What can a company check before it holds or pays with a stablecoin?

1. Who issues it, and who regulates them?

A fiat-backed stablecoin is a claim on a company, so start with the company.⁶ For example, Circle's USDC Terms, which apply to holders outside the European Economic Area, name the US company that issues USDC, and say it is regulated under US state money transmission laws.¹

Rules now name who may issue. In the US, only permitted issuers may issue payment stablecoins once the GENIUS Act takes effect, with an exception for some regulated foreign issuers.^3,7 In the EU, an e-money token issuer must be a bank or an electronic money institution.⁸ Hong Kong keeps a public register of licensed issuers.⁹

2. Can you redeem directly, and at what cost?

Most holders can't redeem with the issuer; they rely on the market.¹⁰ So ask whether your company can open an account with the issuer, and what that takes.^1,2

Then do the sums. At a fee of 0.1%, redeeming 2,000,000 tokens costs $2,000 and returns $1,998,000. Check for minimums too: Tether's is $100,000.²

The FSB says redemption fees should be clear and proportionate, and that minimum amounts should not unduly restrict redemption.⁴ The GENIUS Act requires issuers to disclose their fees, and MiCA generally bans redemption fees for e-money tokens.^3,8

3. What is in the reserves, and how is it checked?

• Coverage. Divide reserves by tokens in circulation. $1,005 of reserves for 1,000 tokens is 100.5% coverage.¹¹
• Mix. Cash and short-term Treasury bills are not the same as gold, bitcoin or loans. Reserve reports list the categories.^11,12
• Separation. Are reserves kept apart from the issuer's own money? Circle says USDC reserves are held separately from its operating money.^13,11
• Kind of check. An attestation covers set dates; an audit covers a full year of accounts. Proof-of-reserves reports are not audits, PCAOB staff warn.^12,14,5

4. What is the issuer's track record?

Look for past enforcement, and read what was actually found. Tether's record is one example.^15,16

• In February 2021, Tether and the companies that run the Bitfinex trading platform settled with the New York Attorney General's office, neither admitting nor denying its findings.¹⁷ The office said its investigation found that they made false statements about the backing of the tether stablecoin.¹⁶ The settlement required them to stop trading with New Yorkers, pay $18.5 million and, at least once a quarter for two years, publish the categories of assets backing tethers.^16,17
• In October 2021, Tether settled with the US Commodity Futures Trading Commission (CFTC), neither admitting nor denying the findings in its order.¹⁸ The order found that from 2016 to 2019 Tether misrepresented that it held enough US dollar reserves to back every USDT.¹⁵ It found that the cash in Tether's own bank accounts, those in its name or held in trust for it, covered the USDT in circulation on only 27.6% of days in a 26-month sample from 2016 to 2018. Some of the reserves were in other bank accounts.^15,18 Tether was ordered to pay a $41 million penalty.^15,18
• Tether's view: it said it admitted no wrongdoing in the New York settlement, and that there was no finding that it ever issued tokens without backing.¹⁹ It said the CFTC order made no finding that tether tokens were not fully backed at all times, only that the reserves were not all in cash, in a bank account in its own name, at all times.²⁰ The CFTC order itself records Tether's statement that it has not failed to meet a redemption request.¹⁸

5. What if the price breaks?

Ask who would act, and when, if a stablecoin traded below its peg. Fed staff note that in a run, each holder has a reason to move before the others.²¹ In March 2023, USDC redemptions were held up by bank closing hours over a weekend.¹⁰ Circle's terms also warn that operational problems can delay redemptions.¹

Issuers can also freeze tokens. Circle's terms say it can block addresses it links to illegal activity, and may have to freeze USDC if a government authority orders it.¹