What is a stablecoin? Types, risks and the EU's MiCA rules
A stablecoin is a cryptocurrency designed to keep a stable value, usually one US dollar or one euro per token. It does this by holding reserves, such as cash and short-term government bonds, that back every coin in circulation.
Stablecoins let you move money on a blockchain without the price swings of other cryptocurrencies. They are the most used tokens on crypto exchanges, but “stable” doesn’t mean free of risk, and in the EU the rules for them changed completely with MiCA.
What is a stablecoin?
A stablecoin is a digital asset that aims to maintain a stable value by tracking a reference asset, most often a fiat currency like the US dollar. If a stablecoin works as intended, one token can always be swapped for one dollar (or one euro) with the issuer.
That makes stablecoins a bridge between the crypto industry and the traditional financial system. They behave like digital money: you can hold them in a digital wallet, send them anywhere in minutes, and use them in smart contracts, but their price doesn’t jump around like Bitcoin’s.
The best-known examples are Tether (USDT) and USD Coin (USDC), both tracking the dollar. Euro stablecoins exist too, such as Circle’s EURC, but they are still small compared with the dollar ones.
How stablecoins work
Most stablecoins work through a simple promise: the issuer creates new tokens when someone deposits money, and destroys them when someone redeems tokens for money. The reserves held by the issuer should always cover every token in circulation.
Price stability on exchanges comes from arbitrage. If a dollar stablecoin trades at $0.99, traders buy it cheaply and redeem it with the issuer for $1.00, which pushes the price back up. If it trades at $1.01, they create new tokens for $1.00 and sell them. That only works if people trust that the issuer really holds the reserves and will pay out.
Types of stablecoins
There are four main types of stablecoins, defined by what backs them.
Fiat-backed stablecoins
Fiat-backed stablecoins hold reserves in traditional assets: bank deposits, money market funds and short-term treasuries. They are by far the largest group. The quality of the reserves matters: cash and short-term government bonds can be sold quickly, while riskier assets may not be worth their face value in a crisis. Good issuers publish regular reports on their reserves, checked by an accounting firm.
Commodity-backed stablecoins
Commodity-backed stablecoins track the price of a real asset, usually gold. Each token represents a fixed amount of metal held in a vault. Their value is only stable in gold terms, so in euros they move with the gold price.
Crypto-backed stablecoins
These hold other crypto assets as collateral, locked in smart contracts. Because that collateral is volatile, they hold more than they issue, for example €150 of ether for every €100 of stablecoins. If the collateral falls too far, it is sold automatically.
Algorithmic stablecoins
Algorithmic stablecoins try to keep their peg with code and incentives instead of real reserves. They have the worst track record. The best-known collapse is TerraUSD in May 2022, which lost its dollar peg within days and wiped out most of its value, along with its sister token. Treat any stablecoin without real reserves as one of the riskiest, most volatile tokens in crypto, not as a place to park money.
What stablecoins are used for
Stablecoins are used mainly for four things:
- Trading. On crypto exchanges, many pairs are quoted in stablecoins. Traders move into stablecoins to step out of market volatility without cashing out to a bank account.
- Cross border payments. Sending stablecoins abroad is fast and low cost compared with some international bank transfers, which is why they are popular in emerging markets with weak local currencies.
- DeFi. Lending, yield farming and decentralized exchanges rely heavily on stablecoins.
- Saving in dollars. Some people outside the euro area or the US use dollar stablecoins as a store of value when their own currency is unstable.
Stablecoins under MiCA in the European Union
The European Union regulates stablecoins under MiCA, and those rules have applied since 30 June 2024. MiCA splits stablecoins into two categories:
| E-money token (EMT) | Asset-referenced token (ART) | |
|---|---|---|
| What it tracks | One official currency, such as the euro or dollar | Something else, such as a basket of currencies or a commodity |
| Who may issue it | A licensed bank or electronic money institution | An issuer authorised by a national regulator, or a bank |
| Your right | Redeem at face value from the issuer, at any time | Redemption rights set out in the issuer’s rules |
| Interest | Not allowed | Not allowed |
For you, three MiCA rules matter most:
- Only regulated issuers. Stablecoins offered to the public in the EU must come from authorised issuers that hold reserves and publish a white paper. That is why some well-known stablecoins, such as USDT, are no longer offered to EEA customers on many EU exchanges: their issuer is not authorised under MiCA.
- A right to your money back. Holders of an e-money token can redeem it at face value from the issuer. That is your main consumer protection. Stablecoins are not bank deposits, so the €100,000 deposit guarantee doesn’t apply.
- No interest. Issuers and crypto service providers may not pay interest on e-money tokens or asset-referenced tokens. If a platform offers a “yield” on stablecoins, it comes from a separate product such as lending, with separate risks.
The aim of this regulatory framework is financial stability and monetary sovereignty: EU central banks don’t want large dollar stablecoins to replace the euro in everyday payments. In the US, the GENIUS Act of 2025 set out federal rules for payment stablecoins, so regulatory clarity is growing on both sides of the Atlantic.
An example: putting €1,000 into a stablecoin
Say you sell some crypto and want to keep €1,000 on an exchange in stablecoins until you buy again. Two costs and one risk matter:
- Fees. At Kraken, stablecoin pairs cost 0.20% on its order book, so converting €1,000 costs €2.00 (see our Kraken fee guide). Bitpanda builds a 0.99% premium into stablecoin prices instead, so the same €1,000 costs €9.90 there (see our Bitpanda review). Both checked on 23 October 2026.
- Currency risk. A dollar stablecoin is stable in dollars, not euros. If the dollar falls 5% against the euro, your €1,000 in USDC is worth about €950. A euro stablecoin avoids that.
- Issuer risk. If the issuer can’t honour redemptions, the token can lose its peg. Even USDC briefly traded below one dollar in March 2023, when part of its reserves sat at a failed US bank.
Risks of stablecoins
Before you hold stablecoins, know the risks:
- Depegging. The price can fall below its target if trust in the reserves or the issuer disappears.
- Issuer and reserve risk. You depend on one company holding the reserves it claims.
- Frozen funds. Most fiat-backed stablecoin issuers can freeze tokens at specific addresses, for example to fight money laundering and illicit financial activity.
- Platform risk. Stablecoins held on an exchange carry the exchange’s risk too. Lending them out for interest adds the borrower’s risk.
The bottom line
A stablecoin is a crypto token that tracks a currency, backed by reserves the issuer holds. In the EU, MiCA now decides which stablecoins licensed platforms may offer, gives e-money token holders a right to redeem at face value, and bans interest. Use stablecoins for moving and parking money, prefer regulated issuers, and remember that a dollar stablecoin still carries currency risk for anyone who spends in euros. Read more about the rules in our page on crypto regulation and about the currencies behind them on fiat.
Related terms
Questions people ask
Is a stablecoin a good investment?
No, not in the usual sense. A stablecoin is designed to keep the same value, so it doesn't grow. People hold stablecoins to move money, park funds between trades or pay, not to earn a return.
Is Bitcoin a stablecoin?
No. Bitcoin's price moves freely with supply and demand and can swing sharply. A stablecoin is built to track a fixed reference, such as one euro or one dollar.
What is EURC?
EURC is a euro stablecoin issued by Circle, the company behind USDC. Each token aims to be worth one euro and is backed by euro reserves.
Can I earn interest on stablecoins in the EU?
MiCA bans issuers of e-money tokens and crypto service providers from paying interest on them. Some platforms offer separate lending or Earn products instead, which carry the risk that the borrower or platform fails.
Are stablecoins covered by the deposit guarantee?
No. Stablecoins are not bank deposits, so the €100,000 deposit guarantee doesn't apply. Under MiCA, holders of e-money tokens have a right to redeem them at face value from the issuer instead.