Stablecoins are blockchain tokens pegged to a stable reference value — overwhelmingly the US dollar, with small markets for euro, sterling, and gold-pegged variants. They serve as the foundational settlement layer for all tokenized asset markets: every tokenized bond trade, every PE fund subscription, every Treasury yield distribution ultimately settles in stablecoins. Without stablecoins, tokenized finance cannot operate as a closed-loop system. Total stablecoin circulation reached $220B+ as of early 2026, representing one of the most consequential financial innovations of the past decade.
Types of Stablecoins
Fiat-backed (centralized): The dominant and institutionally preferred model. A regulated entity holds US dollars (or dollar-equivalent assets) equal to 100% or more of tokens in circulation. USDC (Circle), USDT (Tether), and PYUSD (PayPal) are the major examples.
Crypto-backed (decentralized): Smart contracts hold cryptocurrency collateral — typically ETH or other established tokens — at 150%+ of the stablecoin supply, providing a buffer against collateral price declines. DAI (issued by MakerDAO, now rebranding to SKY) is the most established example with $5B+ in circulation.
Algorithmic: Use protocol mechanics (token burns, minting, seigniorage) to maintain peg without full collateral backing. TerraUSD (UST) was the largest example — its collapse in May 2022 destroyed $40B in market value within days and eliminated investor confidence in uncollateralized algorithmic stablecoins. No major algorithmic stablecoin has recovered credibility.
USDC: The Institutional Standard
Circle’s USD Coin (USDC) has established itself as the institutional standard for compliant stablecoin settlement. Key attributes: 100% backed by cash and short-term US Treasuries, reserve composition published monthly with Deloitte attestation, held in segregated BlackRock-managed money market funds, issuer (Circle) pursuing bank charter. USDC is available natively on 15+ blockchains including Ethereum, Solana, Polygon, Avalanche, and Base.
USDC settles $10B+ daily and is the primary settlement currency for institutional DeFi, tokenized Treasury products, and cross-border payment networks. Circle’s compliance posture — including freezing $100M+ in USDC wallets sanctioned by OFAC — demonstrates a willingness to cooperate with US regulatory requirements, distinguishing it from competitors.
USDT: Scale with Controversy
Tether’s USDT circulates at $140B+ — more than three times USDC — and dominates emerging market dollar usage in Southeast Asia, Latin America, and Eastern Europe. Tether Holdings Limited is based in the British Virgin Islands and domiciled in El Salvador. Reserve disclosures have historically been incomplete: Tether settled with NYAG in 2021 for $18.5M over misleading reserve representations. Current attestations show USDT backed by US Treasuries, repo, and money market funds, but independent audit (vs. attestation) has not been completed.
Tether’s compliance with the GENIUS Act as currently drafted is unclear: the Act would require issuers to hold reserves 1:1 in eligible liquid assets and be subject to US regulatory oversight. If GENIUS passes, Tether faces a choice between structural reform or exiting the US market.
PayPal USD (PYUSD)
PayPal launched PYUSD in August 2023, initially on Ethereum and subsequently on Solana. Issued by Paxos Trust Company (NYDFS-chartered), backed by dollar deposits and short-duration Treasuries. PYUSD grew to $500M+ in circulation, with PayPal integrating it across its 400M-user payment platform. Primarily used for PayPal’s crypto checkout features and remittances.
The GENIUS Act
The Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act) is bipartisan legislation establishing the first comprehensive US stablecoin regulatory framework. Key provisions: 1:1 reserve requirement in eligible liquid assets (US Treasuries, cash, Fed deposits), licensing requirement for issuers above $10B in circulation (federal or state license), prohibition on algorithmic non-backed stablecoins, consumer protection requirements. Expected passage in 2026.
Why Stablecoins Are Foundational to Tokenization
Tokenized assets denominated in fiat must settle in fiat-equivalent. A Treasury bond paying 5.2% in dollars cannot distribute yield in bitcoin or ETH without introducing currency risk. Stablecoins solve this: distributions, subscriptions, redemptions, and secondary trades all settle in USDC or equivalent — creating a complete on-chain dollar ecosystem. This is why every major tokenized Treasury product, PE fund, and corporate bond product is denominated and settled in USDC.