Stablecoins look like money, but are they really?

Imagine buying €1,000 worth of Bitcoin. One day later, that Bitcoin could be worth €900 or €1,100. A stablecoin is designed to behave differently. One USDC, for example, is intended to be worth approximately one US dollar.

That is why crypto users hold stablecoins while waiting to make another trade, use them to buy other cryptocurrencies or send digital money to someone else. But what are you actually buying when you hold USDT or USDC? And is it as safe as the euros in your bank account?

A stablecoin tries to maintain the value of an ordinary currency

The word stablecoin combines two English words: stable and coin. It describes a digital token designed to maintain a fixed value.

The best known stablecoins follow the US dollar. One USDT or USDC is intended to be worth approximately one dollar. There are also stablecoins that follow the euro, such as EURC.

Bitcoin works differently. Its price is determined by supply and demand. Its value can change considerably in a single day. A stablecoin is designed to limit those price movements.

According to the International Monetary Fund, the total market value of stablecoins was around $300 billion in August 2026. Almost 99 percent of these tokens were linked to the US dollar. That shows how important the dollar has become within the crypto market.

What does that mean? A stablecoin is a digital asset designed to follow a fixed value. It is not a banknote and it is not automatically a bank deposit. You rely on the issuer, its reserves and the technology behind the token.

USDT and USDC are the best known digital dollars

Not every stablecoin is the same. Its name and issuer determine how it works and which risks come with it.

Here are some well known examples:

USDT stands for Tether and is one of the world's largest stablecoins. USDC stands for USD Coin and is issued by Circle. Both are designed to follow the value of one US dollar.

They differ in their issuer, reserves, reporting and the way holders can redeem them. Circle publishes information about the reserves backing USDC and EURC. Circle says these reserves are held separately from its own company funds and are regularly checked by an independent accounting firm.

EURC is interesting for people who use euros. Its value follows the euro, so it does not carry the same exchange rate exposure as a dollar stablecoin.

There are four main types of stablecoins

Stablecoins use different methods to support their value. This is one of the most important differences between them.

1. Stablecoins backed by money and short term investments

This is the best known type. The issuer receives money and holds reserves, such as bank deposits and short term US government bonds.

Examples include USDT, USDC, EURC, PYUSD and RLUSD. The issuer aims to hold enough reserve value to redeem the tokens it has issued.

You depend on the issuer and the quality of its reserves.

2. Stablecoins backed by other cryptocurrencies

This type is supported by other cryptocurrencies. Smart contracts, which are pieces of software that automatically carry out instructions on a blockchain, manage the system.

DAI and USDS are well known examples in this category. Because the value of a cryptocurrency such as Ethereum can fall, the system often locks up more collateral than the value of the stablecoins it issues.

Imagine that a system issues $100 worth of stablecoins. It might require $150 or $200 worth of crypto as collateral. This creates a buffer against price declines.

3. Stablecoins that track commodities

Some digital tokens follow the price of a commodity, such as gold. PAXG and XAUT are well known gold tokens.

According to its issuer Paxos, one PAXG token represents one troy ounce of physical gold held in storage. A troy ounce is approximately 31.1 grams.

This is not the same as a digital dollar. If the price of gold rises or falls, the token's value changes with it. It is better understood as a digital asset that tracks gold than as a stable payment currency.

4. Algorithmic stablecoins

These try to maintain their value through software and automatic changes in supply. They do not necessarily have an equivalent amount of money or other assets held in reserve for every token.

That may sound efficient, but the system is vulnerable when confidence disappears. TerraUSD, also known as UST, was a notorious example. In May 2022, its system collapsed and the token lost almost all of its value.

The lesson is simple: calling a token stable does not make it stable.

You can use stablecoins to make payments and trade crypto

Why use a digital dollar when you already have euros in your bank account?

Within crypto markets, stablecoins are useful because you do not have to keep transferring money back to a regular bank account. You can sell Bitcoin, for example, and temporarily hold the proceeds in USDC or USDT.

Other uses include:

• Buying and selling crypto without repeatedly transferring euros to a trading platform.
• Sending digital dollars or euros to someone in another country.
• Making payments through a blockchain, sometimes outside normal banking hours.
• Temporarily holding value outside a volatile cryptocurrency.
• Using DeFi, where financial services such as lending and borrowing operate through software on a blockchain.

A blockchain payment can be processed quickly. However, fees depend on the network, how busy it is and which service you use. A cheap transaction is not guaranteed on every token or network.

A stablecoin is not the same as euros in your bank account

This is an important difference. If you have €1,000 in an ordinary bank account, you have a claim against your bank. In the European Union, eligible bank deposits are generally protected up to €100,000 per person per bank by deposit guarantee schemes.

With a stablecoin, you hold a digital token. You depend on the issuer, the reserves and the conditions under which the token can be redeemed. A stablecoin is not automatically covered by bank deposit insurance.

The currency also matters. Imagine that you live in Spain or the Netherlands and exchange €1,000 for a dollar stablecoin. The token may remain worth about one dollar, but the dollar itself can lose value against the euro.

In numbers: You exchange €1,000 for dollar stablecoins. Imagine you receive $1,100. If the dollar then falls 5 percent against the euro, your holdings would be worth about €950 when converted back. The stablecoin stayed close to one dollar, but the exchange rate cost you €50.

A stablecoin is therefore not automatically a better place for your savings. It carries different risks from a bank account.

Stablecoins do not automatically pay interest

An ordinary stablecoin such as USDC or USDT does not automatically pay interest. You hold a digital token designed to follow a fixed value.

Yet online platforms often advertise returns of 3, 5 or even 10 percent on stablecoins. Where does that money come from?

In many cases, you lend your stablecoins to other users or to a platform. That platform pays you a fee. Sometimes the return comes from DeFi protocols, where you make your funds available to a smart contract.

There are risks. The borrower may run into trouble. A platform may fail, a smart contract may contain an error and a loan may not be repaid.

The European Union also has a specific rule. MiCA prohibits issuers and crypto service providers from granting interest on e money tokens. A reward paid simply because you hold such a token for a period of time may also fall under this prohibition.

An advertised return is therefore not the same as interest on a savings account. Always check where the return comes from and who carries the risk.

European MiCA rules determine which stablecoins can be offered

MiCA rules for crypto assets apply across the European Union. Stablecoins mainly fall into two groups.

An e money token follows one official currency, such as the euro or the US dollar. An asset referenced token follows another value or a combination of values.

The rules set requirements for issuers, reserves and redemption. Holders of e money tokens must be able to redeem them from the issuer at face value. The rules also prohibit interest payments on these tokens.

On 8 October 2026, ESMA, the European regulator for securities and markets, clarified that licensed crypto service providers must stop providing services involving stablecoins that do not comply with MiCA.

This may affect which tokens you can buy, sell or hold through a European trading app. A token that is well known worldwide is not automatically available on every European platform.

Always check whether your trading platform is allowed to offer the stablecoin under European rules. Also check the issuer and the redemption conditions.

Ask these questions before using a stablecoin

• Who issues the token and in which country is that company supervised?
• Is it backed by money, government bonds, crypto or an algorithm?
• Where can I see the reserves and the checks performed on them?
• Can I redeem the token directly with the issuer?
• What fees apply when buying, sending and redeeming it?

Stablecoins can be useful for digital payments and crypto transactions, but they are not a risk free replacement for a bank account. This article is for educational purposes only and is not financial advice.

Sources

• International Monetary Fund, Stablecoins: Promise, Risks, and Policy Choices for Emerging Markets, 7 August 2026
• Bank for International Settlements, The next generation monetary and financial system, Annual Economic Report 2025
• European Union, MiCA Regulation 2023/1114, Articles 49 and 50
• ESMA, Supervisory expectations on services related to unauthorised stablecoins, 8 October 2026
• Federal Reserve, Primary and Secondary Markets for Stablecoins, 23 February 2024
• Ethereum.org, Stablecoins
• Circle, Transparency and Stability
• Paxos, Pax Gold