What Are Stablecoins and What Do They Do

Stablecoins are cryptocurrencies designed to maintain a fixed value—typically one US dollar—by holding equivalent reserves in cash, treasury bills, or other liquid assets. Unlike Bitcoin or Ethereum, which can swing dramatically in a single trading session, a well-managed stablecoin stays predictably at its peg.

This stability has made stablecoins the backbone of crypto trading, cross-border payments, and institutional treasury operations. Below, we'll cover how different types of stablecoins maintain their value, what they're actually used for, and the risks and benefits that matter for professional investors.

What is a stablecoin

A stablecoin is a cryptocurrency designed to maintain a fixed value, usually by pegging to a reserve asset like the US dollar. While Bitcoin and Ethereum can swing 10% in a single day, a dollar-pegged stablecoin aims to stay at exactly $1.00.

The "peg" refers to this fixed exchange rate. When you hold one USDC or one USDT, you can expect it to be worth one US dollar at any given moment. This predictability makes stablecoins useful for payments, trading, and storing value without the volatility that defines most crypto assets.

Think of stablecoins as digital dollars living on a blockchain. They combine the stability of traditional currency with the speed and programmability of cryptocurrency.

How do stablecoins work

The most common stablecoins maintain their peg through reserves. An issuer holds real-world assets—cash, treasury bills, or other liquid instruments—equal to the total value of stablecoins in circulation.

The process works like this:

• Minting: You deposit fiat currency with the issuer, and they create new stablecoins sent to your wallet
• Reserve backing: The issuer maintains assets equivalent to every stablecoin issued
• Redemption: When you want to exit, you return your stablecoins and receive fiat currency back

This create-and-destroy mechanism keeps supply aligned with demand. If too many people sell a stablecoin on the open market and push the price below $1.00, arbitrageurs can buy it cheaply and redeem it for $1.00 worth of reserves. They pocket the difference, and their buying pressure pushes the price back up.

Types of stablecoins

The collateralisation model—what backs the coin—determines how a stablecoin behaves and what risks it carries.

Fiat-backed stablecoins

Fiat-backed stablecoins hold traditional currency reserves in bank accounts or short-term investments. Tether (USDT) and USD Coin (USDC) are the most widely used examples. For every token in circulation, there's a dollar or equivalent sitting in reserve. The backing is straightforward, which explains their popularity.

Crypto-backed stablecoins

Instead of fiat, crypto-backed stablecoins use other cryptocurrencies as collateral. DAI, for instance, is backed by Ethereum and other crypto assets locked in smart contracts.

Because crypto prices fluctuate, these systems require over-collateralisation. You might lock up $150 worth of ETH to mint $100 worth of stablecoins. If ETH drops in value, the system can liquidate your collateral before the stablecoin becomes underbacked.

Algorithmic stablecoins

Algorithmic stablecoins attempt to maintain their peg through code rather than collateral. Smart contracts automatically adjust supply based on demand—minting new tokens when prices rise above $1.00 and burning them when prices fall below.

However, algorithmic stablecoins have a troubled history. The collapse of TerraUSD in 2022 wiped out tens of billions in value when its stabilisation mechanism failed during a market panic.

Commodity-backed stablecoins

Some stablecoins represent ownership of physical assets like gold. PAX Gold (PAXG) is backed by actual gold bars stored in London vaults, with each token corresponding to one troy ounce of London Good Delivery gold.

What do stablecoins do

Stablecoins serve as connective tissue between traditional finance and digital asset markets. Their practical applications span trading, payments, treasury management, and financial access.

Trading and settlement across crypto markets

On cryptocurrency exchanges, stablecoins function as the primary trading pair for most assets. Rather than converting back to fiat between trades—which can take days and incur fees—traders move in and out of positions using stablecoins.

Settlement happens in minutes instead of business days. A trader in Singapore can sell Bitcoin for USDT, wait for market conditions to change, then buy Ethereum—all without touching the traditional banking system.

Cross-border payments and remittances

Sending money internationally through traditional banks involves correspondent banking relationships, multiple intermediaries, and settlement times measured in days. Stablecoins move across borders in minutes with minimal fees.

For remittances, this matters. A worker in Australia can send USDC to family in the Philippines, and the recipient can convert to local currency through a local exchange—often faster and cheaper than Western Union or bank wires.

Corporate treasury and cash management

Businesses increasingly hold stablecoins as part of their treasury strategy. Stablecoins offer the liquidity of cash with the programmability of blockchain, which proves useful for rapid deployment across global markets or automated payment workflows.

A multinational company can hold USDC in a digital wallet and deploy it to any subsidiary worldwide in minutes, without waiting for correspondent banks to process transfers.

Access to decentralised finance

Stablecoins are the entry point for DeFi—decentralised finance—a collection of lending, borrowing, and trading protocols built on blockchain. You can deposit stablecoins into lending protocols to earn yield, use them as collateral for loans, or provide liquidity to decentralised exchanges.

Without stablecoins, DeFi would be far less practical. Nobody wants to take out a loan denominated in an asset that might drop 20% before they can use it.

Store of value in high-inflation economies

In countries experiencing currency instability, USD-pegged stablecoins offer a way to preserve purchasing power. Citizens in Argentina, Turkey, or Nigeria can hold digital dollars without needing a US bank account or passing through capital controls.

All that's required is a smartphone and internet access.

Benefits of stablecoins

Fast transaction speeds

Stablecoin transactions typically settle in minutes, regardless of amount or destination. International wire transfers, by comparison, can take three to five business days and often longer when crossing multiple banking jurisdictions.

Low transaction fees

Moving large sums in stablecoins costs a fraction of traditional banking fees. The same transfer through correspondent banking could incur hundreds in wire fees and foreign exchange charges, plus potential intermediary bank fees along the way.

Global accessibility

Anyone with an internet connection and a digital wallet can hold and transact in stablecoins. There's no minimum balance, no credit check, and no need for a relationship with a traditional bank. This opens financial access to populations underserved by conventional banking infrastructure.

Programmability and platform compatibility

Because stablecoins exist on programmable blockchains, they can integrate with smart contracts. This enables automated payments, escrow arrangements, and complex financial instruments that execute without manual intervention.

Risks of stablecoins

De-pegging events

A stablecoin "de-pegs" when it loses its 1:1 value with the underlying asset. This can happen during market panics, liquidity crises, or when confidence in the issuer erodes.

USDC briefly traded at $0.87 in March 2023 when its issuer disclosed exposure to the failing Silicon Valley Bank. The peg recovered once it became clear the reserves were safe, but the episode illustrated how quickly confidence can shake.

Reserve and issuer transparency

Not all stablecoin issuers provide the same level of transparency about their reserves. Without regular audits or attestations, there's risk that circulating supply exceeds actual backing. Some issuers publish monthly attestations from accounting firms, while others provide less frequent or less detailed disclosures.

Centralisation and counterparty risk

Most major stablecoins are controlled by centralised issuers who can freeze accounts, blacklist addresses, or refuse redemptions. When you hold USDT or USDC, you're trusting a company to honour redemptions and manage reserves responsibly.

This differs fundamentally from holding Bitcoin, where no central party can freeze your funds.

Regulatory uncertainty

Stablecoin regulation varies dramatically by jurisdiction and continues to evolve. New rules could affect how stablecoins operate, who can issue them, and how they're taxed. For institutional users, regulatory clarity—or lack thereof—directly impacts operational planning.

Stablecoins vs Bitcoin and volatile cryptocurrencies

The fundamental difference comes down to purpose. Bitcoin was designed as a decentralised store of value and potential inflation hedge. Its price volatility is a feature for investors seeking appreciation. Stablecoins prioritise predictability over growth potential.

You wouldn't use Bitcoin to pay invoices if you're worried it might drop 15% before your supplier converts it. Stablecoins solve that problem.

Stablecoins vs central bank digital currencies

Central bank digital currencies (CBDCs) are government-issued digital money, while stablecoins are privately issued tokens. The distinction matters for control, privacy, and accessibility.

CBDCs give governments direct visibility into transactions and new monetary policy tools. Stablecoins operate more independently, though major issuers do comply with law enforcement requests and sanctions requirements.

Who uses stablecoins

Institutional investors and funds

Institutions use stablecoins for rapid capital deployment, as a stable base during market volatility, and for efficient settlement between trading venues. When markets move quickly, the ability to deploy capital in minutes rather than days creates meaningful advantages.

Fintechs and payment providers

Payment companies integrate stablecoins to offer faster, cheaper cross-border transfers. The infrastructure costs less to operate than traditional correspondent banking, and settlement times improve dramatically.

Global corporates and multinationals

Treasury teams at multinational companies use stablecoins for supplier payments, intercompany transfers, and liquidity management across jurisdictions. The 24/7 availability and rapid settlement prove particularly valuable for companies operating across time zones.

Retail users in emerging markets

Individuals in countries with unstable currencies or limited banking access use stablecoins to hold dollars, receive remittances, and participate in the global digital economy. For someone in a country experiencing 50% annual inflation, holding USDC represents a practical way to preserve savings.

The biggest stablecoins in the market

• Tether (USDT): The largest stablecoin by market capitalisation, widely used across exchanges globally
• USD Coin (USDC): A regulated, US-based stablecoin known for transparent reserve attestations
• DAI: A decentralised, crypto-backed stablecoin governed by the MakerDAO community
• First Digital USD (FDUSD): A newer fiat-backed stablecoin gaining traction in Asian markets

How stablecoin issuers make money

Stablecoin issuers earn revenue primarily through yield on their reserves. When users deposit $1 billion to mint stablecoins, the issuer invests those reserves in short-term treasury bills and money market instruments. At current interest rates, that generates substantial income—and the stablecoin holder doesn't receive any of it.

Some issuers also charge redemption fees for converting stablecoins back to fiat, though competition has pushed these fees lower over time.

Stablecoin regulation in Australia and globally

Australia's Treasury has been consulting on a regulatory framework for digital assets, including stablecoins. The focus centres on consumer protection, reserve requirements, and licensing for issuers operating in the country.

Globally, the European Union's MiCA regulation establishes clear rules for stablecoin issuers, while the US continues to debate federal legislation. For institutional users, working with compliant partners who understand evolving requirements reduces operational and legal risk.

Accessing stablecoins with institutional confidence

For institutions seeking secure access to stablecoin markets, infrastructure matters. MHC Digital Group's OTC trading desk provides deep liquidity for large stablecoin transactions, with compliant processes designed for professional and institutional clients.

Whether you're managing treasury, settling trades, or building payment infrastructure, working with an experienced partner reduces operational and counterparty risk.

Enquire now to access institutional-grade digital asset services

Frequently asked questions about stablecoins

Are stablecoins safe to hold long term?

Safety depends on the issuer's reserve management and regulatory standing. Fiat-backed stablecoins from reputable issuers with regular audits carry lower risk than algorithmic alternatives. Diversifying across multiple stablecoins can further reduce single-issuer exposure.

Can you earn yield on stablecoins?

Yes, though earning yield requires deploying stablecoins into lending protocols, staking platforms, or centralised yield products. This introduces additional risks—smart contract vulnerabilities, platform insolvency, or counterparty default—that don't exist when simply holding stablecoins in a wallet.

Are stablecoins legal in Australia?

Stablecoins are legal to buy, hold, and trade in Australia. The regulatory framework for issuers and custodians continues to develop, with Treasury actively consulting on appropriate oversight mechanisms.

What happens if a stablecoin issuer collapses?

If an issuer becomes insolvent, redemption may become impossible and the stablecoin could trade well below its peg. Choosing well-regulated issuers with transparent reserves and diversifying holdings helps mitigate this risk.

Do stablecoins pay interest like a savings account?

Stablecoins themselves don't pay interest—they're designed to maintain stable value, not generate returns. However, you can earn yield by lending stablecoins through various platforms, accepting the associated risks that come with those arrangements.