Cryptomaidav Basics
Stablecoins: How They Work, Their Uses and Risks
Digital tokens with a fixed link to the euro or the dollar: how stablecoins aim to hold their value, what they are used for and what MiCA regulates.
Stablecoins are digital tokens whose value is meant to be pegged to a reference asset, usually the US dollar or the euro. They combine the technology of crypto-assets with the aim of a stable value. This article explains which types exist, how they try to hold their price, what businesses and private individuals use them for, what the EU’s Markets in Crypto-Assets Regulation (MiCA) requires, where the risks lie and how stablecoins differ from the planned digital euro.
Three routes to stability
The name describes an aim, not a fixed property. Whether a stablecoin holds its target price depends on what backs it and how reliably the issuer takes tokens back in exchange for money. As long as holders trust that they can get one euro or one dollar back per token at any time, the market price usually stays close to the target. Broadly, three models can be distinguished:
- Reserve-backed: for every token issued, the issuer holds bank deposits or safe, short-term securities in the same currency.
- Crypto-collateralised: other crypto-assets are deposited as collateral, usually with a substantial surplus, to cushion price swings in the collateral.
- Algorithmically managed: software is meant to adjust the supply of tokens so that the price remains stable, without a full reserve behind it.
The market is dominated by tokens linked to the US dollar, most of them reserve-backed. According to the European Central Bank (ECB), dollar stablecoins account for around 99 per cent of the market capitalisation of all stablecoins, while euro stablecoins have so far played only a small role. Crypto-collateralised models work with automated contracts on a blockchain that sell collateral if its value falls too far. Algorithmic models are considered particularly fragile: if confidence wanes, self-reinforcing selling pressure can build up with no reserve to counter it.
What stablecoins are used for
Originally, stablecoins served mainly for trading crypto-assets. Anyone who switches between two crypto-assets, or wants to park funds for a while without leaving the blockchain, uses a stablecoin as a digital equivalent of cash. On many trading platforms they are therefore an important quote currency.
Payments and transfers abroad are a further use. A transfer on a blockchain is possible around the clock and can be completed within minutes, even across national borders. For companies with international suppliers, or for people who send money to relatives abroad, this can reduce costs and waiting times, provided that conversion into the local currency is straightforward on both sides.
A third area is the settlement of tokenised securities. If bonds or fund units are issued as tokens, a means of payment is also needed on the blockchain so that delivery and payment can take place simultaneously. What tokenisation could change in the economy is described in a separate article.
What MiCA regulates
In the EU, the rules of the Markets in Crypto-Assets Regulation (MiCA) on stablecoins have applied since 30 June 2024, and the remaining parts since 30 December 2024. MiCA distinguishes two categories. E-money tokens refer to exactly one official currency, such as the euro. Asset-referenced tokens refer to other values or rights, for example a basket of several currencies or commodities.
Only credit institutions and electronic money institutions may offer e-money tokens to the public. Anyone wishing to issue asset-referenced tokens needs authorisation from the supervisory authority, which in Germany is the Federal Financial Supervisory Authority (BaFin), while credit institutions must submit documents in advance. A crypto-asset white paper containing the key information must be drawn up for every token. Stricter requirements apply to large, so-called significant tokens, and supervision then lies partly or wholly with the European Banking Authority (EBA).
The core of the protection lies in the reserve and redemption. Holders of e-money tokens have a claim against the issuer, which must repay the equivalent value at any time and at par value, in principle free of charge. At least 30 per cent of the funds received must be held in separate accounts at credit institutions, and the remainder in secure, low-risk assets in the same currency. Issuers of asset-referenced tokens must hold a reserve of assets and likewise allow redemption. Neither issuers nor crypto-asset service providers may pay interest on e-money tokens.
| Assumption: tokens issued | 10,000,000 units at €1 each |
|---|---|
| Funds received | €10,000,000 |
| Minimum held in bank accounts (30 %) | €3,000,000 |
| Remainder in secure, low-risk assets | up to €7,000,000 |
| Redemption of 500 tokens | €500, in principle free of charge |
The figures are purely illustrative. What matters is that the issuer can meet redemption requests at any time: part of the reserve is immediately available at banks, and the rest must be saleable without significant discounts.
The risks at a glance
The quality of the reserve is decisive. If the reserves consist of assets that fluctuate in value, or that can only be sold at a discount in a stress situation, the equivalent value for all tokens may no longer be covered. How good a reserve really is depends on transparency, regular audits and supervision.
Then there is issuer risk. Holders have a claim against a company, not against a central bank. If the issuer runs into difficulties, payouts may be delayed. In addition, the market price on trading platforms can temporarily deviate from the target, for instance when many holders want to sell at the same time.
Finally, the same rules do not apply everywhere. In the United States, the GENIUS Act was signed in July 2025 as the first federal law for payment stablecoins; among other things, it requires full backing by reserves. The details differ from MiCA. Whether an issuer is authorised under MiCA can be checked in the register of the European Securities and Markets Authority (ESMA). How tokens can be held securely is explained in the article Wallets and Custody.
Stablecoins and the digital euro
Stablecoins are often confused with the digital euro. The difference lies in the issuer. The digital euro would be issued by the Eurosystem, that is, the ECB together with the national central banks. Like cash, it would be central bank money and thus a claim on the central bank. A euro stablecoin, by contrast, is private money whose value depends on the reserve and the issuer.
The position as of October 2026: the ECB completed its preparation phase in October 2025 and has since been working on the next phase of the project. The legal basis is still missing. The Council of the EU adopted its position in December 2025 and the European Parliament in July 2026, and the institutions have been negotiating ever since. The ECB’s Governing Council intends to decide on issuance only once the regulation has been adopted. A pilot project is planned from the second half of 2027, and the Eurosystem is aiming for a possible first issuance in 2029, provided the regulation is adopted by the end of 2026.
With stablecoins, stability is a promise whose value depends on the reserve and the issuer.
Stablecoins build a bridge between conventional money and blockchain technology. With MiCA, the EU has created rules for reserves, redemption and supervision, but the risks do not disappear as a result. How private stablecoins and a possible digital euro will complement each other in payments also depends on legislation in the coming months. Further terms are explained in the Business Glossary.
Frequently asked questions
Can a stablecoin lose its value?
Yes. The target price is a promise made by the issuer. If the reserve is insufficient, if the issuer runs into difficulties or if a very large number of holders want to sell at the same time, the market price can fall below the target. Algorithmic models without a full reserve are considered particularly fragile. Regulated e-money tokens reduce the risk but do not rule it out.
Is interest paid on e-money tokens?
Not under MiCA. Issuers of e-money tokens may not grant interest, and crypto-asset service providers may not pay interest in connection with e-money tokens either. Interest covers any remuneration or other benefit linked to the length of time the tokens are held. In BaFin’s view, stablecoins are also not suitable for building wealth.
What is the difference between a euro stablecoin and the digital euro?
A euro stablecoin is issued by a private company, in the EU by a credit institution or an electronic money institution. Its value depends on the reserve and the issuer. The digital euro, by contrast, would be central bank money issued by the Eurosystem, comparable to cash in digital form. Whether and when it arrives depends on the ongoing EU legislative process and a subsequent decision by the ECB.
Terms
- E-money token
- A crypto-asset under MiCA whose value is meant to be kept stable by referring to exactly one official currency.
- Asset-referenced token
- A crypto-asset under MiCA that is meant to keep its value stable by referring to other values or rights, such as a basket of currencies or commodities.
- Right of redemption
- The right of the holders of an e-money token to demand that the issuer repay the equivalent value at par at any time.
Sources
- Issuance of tokens under MiCARFederal Financial Supervisory Authority (BaFin)
- Merkblatt Zulassungsanforderungen bzgl. ART und EMT nach MiCAR (in German)Federal Financial Supervisory Authority (BaFin)
- Bitcoin and co.: how crypto-assets are regulatedDeutsche Bundesbank
- FAQs on the digital euroEuropean Central Bank
- From hype to hazard: what stablecoins mean for Europe (ECB Blog, July 2025)European Central Bank
Image: illustration, created with AI.
