile assets, the issuer may have to accept larger discounts or wait for maturities.

Asset — How it can provide redemption liquidity — What could go wrong

Bank cash — Immediate transfer if banking access is functioning — Bank failure, account restrictions or payment-system downtime

Short Treasury bills — Sale in deep government-securities market or maturity into cash — Execution and settlement still take time; price may differ slightly from par

Overnight Treasury repo — Position unwinds into cash on a short cycle — Counterparty or operational disruption

Gold — Can be sold in deep global markets — Price can move materially and settlement differs from cash

Secured loans — Borrower repayment or sale of the loan — May not be callable or liquid when cash is needed

Bitcoin or other crypto — Trades continuously — Can fall sharply during the same stress event driving redemptions

Why issuers care about the yield on reserves

Reserve design is also central to the economics of the stablecoin business.

Short-term U.S. government securities earn interest. If an issuer has $100 billion of non-interest-bearing stablecoin liabilities and earns 4% annually on the reserve, the gross interest income is $4 billion before expenses, revenue sharing, credit losses, taxes and other costs.

Worked example

Illustrative reserve-income sensitivity

$100B reserve at 4% = $4.0B annualized gross interest

$100B reserve at 3% = $3.0B

$100B reserve at 2% = $2.0B

A one-percentage-point change in yield changes gross annualized reserve income by $1 billion on a $100 billion reserve.

That has turned interest rates into an important part of stablecoin economics. Circle reported $701 million of total revenue and reserve income in the second quarter of 2026. Tether's quarterly results similarly attribute a substantial part of profitability to its Treasury and repo portfolio.

USDe is not backed like USDC or USDT

Ethena explicitly describes USDe as a synthetic dollar rather than a fiat stablecoin.

When a whitelisted participant mints USDe, Ethena can take crypto collateral and open a short derivatives position of approximately the same dollar value. If the collateral rises, the short loses value; if the collateral falls, the short gains. The intention is for the two price movements to offset so that the combined position remains close to a fixed dollar value.

Worked example

Simplified delta-neutral position

Long $1,000 of ETH

Short $1,000 of ETH perpetual futures

If ETH rises 10%:

Spot position: +$100

Short hedge: approximately -$100

Net directional change: approximately $0, before funding, basis, fees and tracking differences.

Ethena says backing assets remain in off-exchange custody while derivatives positions are used to hedge price exposure. The protocol also holds liquid stablecoins as part of its backing mix.

This creates risks that do not exist in the same form for a Treasury-backed stablecoin. The derivatives hedge has to remain available and correctly sized. Exchanges and off-exchange custody providers have to function. Funding rates can turn negative. A collateral asset can trade away from the asset used in the hedge. Those are different risks from the bank, Treasury, custody and reserve-management risks of a conventional fiat-backed stablecoin.

Model — Examples — How dollar value is supported — Main questions

Fiat-reserve stablecoin — USDC, USDT, PYUSD — Off-chain assets held against token liabilities — Reserve quality, liquidity, custody, segregation and redemption

Crypto-overcollateralized stablecoin — Protocol-issued collateralized dollars — More than $1 of volatile collateral supports $1 of stablecoin — Collateral volatility and liquidation mechanics

Synthetic dollar — USDe — Crypto collateral plus offsetting derivatives hedge and liquid stable backing — Hedge effectiveness, counterparties, custody, funding and basis risk

What regulation is changing

Regulators have increasingly focused on the same parts of the structure that matter in a redemption event: eligible reserve assets, segregation, liquidity, redemption rights and supervision of the issuer.

MiCA in the European Union treats single-currency stablecoins as e-money tokens and places issuance inside regulated credit-institution and e-money-institution frameworks. In the United States, the GENIUS Act established a federal payment-stablecoin framework in 2025, with implementing rules moving through regulators in 2026.

The direction is toward a narrower set of assets for payment stablecoins and clearer legal claims for holders. That may make regulated payment stablecoins look increasingly similar in their basic reserve architecture even while they continue to differ in distribution, technology and commercial economics.

How to compare two stablecoins

Market capitalization is not enough, and neither is the issuer's description of the token as “fully backed.” A useful comparison can usually be reduced to eight questions.

Question — What to look for

What assets are held? — Specific categories and amounts rather than an undefined “cash equivalents” bucket

How quickly can those assets become dollars? — Cash, maturity profile, market depth and settlement mechanics

Where are they held? — Banks, custodians, funds and other counterparties

Are they separate from the issuer's own assets? — Segregation, trust or bankruptcy-remote treatment

Who can redeem directly? — Eligibility, minimum size, fees, banking hours and expected timing

How often does the issuer disclose reserves? — Current reserve reporting and historical archive

What independent work exists? — Attestations, audited financial statements and regulatory filings

Is it actually fiat-backed? — Distinguish reserve-backed tokens from crypto-collateralized and synthetic structures

What has to keep working for a stablecoin to hold $1

Stablecoins are easiest to evaluate when markets are quiet. The token trades at $1, redemptions are routine and reserve assets are not under pressure.

The structure becomes more visible when one of those conditions changes.

For a fiat-backed stablecoin, the issuer must be able to produce dollars as holders redeem. That requires enough assets, sufficiently liquid assets, access to banks and markets, and a legal structure that makes the assets available for the purpose they were supposed to serve. For a synthetic dollar, the mechanism is different but the practical question is similar: can the collateral and hedge continue to support the promised dollar value when the market becomes difficult?

That is the standard worth applying to any stablecoin reserve disclosure. Not simply whether the issuer says the token is backed, but what the backing consists of, how the holder gets back to cash, and which parts of the mechanism could fail under stress.

Primary sources

1. Circle — USDC reserve composition, weekly disclosures and monthly assurance
2. Circle — USDC circulation and redemption information
3. Circle — Q2 2026 financial results
4. Tether — Q1 2026 attestation and reserve figures
5. Tether — KPMG audit of 2025 financial statements, Aug. 13 2026
6. Paxos — PYUSD reserve and bankruptcy-remoteness disclosures
7. Paxos — PYUSD monthly reports and KPMG attestations
8. Ethena — How USDe works
9. Ethena — Delta-neutral stability
10. Ethena — Funding risk