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Fiat-backed stablecoins are cryptocurrency tokens backed 1:1 by actual fiat currency reserves held off-chain. For every token, an equivalent amount of fiat currency exists as a reserve asset. This differs from crypto-backed stablecoins (backed by cryptocurrency) and algorithmic stablecoins (no underlying collateral). Examples include USDT and USDC.
Stablecoins maintain their peg through continuous minting and redemption. Users deposit fiat to mint tokens; the issuer holds the fiat as reserves. Users redeem tokens to withdraw fiat; the issuer burns tokens and reduces reserves. This bidirectional flow keeps token supply aligned with reserves, maintaining the 1:1 peg.
Reserves include cash held at regulated banks, short-term U.S. Treasury bills, money market instruments, and certificates of deposit. Major issuers increasingly use Treasury bills for their liquidity, safety, and yield. Reserves must be highly liquid and accessible for immediate redemptions.
Custody protects reserve assets from theft or misappropriation, enables regulatory compliance through auditable records, supports continuous proof of reserves, and ensures operational resilience. Without a robust custody infrastructure, reserves cannot be verified, and trust becomes speculative. Strong custody is foundational to stablecoin credibility.
