"Reserved" Part 1

Q:  If an issuer defaults, what rights do stablecoin holders have to reserves?

A: Before GENIUS, not much; after GENIUS, not as much as people think.

The GENIUS Act brought some much-needed clarity to the regulation of stablecoins and stablecoin issuers, and to the rights of stablecoin issuers.⁽¹⁾ The proposed rules issued by the OCC and the FDIC will, when finalized, further clarify these issues.⁽²⁾ The GENIUS Act only applies to payment stablecoins, which is what this article discusses.⁽³⁾

But one huge issue remains – what rights do holders have to stablecoin reserves if an issuer defaults? 

I’ve  often heard people say that a stablecoin is “backed” by 1-1 cash reserves so that the holder of the stablecoin has no risk in holding it.⁽⁴⁾ Based on this, people assume that if there’s a problem with the issuer, the holder is entitled to be paid from the issuer’s assets, commonly called “reserves,” and that the reserves are readily available and liquid enough to satisfy all holders should they all need to be paid. This is somewhat true, somewhat false, and usually confused.

While it has never been very clear what “backed” means in these circumstances, the term has been thrown around the industry to somehow mean that because stablecoins are backed by cash, U.S. Treasuries, or other cash-like instruments held in reserve, they are risk-free to the holder in the same as way cash.⁽⁵⁾

This is not true. Cash is the only thing as safe as cash (and cash includes insured bank deposits, the most common form of cash). Everything else, no matter how safe, is at least one step removed. As an example, Treasuries are widely held to be risk-free and are used as collateral for the vast majority of financial transactions on a daily basis.⁽⁶⁾ Treasuries are also the cornerstone of liquidity requirements for banks, as they count as highly-qualified, liquid assets.⁽⁷⁾

And yet, Treasuries are held for an owner (or for whoever they are pledged as collateral) by a third party, often a broker-dealer (or by the Federal Reserve through Fed Direct).⁽⁸⁾ This raises two issues: one, to be used as cash, Treasuries will need to be sold, which opens the owner to price, market, or payment risks (or a combination thereof), and two, the owner faces credit risk should the third party fail or falter, which can be exacerbated by withdrawal requests from the stablecoin issuer. An inability to safely liquidate Treasuries was partially responsible for the failure of Silicon Valley Bank in 2023.⁽⁹⁾

The same holds true with stablecoins – responsible issuers hold cash and cash-like obligations in an amount equal to or greater than the amount of stablecoins issued.⁽¹⁰⁾ These holdings are available to pay stablecoin holders when they need to redeem for cash (or should the issuer fail and all holders need to be redeemed). As with Treasuries, these obligations are held at third-party banks or broker-dealers and must be liquidated to make the payments. Holders are then at risk of failure by these third parties. 

And what rights do they have if the third parties don’t pay out in a timely manner? Very few – before GENIUS is fully implemented, holders only have the right to sue the issuer for payment. It is the issuer that has the right to demand payment from the third parties. If a third party fails, it is the issuer that has the right to claim its assets. And if the issuer fails, holders are just general creditors of the issuer with no rights to the third-party held reserves. To put it plainly, stablecoin holders have no direct rights to “reserves” that “back” the stablecoin issuer’s obligation. As a comparison, holders always have direct rights to their cash held in bank deposits – and this obligation is insured by the federal government through the FDIC up to $250,000 (per account).

GENIUS attempts to solve this problem and partially succeeds – more next post.

1. 12 U.S.C. 5901 et seq. (2025) (The Guiding and Establishing National Innovation for U.S. Stablecoins Act, commonly known as the GENIUS Act).

2. https://www.occ.treas.gov/news-issuances/federal-register/2026/91fr10202.pdf and https://www.fdic.gov/news/financial-institution-letters/2026/notice-proposed-rulemaking-establish-genius-act. 

3. See 12 U.S.C. Section 5901(3) (“Issuance and Treatment of Payment Stablecoins”) and the initial statement of purpose for the Act (“To provide for the regulation of payment stablecoins …”).

4. https://www.brookings.edu/articles/the-rise-of-stablecoins-and-implications-for-treasury-markets/ (“the most popular stablecoins are pegged to the U.S. dollar and backed by reserves of U.S. Treasuries and other assets”); but see https://bpi.com/stablecoins-are-backed-by-reserves-give-us-a-break/ 

5. See https://www.moderntreasury.com/learn/what-are-stablecoin-reserves

6. https://www.federalreserve.gov/econres/feds/files/2020103r1pap.pdf

7. See, e.g., 12 C.F.R. 329.20(a) (2026).

8. https://www.treasurydirect.gov 

9. See https://oig.federalreserve.gov/reports/board-material-loss-review-silicon-valley-bank-sep2023.pdf

https://www.federalreserve.gov/econres/notes/feds-notes/banks-in-the-age-of-stablecoins-implications-for-deposits-credit-and-financial-intermediation-20251217.html