A stablecoin near one dollar is a claim on assets that sit off the chain. For a fiat-backed token, the reserve, the custodian, and the insolvency rule decide whether that claim can be paid.
Minting and redemption change how many tokens exist. The reserve is what sits behind that token. U.S. and European Union rules, as of October 2026, set how those assets are held.
What problem does reserve custody solve?
Reserve custody exists because the token and the dollars are different records. A holder can transfer the token in seconds. The matching assets sit at a bank, a fund, or a custodian.
If the issuer fails, a claim on named accounts is not the same as a general debt of the company. On August 31, 2026, Circle’s examination report listed 73,320,757,305 USDC in circulation. Reserve assets had a fair value of $73,398,532,613.
That report is one issuer’s snapshot. The custody question is which of those dollars other creditors can reach.
What actually happens when reserve assets are held?
For a fiat-backed token, the issuer places reserve assets with a bank, a money market fund, or a custodian. The issuer pays redemptions from those assets.
Circle says most of the USDC reserve sits in the Circle Reserve Fund, ticker USDXX. Circle describes that fund as an SEC-registered 2a-7 government money market fund managed by BlackRock. The same page says the portfolio is custodied at The Bank of New York Mellon.
The fund can hold cash, short-dated U.S. Treasuries, and overnight Treasury repurchase agreements. The August 31, 2026 examination says Circle Internet Financial, LLC owns all of the fund’s equity. The report says that equity is held on behalf of USDC holders.
Fund assets that day were $62,317,374,425. That total included $49,584,000,000 of Treasury repurchase agreements and $11,918,146,195 of Treasury securities.
Cash at regulated financial institutions, outside the fund, was $9,591,096,978. Fair value exceeded circulation by $77,775,308.
Tether counts the company’s assets as the reserve, including assets above any regulatory minimum. BDO’s June 30, 2026 assurance report lists assets of $187,751,426,411 at 11:59 p.m. UTC. Liabilities were $183,641,897,215. Digital tokens issued accounted for $183,622,105,630 of those liabilities.
Cash equivalents and other short-term deposits were $140,642,627,095. U.S. Treasury bills were $114,960,963,604 of that subtotal. The subtotal is below the token liability.
Precious metals were $18,838,357,171. Bitcoin was $5,801,630,681. Public equities were $3,761,438,892. Other investments were $5,244,911,675. Secured loans were $13,453,749,726. Corporate bonds were $8,711,171. Assets exceeded liabilities by $4,109,529,196.
A large redemption draws on the liquid lines first. Overnight repurchase agreements and bank cash can fund a wire sooner than a loan, gold, or Bitcoin. The exchange price can move before that wire settles.
The asset list is what a redemption can draw on that day.
Where the money, risk, and data move
The token ledger, the reserve accounts, and the issuer’s operating cash are three separate records.
Circle’s transparency page says USDC reserves are held for holders and kept separate from operating funds. The examination defines those reserves as the Circle Reserve Fund plus segregated accounts at regulated institutions. Segregated means redemption assets are not the account that pays the issuer’s vendors.
A trust charter is a different legal holder. New York Department of Financial Services guidance from June 8, 2022 covers USD stablecoins from BitLicensees. It also covers limited purpose trust companies chartered under the New York Banking Law. Reserve assets must be segregated from the issuer’s own assets, held for holders, and titled that way.
That guidance limits the reserve to Treasury bills acquired within three months of maturity. It also allows specified overnight reverse repurchase agreements, government money-market funds, and deposits at U.S. chartered banks. The department can cap how much sits at one bank.
In the European Union, Article 36 of Regulation 2023/1114 requires a reserve for asset-referenced tokens. That reserve is legally segregated from the issuer’s estate. Creditors of the issuer have no recourse to it, including in insolvency. Article 37 requires a custodian that is a separate legal person. The custody contract must shield the assets from that custodian’s creditors.
12 U.S.C. § 5909 requires a custodian of payment stablecoin reserves to treat the stablecoins, keys, and cash it holds as the customer’s property. Those assets must be segregated from the custodian’s own assets. The section still allows one pooled account at a bank or trust company. This duty takes effect on the earlier of January 18, 2027, or 120 days after final federal rules.
Cash at a bank is a claim on that bank. A Treasury bill is a claim on the U.S. government, held through a custodian. A loan or a Bitcoin position can change in price before it is sold. Stablecoins are not risk-free cash because those claims can fail on different days.
Holders are paid from the reserve record. The token’s exchange price is a separate number.
What it costs and where it leaks
The issuer keeps the interest on Treasuries and repurchase agreements. Holders redeem at the token’s face amount, not at that interest.
The issuer leaks reserve value when it uses those assets for something other than a redemption. 12 U.S.C. § 5903 comes from the GENIUS Act, Public Law 119-27, enacted July 18, 2025. It bars a permitted issuer from pledging, rehypothecating, or reusing required reserves. The statute allows a limited use to create liquidity for redemptions.
The same section requires identifiable reserves of at least 1 to 1. Permitted assets include currency, demand deposits at an insured bank, and Treasuries with 93 days or less remaining. They also include specified overnight repurchase agreements and government money market funds that hold only those assets. The Code sets the effective date as the earlier of January 18, 2027, or 120 days after final federal implementing rules.
A Federal Reserve Board memo dated September 24, 2026 describes a proposed rule for Board-supervised issuers. The proposal would require reserve fair value to stay at least equal to the par amount of outstanding payment stablecoins. It would also require those issuers to limit uninsured deposits at a small number of banks.
Circle’s August report adjusts balances for timing. Wires after a bank cutoff, and securities that settle later, are reconciling items. A token can be outstanding while the cash is still moving.
Tether’s June 30 report counts secured loans and Bitcoin among reserve assets. Those lines are not overnight cash. The report says it is not the company’s financial statements.
Interest kept by the issuer is a stated cost. Slower assets inside the reserve become a cost when many holders redeem at once.
What can break or delay the process
Redemption breaks when the reserve cannot become cash near par as fast as holders request it. A stablecoin can trade below its stated price during that gap.
On June 30, 2026, Tether’s cash equivalents and other short-term deposits were $140,642,627,095. Token liabilities were $183,622,105,630. Metals, Bitcoin, equities, loans, other investments, and corporate bonds made up the rest. Assets exceeded all liabilities by $4,109,529,196.
A price drop in those other assets shrinks the surplus even if no token is redeemed.
Bank cash above deposit insurance is an uninsured claim on that bank. The September 24, 2026 Federal Reserve proposal would require Board-supervised issuers to mitigate that concentration. It is not a final rule.
Insolvency priority depends on which statute already applies. 12 U.S.C. § 5910 gives holders of a permitted issuer’s payment stablecoins a priority claim on required reserves. Bankruptcy Code section 507(e) qualifies that priority. Those holders rank ahead of the issuer and its other creditors, and they share the priority ratably.
The priority does not apply to claims that do not come from holding the stablecoin. A Code note sets the effective date. The date is the earlier of January 18, 2027, or 120 days after final implementing regulations. Before that date, the charter, the account titles, and the insolvency law that applies set the order.
Reports miss what happens between their dates. Circle publishes reserve holdings each week. A Big Four firm provides monthly assurance, under AICPA attestation standards, that reserve value covers USDC on the report dates. Circle identifies Deloitte & Touche LLP as the auditor of its financial statements since fiscal 2022.
An attestation examines a management assertion at stated moments. A financial-statement audit examines the books over a period.
New York’s June 8, 2022 guidance requires a monthly AICPA examination for a DFS-supervised USD stablecoin. The exam covers the last business day and one random day. An annual attestation covers internal controls. The monthly report must be public within 30 days.
For asset-referenced tokens, Article 30 requires publication of circulation and reserve composition at least monthly. Article 36 requires an independent audit of that reserve every six months.
An on-chain proof of reserves can show token supply and assets in a visible wallet. It does not show a bank balance or a Treasury bill at a custodian.
A dated attestation, an account title, and an insolvency statute each cover a different failure.
