Stablecoins and Private Law

What Is a Stablecoin?

Stablecoins are digital assets issued on public blockchain networks that are designed to maintain a stable price relative to a reference asset, most commonly the United States dollar but also other fiat currencies such as the euro and, less commonly, precious metals such as gold.¹ Unlike volatile cryptocurrencies such as Bitcoin and Ether, whose prices are driven primarily by supply and demand and market sentiment, stablecoins pair the price stability of traditional currencies with the technological advantages of distributed ledger technology, including disintermediation, cryptographic security, and programmability.² From approximately $1 billion in circulation in 2019, stablecoin issuance is projected to reach up to $4 trillion by 2030, and these instruments have emerged as “a serious contender for a place within the hierarchy of money,” with major payment providers including PayPal, Visa, and Western Union actively incorporating stablecoins into their product portfolios and leading financial institutions such as Fidelity and Citi seeking to introduce their own.³

Stablecoins serve multiple functions within the financial system. Their original and still predominant use is as a base currency for trading other digital assets. Over time, they have also become the preferred settlement medium in decentralized finance protocols, facilitate billions of dollars in cross-border payments annually, are used as an inflation hedge in economies with weaker domestic payment systems, and, on a small but growing scale, are accepted in retail transactions.⁴ This growing economic significance has prompted regulatory responses on both sides of the Atlantic, culminating in the European Union’s Markets in Crypto-Assets Regulation (MiCAR) and the United States’ Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), enacted in July 2025.⁵

One distinction runs through every question addressed below: whether the stablecoin is centralized or decentralized. Centralized stablecoins are issued by identifiable companies such as Tether, Circle, and PayPal; decentralized stablecoins are controlled by autonomous software protocols such as MakerDAO. Centralized stablecoins dominate the market, but the decentralized variants raise distinct legal challenges that are noted where relevant.

What Are the Different Types of Stablecoins?

There is no universally agreed-upon definition of a stablecoin. From a legal perspective, however, stablecoins can be decomposed into three constitutive elements, each with distinct private law implications: the issuer, the peg, and the stabilization mechanism.⁶ Taxonomies drawn from computer science and economics serve other purposes; this one governs the analysis of the rights, obligations, and risks of stablecoin holders.

The majority of stablecoins are centralized, controlled by a single, identifiable entity that issues them.⁷ Tether’s USDT is issued by Tether International, S.A. de C.V., a company that migrated from the British Virgin Islands to El Salvador. Circle’s USDC is issued by Circle Internet Financial, LLC, a Delaware limited liability company.⁸ Centralized issuers retain complete control over the design, creation (minting), destruction (burning), and operation of their stablecoins, and “these entities constitute identifiable counterparties with which coinholders can interact pursuant to publicly available terms of service and, possibly, enter into a contractual relationship with defined rights and obligations.”⁹ Private law therefore has a party to address.

Not all stablecoins, however, have an identifiable issuer. Decentralized stablecoins are controlled by software protocols, bundles of interconnected smart contracts deployed on distributed ledger networks such as Ethereum. These protocols create stablecoins and manage every aspect of their operation automatically, pursuant to their code.¹⁰ DAI supplies the principal example in the research examined here. Its MakerDAO architecture operates through a protocol without legal personhood. Users interact exclusively with code rather than corporate counterparties. Updates and modifications to the protocol are effectuated through voting by holders of a separate governance token (MKR).¹¹ If such a stablecoin collapses, coinholders face substantial difficulties identifying persons who owe enforceable duties. The absence of an identified redemption debtor does not itself foreclose claims under default entity rules or other applicable law; these difficulties are examined in the section on decentralized stablecoins below.¹²

Almost all stablecoins are pegged to either a currency or a precious metal. The United States dollar is overwhelmingly the most common choice, constituting, as of 2022, 99% of the market capitalization of fiat-pegged stablecoins.¹³ Gold-pegged stablecoins such as PAXG and XAUT also exist, though their market capitalization is significantly smaller.¹⁴

Three stabilization mechanisms are prevalent. Reserve-backed issuers such as Tether and Circle hold pools of valuable assets and commit to mint and redeem stablecoins at a predetermined rate, typically one token for one dollar.¹⁵ Dual-coin structures link a primary stablecoin to a secondary coin designed to absorb volatility.¹⁶ Algorithmic designs adjust the supply of stablecoins in circulation to counteract price swings.¹⁷ The mechanics of each are examined in the next section, and the failure record of the latter two in the section on algorithmic stablecoins.

How Do Stablecoins Maintain Their Peg?

Centralized, reserve-backed stablecoins represent the dominant model, and their stabilization mechanism operates through economic arbitrage.¹⁸ Issuers hold large asset pools and undertake to supply one stablecoin to eligible customers who tender one dollar and, conversely, to redeem each stablecoin for one dollar. When the market price of a stablecoin dips below one dollar, arbitrageurs purchase tokens in the open market and redeem them with the issuer for one dollar, netting a profit and contracting supply until the price recovers. When the market price rises above one dollar, arbitrageurs mint new tokens from the issuer and sell them at a profit, expanding supply and lowering the price.¹⁹

This mechanism is not novel; it can be traced to seventeenth-century European banks that issued deposits backed by precious metal coins, and it underpinned the Bretton Woods accord.²⁰ Its viability “is dependent on market participants trusting that the issuer has sufficient resources to honor its commitment to mint and, especially, redeem stablecoins at the predetermined rate”; it follows that “the contractual terms pursuant to which issuers promise to perform these operations and manage their reserves are key.”²¹ Those terms are drafted by the issuer alone.

Transaction fees can blunt this stabilization mechanism. For example, Tether charges a 0.1% fee for minting and the greater of $1,000 or 0.1% for redemption, with $100,000 minimum thresholds.²² Arbitrageurs will act to correct price deviations only to the extent that the spread exceeds total fees; a 0.2% total fee thus creates a floor below which the arbitrage mechanism does not operate.²³

Dual-coin stablecoins operate on an altogether different principle. Rather than backing the primary coin with reserves, the design pairs it with a secondary coin engineered to absorb price volatility. Holders can exchange one primary token for a fixed dollar value of the secondary token, so that arbitrage operates against the floating market value of the volatility coin rather than against an asset reserve. The viability of this mechanism is wholly dependent on the secondary coin retaining value; the catastrophic failure record of the design is examined in the section on algorithmic stablecoins below.²⁴

Purely algorithmic stablecoins such as Ampleforth take yet another approach, adjusting the total supply of tokens in circulation to counteract price deviations rather than relying on backing assets or a secondary coin. The protocol expands the supply when prices rise above the peg and contracts it when prices fall, on the model of a quasi-central bank.²⁵

For decentralized stablecoins such as DAI, the peg is maintained by autonomous code rather than by an issuer holding reserves. Users deposit volatile digital assets such as Ether into non-custodial vaults controlled by the smart contracts of the protocol and can generate DAI up to a predetermined percentage of the value of those locked assets.²⁶ The specific ratios vary by asset type and are established through governance; for example, a user depositing $1,000 worth of Ether might be able to generate up to $750 worth of DAI. Because the value of the locked assets always exceeds the value of DAI generated, the system maintains a surplus that serves as a buffer against price volatility. If the market value of deposited assets declines below a safety threshold, the protocol automatically seizes and auctions them, with the proceeds burned to reduce the DAI supply and maintain the peg.²⁷ No issuer stands behind this process; it is purely algorithmic.

Despite the prevalent use of words such as “collateral,” “collateralized debt position,” and “foreclosure” to describe this mechanism, no secured transaction in the legal sense is created. There is no lender, no borrower, no security interest, no perfection, and no foreclosure proceeding. The imprecise terminology is regrettable and a source of considerable confusion in the academic literature and in policy debates, because a so-called “collateralized debt position” in fact “creates neither collateral rights nor debt obligations (merely exposure to autonomous code executing without recourse).”²⁸

Are Stablecoins Money?

Privately issued stablecoins are not United States legal tender. Acceptance generally depends on agreement between the parties.

“Money,” however, is a much broader concept than legal tender. Modern economies rely on a heterogeneous set of instruments that perform monetary functions without being legal tender. Bank deposits, electronic-money balances held with providers such as PayPal or Cash App, and money-market-fund shares perform monetary functions to differing degrees, yet none of them carries legal-tender status. Stablecoins belong somewhere on the same continuum, and the material question is how far along it they sit. The relevant analytical concept is “moneyness,” which “captures the degree to which an instrument’s legal and institutional architecture enables it to perform monetary functions.”²⁹

The conventional definition of money looks to three characteristic features: a unit of account, a store of value, and a medium of exchange.³⁰ These functional definitions, however, describe what money does, not what money is, and they do not explain how something becomes money. A decisive yet undertheorized dimension is the capacity of an instrument to operate effectively within the domain of private law.³¹

The moneyness framework developed in the Article comprises four constitutive elements. The first and foundational element is the nature and substance of the claim, the legal right the holder possesses. Public money is sui generis; Federal Reserve notes and central bank reserves constitute money rather than evidencing a right to receive it.³² Private money “consists of claims issued by non-sovereign institutions, with the holder acquiring a personal right against an identified obligor.” Bank deposits and claims against centralized stablecoin issuers belong to this category.³³ The second element is safety, whether the issuer is likely to honor its undertakings and what recovery holders can expect if it fails.³⁴ The third is discharge capacity, whether creditors will accept the instrument in satisfaction of obligations and whether transfers achieve legal finality.³⁵ The fourth is negotiability, whether recipients can take the instrument free of competing claims and defenses, permitting circulation without inquiry into provenance.³⁶

Moneyness is a matter of degree: “the four contribute multiplicatively, and the whole is neither their sum nor their average.” Excellence in one element cannot fully compensate for weakness in another.³⁷ The analysis identifies deficiencies across the legal architecture of centralized stablecoins.

Stablecoins occupy an unambiguous position in the monetary hierarchy: they are private money. The GENIUS Act makes this classification explicit, providing that it is unlawful to represent that payment stablecoins are backed by the full faith and credit of the United States or subject to federal deposit insurance.³⁸ Measured against these four elements, stablecoins in their current legal and institutional configuration exhibit a relatively low degree of moneyness. The GENIUS Act brings genuine improvements yet fails to resolve critical deficiencies across safety, discharge capacity, and the legal nature of the redemption claim.³⁹

Decentralized stablecoins confront deficiencies across the moneyness framework. The absence of an identifiable issuer deprives holders of contractual redemption claims and issuer-backed reserve protection, even where property law recognizes the tokens and regulates their transfer.⁴⁰

What Is the Difference Between a Stablecoin and a Bank Deposit?

A bank deposit is a contractual debt claim representing an unsecured personal right to receive a determinate monetary sum from the depositing bank.⁴¹ Though formally an unsecured claim, bank deposits are transformed into near-equivalents of public money by four interlocking layers of legal protection: federal deposit insurance guaranteeing accounts up to $250,000; access to Federal Reserve liquidity facilities during stress; prudential supervision, including capital and liquidity requirements; and a tailored FDIC resolution regime outside ordinary bankruptcy that prioritizes rapid depositor recovery.⁴² These protections render bank deposits informationally insensitive; holders can accept them at par without investigating the financial condition of the issuing bank.⁴³ Uncertainty about issuer performance and recovery requires holders to investigate and discount claims. “[n]either exercise is compatible with an instrument that is intended to be exchanged at par, sight unseen.”⁴⁴ What places bank deposits beyond that inquiry is the four layers, not the contractual form of the claim.

By contrast, a centralized stablecoin does not benefit from the same protective architecture. The GENIUS Act explicitly denies federal deposit insurance to stablecoin holders.⁴⁵ Typical stablecoin issuers cannot hold reserves directly at the Federal Reserve and must rely on private custodians, although eligibility for a master account may differ for entities such as uninsured national trust banks. This dependence became evident in March 2023 when the weekend failure of Silicon Valley Bank drove USDC below par; the episode is examined in the section on systemic risks below.⁴⁶ While the GENIUS Act introduces reserve requirements and custody rules, it does not replicate the prudential supervision that governs bank operations, and its bankruptcy provisions suffer from internal contradictions, examined in the section on issuer insolvency.⁴⁷ Prudent holders must therefore assess the soundness of both the issuer and its reserve custodians before accepting payment, a burden incompatible with the basic function of money as an instrument accepted at face value without investigation.⁴⁸

Not one of these four layers is present in a decentralized stablecoin. There is no issuer to assess, no issuer-held reserve pool, and no deposit insurance. Holders lack a contractual counterparty against whom to enforce redemption.⁴⁹

What Is the Difference Between a Stablecoin and Electronic Money?

Electronic money (e-money) is the balance held in a digital wallet with a provider such as PayPal or Cash App, and it shares important characteristics with stablecoins. Both are non-bank payment claims, contractual obligations of non-state, private institutions evidencing a right to receive value.⁵⁰ Both lack the layered safety architecture that transforms bank deposits into near-equivalents of public money. Both, moreover, present heterogeneous legal frameworks that vary by provider and jurisdiction.⁵¹

Stablecoins nevertheless differ from traditional e-money in several material respects. First, acceptance of non-bank payment claims depends on private ordering and “seldom extends beyond the issuer’s ecosystem.” Transfers of e-money balances ordinarily require the involvement of the provider.⁵² By contrast, stablecoins transfer on public blockchain networks without requiring the provider’s involvement. Second, e-money providers in the European Union are subject to the Electronic Money Directive, which imposes specific safeguarding requirements and grants holders a statutory right of redemption at par value at any time, protections that the EU has extended to stablecoins through MiCAR’s e-money token (EMT) category.⁵³ Third, though governed by heterogeneous provider-specific terms, the legal relationship between an e-money holder and the provider is always contractual; privity exists. For stablecoins, the vast majority of holders acquire their tokens on secondary markets rather than directly from the issuer and have no contractual relationship with the issuer whatsoever.⁵⁴

Under MiCAR, stablecoins pegged to a single fiat currency are classified as EMTs and subjected to the electronic money regulatory framework, including unconditional redemption rights, a prohibition on redemption fees, and strict liability for misleading disclosures.⁵⁵ The GENIUS Act takes a different approach, creating a unified “payment stablecoin” category defined by functional redeemability rather than by analogy to e-money.⁵⁶

How Are Stablecoins Regulated Under the GENIUS Act?

Enacted on July 18, 2025, the GENIUS Act establishes a federal framework for payment stablecoins. Section 20 postpones its general effective date until the earlier of January 18, 2027, or 120 days after final implementing regulations are issued. The analysis below concerns the enacted framework; enactment does not itself establish that every protection is already operative.⁵⁷ The Act establishes a unified category of “payment stablecoins” and creates a permission structure for their issuance and growth; the term denotes digital assets designed to maintain stable value relative to a reference asset and readily redeemable for fiat currency.⁵⁸ Yet “the success of these public law interventions critically depends on how well they address the fundamental private law deficiencies that have developed largely unchecked in the current stablecoin market.”⁵⁹ The Act reaches some of those deficiencies and leaves others untouched.

Six requirements carry the weight of the statute: mandatory one-to-one reserve backing with high-quality assets; restrictions on reserve reuse, subject to statutory exceptions; segregated custody with qualified custodians; redemption requirements whose private-law characterization remains unsettled; disclosure requirements for redemption procedures and fees; and novel bankruptcy protections, including reserve exclusion from the estate, universal holder standing, and super-priority for reserve shortfalls.⁶⁰

The Act creates parallel regulatory tracks; state-licensed issuers operate under state supervision, while federally licensed issuers may obtain charters from the Office of the Comptroller of the Currency.⁶¹ Both bank and non-bank entities may issue payment stablecoins, provided they satisfy applicable requirements.

The statutory definition effectively excludes algorithmic stablecoins that lack reserve backing, as well as decentralized protocols that lack identifiable issuers.⁶² For both categories, the Act mandates future Treasury Department studies rather than imposing substantive regulation.⁶³

What Kind of Property Is a Stablecoin Under Private Law, and What Legal Rights Does a Stablecoin Holder Have Against the Issuer?

Two distinct things must be kept apart, the stablecoin token itself and any rights that may be linked to it. The GENIUS Act leaves the relationship between them unresolved, and the private ordering beneath it offers little reassurance, for “the private ordering structures underlying stablecoins are among the most poorly constructed and problematic across the entire digital assets landscape.”⁶⁴ The legal treatment of the token supplies the starting point.

Where the 2022 amendments to the Uniform Commercial Code apply, a stablecoin token can qualify as a controllable electronic record (CER) if it satisfies the statutory control requirements and falls outside the excluded categories.⁶⁵ Article 12 governs transactions in qualifying tokens; ownership still depends on applicable property law and the circumstances of acquisition. The qualifying purchaser rule under Section 12-104(e) provides that a person who obtains control of a CER for value, in good faith, and without notice of conflicting claims acquires the CER free from any adverse property claim.⁶⁶ The token itself is therefore genuinely negotiable.

The principal difficulty concerns the redemption right, the claim to receive one dollar from the issuer. Where the right remains separate from the token, it is subject to a different private law regime.⁶⁷ Under the issuer terms of service that predate the GENIUS Act, the redemption right is a contractual claim governed by the ordinary rules for the assignment of contract rights. Assignees take subject to all defenses, claims, and setoffs that the issuer could assert against the assignor.⁶⁸ A transferee might therefore obtain clean title to the stablecoin token under Article 12 while simultaneously acquiring a redemption right subject to issuer defenses arising from the conduct of prior holders.⁶⁹

Before the GENIUS Act, the framework was two-tiered and more restrictive still. The issuer figures reported in the September 2026 manuscript were 819 verified customer accounts worldwide for Tether and approximately 1,834 Circle Mint accounts.⁷⁰ The vast majority of holders acquired their tokens on secondary markets and stood in no legal relationship with the issuer, possessing stablecoin tokens as personal property under Article 12 yet maintaining no contractual privity and consequently no direct redemption claim.⁷¹ Attempts by issuers to bind such holders through terms of service fail at the threshold of contract formation, for “[i]t is untenable . . . to suggest that a person, merely by holding and using USDC, can be deemed to have consented to terms they have never been presented with.”⁷²

The GENIUS Act defines a payment stablecoin as a digital asset whose issuer “is obligated to convert, redeem, or repurchase for a fixed amount of monetary value,” but does not resolve whether this obligation is embedded in the token or remains separate.⁷³ Two constructions are possible.

Under the first construction, the GENIUS Act tokenizes the redemption right, embedding it in and rendering it inseparable from the digital asset itself. The redemption right runs to whoever controls the stablecoin, following the model of negotiable instruments where the holder possesses enforcement rights.⁷⁴ This construction would facilitate the use of stablecoins as negotiable instruments, with the qualifying purchaser protections of Article 12 shielding both the token and the redemption right.

Under the second construction, the token and the redemption right remain two distinct things governed by different legal regimes. If the redemption right is contractual, the status quo would persist; the right would run only to the issuer’s contractual counterparty. If statutory, the right would run to whomever the statute is deemed to benefit, but whether that is the owner or the controller of the stablecoin remains unspecified.⁷⁵

The first construction enables true negotiability and allows the token to function as a complete monetary instrument carrying its value-realization mechanism within itself; the second introduces complexity and uncertainty into every stablecoin transaction.⁷⁶ On policy grounds, the first construction is preferable, for it preserves the unitary character of the stablecoin and permits its circulation as a coherent monetary instrument. Whether courts will adopt this construction, however, remains an open question. The Act nowhere provides for tokenization expressly, and “[t]okenization cannot be implied: to embed a right in a thing so that it passes with control is to fashion a new form of property, and the principle of numerus clausus holds that such forms exist only where expressly recognized in law.”⁷⁷ The gap is one that only Congress can close.

Decentralized stablecoins such as DAI lack an identified contractual issuer undertaking to redeem their tokens. A protocol operation resembling redemption does not itself establish an enforceable payment claim. Default entity rules and other applicable law may nevertheless impose duties on participants, so the absence of a contractual redemption debtor does not establish the absence of all legal recourse.⁷⁸

Does a Stablecoin Holder Have a Property Right in the Issuer’s Reserves?

Before the GENIUS Act, the representations issuers made about their reserve holdings fell on a spectrum ranging from custodial arrangements that might shield reserves from creditor claims to clear indications that reserves were issuer property.⁷⁹ At one end stood Gemini and Paxos, both organized as New York limited trust companies, which made the strongest assertions that reserves might be excluded from their bankruptcy estates. At the other end, Tether’s terms of service made clear that reserves were within its “sole control and at the sole and absolute discretion of Tether” and that the redemption right was “a contractual right personal to [the coinholder],” language indicating no proprietary interest in reserves.⁸⁰ After initially providing ambiguous signals, Circle amended its user agreement in June 2022 to disclaim broadly any trust, fiduciary, or qualified custodian status.⁸¹

The GENIUS Act transforms this framework through amendments to the Bankruptcy Code. The Act excludes required reserves from the debtor’s estate entirely, creating complete bankruptcy remoteness.⁸² It ensures that all stablecoin holders have standing in bankruptcy proceedings, including secondary market holders without contractual privity.⁸³ The Act further grants holders priority over all other creditors with respect to reserves, together with a super-priority for any reserve shortfall over the issuer’s entire estate, including administrative expenses.⁸⁴

However, the Act does not grant holders direct proprietary rights in reserves, which “remain issuer assets, albeit segregated.”⁸⁵ The underlying debtor-creditor relationship is thus preserved, “a distinction that becomes critical if reserves lose value or operational failures prevent access to segregated assets.”⁸⁶ The internal contradictions of these bankruptcy provisions, and the preferable alternative to them, are examined in the section on issuer insolvency below.

No reserves exist to be claimed where the stablecoin is decentralized. Assets are locked in non-custodial smart contract vaults by the users themselves, and no entity holds or controls them on behalf of anyone. The automated seizure and auction mechanisms of the protocol operate without consent or legal authorization in the traditional property-law sense, creating profound uncertainties regarding the validity of transfers.⁸⁷

How Are Stablecoins Transferred Under Private Law?

Stablecoins can transfer either peer-to-peer on public blockchain networks or through centralized platforms such as Coinbase, Gemini, and Kraken; for neither route has the law supplied the finality rules that govern other payment forms.⁸⁸

Stablecoin payments generally depend on the agreement of the counterparty rather than on the federal legal-tender rule.⁸⁹ Acceptance is therefore a matter of transaction-by-transaction negotiation rather than of public mandate. The reliance on private ordering for acceptance is further complicated by the fragmentation of the underlying blockchain infrastructure. Stablecoins issued on Ethereum cannot simply be transferred to a creditor with a Solana wallet without bridging mechanisms that introduce additional costs and security risks.⁹⁰

The GENIUS Act supplies no coordinated rules for stablecoin payment finality, “the point at which the payor’s obligation to the payee is extinguished and the transaction is closed to subsequent challenge.”⁹¹ For peer-to-peer transfers, the more coherent rule would be that transfer of control under UCC Article 12 effects discharge of the payor’s obligation, extending the logic that control of a controllable electronic record is the functional equivalent of possession of a tangible asset.⁹² For intermediated transfers, no equivalent to UCC Article 4A exists for stablecoin intermediaries, which vary dramatically from regulated domestic exchanges to offshore platforms to decentralized finance protocols controlled by decentralized autonomous organizations (DAOs).⁹³ In consequence, “[s]tablecoins have neither a statutory acceptance mandate nor finality rules, and the GENIUS Act entirely disregards these issues.”⁹⁴ Parties must allocate that risk by contract, one payment at a time.

How Does UCC Article 12 Apply to Stablecoins?

Stablecoins that meet the statutory control requirements and fall outside the exclusions can qualify as controllable electronic records under UCC Article 12, adopted in 2022.⁹⁵ Article 12 governs the token itself, the electronic record stored on the blockchain. Article 12 also provides rules for controllable accounts and controllable payment intangibles. Other linked rights remain governed by other law; the treatment of a redemption right therefore depends on its legal structure.⁹⁶

The distinction determines what a transferee actually acquires. Under the qualifying purchaser rule examined above, a transferee who obtains control of the token in the prescribed circumstances takes it free from any adverse property claim.⁹⁷ The redemption right may not benefit from the same protections where it remains a separate asset under a different legal regime. The consequence is that “stablecoin transferees may take clean title to the token under Article 12’s qualifying-purchaser rule, yet they do not know whether they are also acquiring the redemption right, and if so, whether free of the claims against prior holders.”⁹⁸

This asymmetry should be resolved by explicit statutory recognition that the redemption right is embedded in the token, such that control of the stablecoin under Article 12 carries with it the entitlement to demand redemption, on the model of negotiable instruments discussed above.⁹⁹ The doctrinal mechanics of control, transfer, and priority under Article 12 belong to that framework and are set out on the companion research page on UCC Article 12 and Controllable Electronic Records.

Can Stablecoins Be Used as Collateral in Secured Transactions?

Under the 2022 UCC amendments, stablecoins that qualify as controllable electronic records can serve as collateral within the secured transactions framework of Article 9. Perfection can proceed by either of two routes, the filing of a financing statement in the relevant public registry or the taking of control of the CER.¹⁰⁰ Control-based perfection dispenses with public filing. Under Section 9-326A, a secured party that perfects by control has priority over conflicting security interests held by secured parties without control; the provision “establishes a nontemporal priority rule, creating an exception to the general first-to-file-or-perfect hierarchy mandated by Article 9.”¹⁰¹ A secured party who takes control therefore defeats a competitor who merely filed first.

An additional architectural possibility is that stablecoins backed by commodities such as gold could be structured as electronic negotiable documents of title under UCC Article 7, deployed as tokens on distributed ledger networks.¹⁰² By providing simple avenues to acquire title and take security, the combined Article 7 and Article 9 regime “would support the rapid circulation of these stablecoins and, consequently, their use as a payment instrument,” and would be “very similar to that which the UCC reserves for ‘money.’”¹⁰³

What Happens When Stablecoins Are Held Through an Intermediary?

When a user holds stablecoins through a centralized platform such as Coinbase or Gemini, the transaction may occur entirely on the platform’s internal ledger rather than on the public blockchain, or it may involve multiple steps across different systems. In either case, intermediaries stand between the holder and the issuer, creating additional layers of credit risk.¹⁰⁴

No tailored payment-law framework governs these intermediated stablecoin transfers. UCC Article 4A supplies the statutory regime for bank-mediated wire transfers, yet it cannot be applied analogically. Article 4A “operates effectively because banks function within a homogeneous regulatory environment, utilize standardized payment rails, and bear uniform obligations to their customers and counterparties,” and “[s]tablecoin intermediaries share none of these characteristics.”¹⁰⁵ “Without a tailored framework, key issues are entirely shrouded in uncertainty, including when an intermediary becomes obligated to execute a customer’s instruction for a stablecoin transfer, at what point the payor’s underlying obligation to the payee is discharged, and what recourse exists if an intermediary fails mid-transaction.”¹⁰⁶ Existing contract and property law must address these questions without the coordinated allocation of responsibilities supplied by Article 4A.

UCC Article 8 offers a potential pathway for the tokens held through an intermediary. An intermediary could agree to treat custodied stablecoins as financial assets credited to securities accounts, giving customers security entitlements under Article 8. In the case of the Circle hosted wallet, this choice would have supplied “clear, enforceable, and bankruptcy-remote property interests in their custodied tokens.”¹⁰⁷ However, neither existing market practice nor the GENIUS Act requires this treatment.

For the millions of stablecoin holders who acquired tokens through secondary markets and hold them on exchange platforms, the insolvency risk is acute. These holders have no direct relationship with the stablecoin issuer. Without the standing provisions of the GENIUS Act, they would likely be unable to file claims in the issuer’s bankruptcy proceedings and would be entirely dependent on whatever recovery their intermediary platform might achieve as an unsecured creditor.¹⁰⁸

What Happens to Stablecoin Holders When an Issuer Becomes Insolvent?

Before the GENIUS Act, stablecoin holders faced a grim prospect. For the two largest issuers, Tether and Circle, reserves were likely property of the bankruptcy estate, and holders would be classified as general unsecured creditors, potentially receiving pennies on the dollar or nothing at all.¹⁰⁹ Even for issuers such as Gemini and Paxos that made custodial representations, establishing that reserves were excluded from the estate would require protracted and expensive litigation.¹¹⁰ Secondary market holders arguably had no standing to file claims at all.¹¹¹

The GENIUS Act introduces novel bankruptcy protections. Reserves are excluded from the estate entirely,¹¹² and all stablecoin holders, regardless of contractual privity, are deemed to hold claims.¹¹³ Holders receive priority over all other creditors with respect to reserves, and a super-priority for any reserve shortfall.¹¹⁴

However, the bankruptcy provisions of the Act suffer from multiple internal contradictions that may undermine their effectiveness.¹¹⁵ The automatic stay is extended to reserves that are simultaneously excluded from the estate, leaving uncertain how the bankruptcy court should administer the protected pool.¹¹⁶ The court must use best efforts to enter an order beginning distributions within fourteen days after the required hearing, subject to the statutory conditions. This process presupposes judicial administration of assets otherwise excluded from the estate.¹¹⁷ The super-priority provision subordinates administrative expenses to holder claims, creating the risk that no trustee, attorney, or debtor-in-possession lender would agree to service a reorganization, paradoxically harming the very holders the Act seeks to protect.¹¹⁸

The core problem is methodological. “Each provision retrofits a protection onto a claim whose legal nature was never settled, and the incoherence flows directly from that inversion.”¹¹⁹ Rather than persisting with ad hoc amendment, “the preferable approach would be to grant stablecoin holders a perfected security interest in the reserve assets under UCC Article 9,” integrating their claims into established commercial law and bankruptcy infrastructure and providing “clear, familiar, predictable priority treatment.”¹²⁰

A decentralized protocol has no issuer to become insolvent and no estate to administer. The Emergency Shutdown mechanism of the MakerDAO protocol provides a limited substitute. Upon activation, vault creation ceases, pending auctions complete, and DAI holders claim proportional shares of the remaining asset portfolio. If aggregate asset value falls below total DAI supply, holders receive less than one dollar per token.¹²¹

What Reserve Requirements Apply to Stablecoin Issuers Under the GENIUS Act?

The GENIUS Act requires permitted issuers to maintain reserves backing outstanding stablecoins on at least a one-to-one basis.¹²² Eligible reserves include cash, withdrawable deposits, short-term Treasuries, qualifying repurchase arrangements, specified money-market funds, and certain other approved liquid federal assets.¹²³ This eliminates the discretion issuers previously exercised over reserve composition. For example, Tether historically held commercial paper, secured loans, precious metals, and crypto-assets in its reserves.¹²⁴

The Act imposes strict custody requirements. Custodians must satisfy the supervision requirements of Section 10. Customer property is subject to segregation requirements and specified exceptions, including permitted omnibus arrangements.¹²⁵ Reserve reuse is restricted, with exceptions for permitted investments, custodial services, and redemption liquidity.¹²⁶

The regulatory architecture of the Act effectively codifies a “narrow bank” model, one “in which safety derives not from who stands behind the issuer, but from what the issuer holds.”¹²⁷ Issuers are restricted from engaging in traditional onward lending and cannot perform fractional reserve banking.¹²⁸ One gap remains, however. Non-bank issuers must entrust reserves to third-party custodians such as commercial banks, which themselves may use the funds for ordinary lending activities. The prohibition on fractional reserve banking operates directly on issuers but cannot prevent the practices of their custodians.¹²⁹

What Redemption Rights Do Stablecoin Holders Have?

The GENIUS Act regulates redemption, but the legal nature of the resulting claim remains unsettled. The stronger reading supports a statutory right available to all holders, although a contractual reading remains possible.¹³⁰ The Act defines a payment stablecoin as a digital asset whose issuer “is obligated to convert, redeem, or repurchase for a fixed amount of monetary value.”¹³¹ It strips issuers of unilateral power to suspend redemption, providing that discretionary limitations can only be imposed by designated public regulators.¹³²

The Act nonetheless leaves significant ambiguities unresolved. It does not explicitly address whether the redemption obligation extends to all token holders or only those with direct issuer relationships.¹³³ It requires procedures for timely redemption but prescribes no fixed numerical deadline, minimum transaction threshold, or uniform verification requirements. Issuer discretion over fees, minimum amounts, and eligibility could preserve existing barriers to redemption. The extent of that discretion depends on the interpretation of the redemption right and on implementing regulations.¹³⁴

Redemption rights of this kind exist primarily for centralized stablecoins regulated under the GENIUS Act; for decentralized stablecoins such as DAI, there is no redemption right in any conventional sense. Vault Owners can reclaim their deposited assets by repaying the generated DAI plus accrued fees, but this is a mechanical interaction with autonomous code, not an enforceable claim against an entity.¹³⁵ DAI Holders who acquired tokens on secondary markets cannot even use DAI to obtain assets directly from a Maker Vault; they hold tokens that represent no claim against any issuer.¹³⁶

Under MiCAR, redemption protections are stronger. Holders of e-money tokens have a right of redemption at any moment and at par value, redemption fees are explicitly prohibited, and temporary suspensions require regulatory approval.¹³⁷

Who Is the “Issuer” of a Decentralized Stablecoin, and Can Decentralized Stablecoins Be Regulated?

Decentralized stablecoins “exist within a veritable legal vacuum that leaves users without contractual counterparties, clouds title to their holdings, and forecloses remedies in tort, criminal, and fiduciary law.”¹³⁸ The central difficulty is the absence of an identified contractual issuer undertaking to redeem the tokens. This does not resolve whether participants owe duties under default entity rules or other applicable law, as the analysis of DAOs and bankruptcy explains. DAI is controlled by the MakerDAO protocol, which comprises multiple smart contracts on the Ethereum network executing predetermined operations automatically.¹³⁹ The protocol itself is neither a legal person nor a contractual redemption debtor. The “white paper” of the protocol is a technical description, not a contract, and “no terms of service specifically govern the issuance, holding, or use of DAI itself.”¹⁴⁰

This architecture creates four private law deficiencies. First, the absence of an identified contractual redemption debtor deprives holders of the ordinary contractual route to enforcing payment. It does not establish that no agreements exist among any participants.¹⁴¹ Second, property rights are unstable; vault owners retain property rights in deposited assets and DAI follows UCC Article 12 for transfers, yet the automated seizure and auction mechanisms of the protocol operate on uncertain legal foundations.¹⁴² Third, tort and criminal law remedies are inadequate, since negligence claims face duty-of-care barriers, conversion claims lack the requisite volitional act, and criminal prosecution of Governors or Maintainers encounters profound mens rea obstacles.¹⁴³ Fourth, the diffuse, pseudonymous, and conflicting relationships that characterize the ecosystem complicate the identification of fiduciary duties and the persons who owe them.¹⁴⁴ Yet “the current legal vacuum reflects a choice in design rather than some inherent constraint in the technology itself.”¹⁴⁵

Whether these instruments can be regulated at all is a separate matter. Both MiCAR and the GENIUS Act explicitly defer substantive regulation of decentralized stablecoins to future study.¹⁴⁶ In the interim, they employ divergent strategies.

MiCAR adopts functional definitions that technically encompass decentralized stablecoins, and DAI qualifies as an e-money token on those definitions; yet the regulation imposes structural compliance requirements that these protocols cannot satisfy, namely authorization, management, and segregated reserves. The regulation effectively excludes decentralized stablecoins by transferring liability to crypto-asset service providers who list them, making these intermediaries quasi-issuers for assets they cannot control.¹⁴⁷

The GENIUS Act adopts structural prerequisites that categorically exclude protocols lacking identifiable issuers from the “payment stablecoin” definition, leaving them in regulatory limbo. The Act explicitly carves out “distributed ledger protocols,” “self-custodial software interfaces,” and “liquidity pools” from the definition of “digital asset service provider.”¹⁴⁸ “Neither framework successfully reconciles the challenge that decentralized stablecoins present, which is the emergence of technologies deliberately designed to replicate financial functions but without financial institutions to orchestrate them.”¹⁴⁹

What Risks Do Algorithmic Stablecoins Present, and Should They Be Banned?

Algorithmic stablecoins and dual-coin stablecoins present acute risks because they are not backed by reserve assets. Their viability depends entirely on market confidence in the stabilization mechanism itself; nothing apart from scarcity and the algorithm stands behind the value of these instruments.¹⁵⁰

The collapse of TerraUSD/Luna in May 2022 remains the most devastating illustration. TerraUSD was a dollar-pegged stablecoin whose stabilization mechanism relied on a secondary coin, Luna. When TerraUSD lost its peg, a self-reinforcing cycle ensued, a “death spiral” in which declines in one coin fueled declines in the other until the stabilization mechanism failed. The market capitalization of the system had exceeded $60 billion; it was destroyed almost entirely within days.¹⁵¹

Multiple other dual-coin and algorithmic stablecoin projects have failed catastrophically through similar dynamics, Iron/Titan and USDX/Lighthouse among them.¹⁵² For holders, the private law analysis “returns a clear and somber outcome: holders of these stablecoins have neither remedies nor recourse in the event of a collapse.”¹⁵³

The GENIUS Act does not explicitly ban algorithmic stablecoins. Its definition of “payment stablecoin” nonetheless excludes them from the regulated stablecoin market, for it requires an issuer “obligated to convert, redeem, or repurchase for a fixed amount of monetary value” and mandates reserve-backed stabilization.¹⁵⁴ The Act mandates a Treasury Department study on “endogenously collateralized payment stablecoins” to inform future policy.¹⁵⁵

How Does the European Union Regulate Stablecoins Under MiCAR?

The EU Markets in Crypto-Assets Regulation (MiCAR) entered into force on June 29, 2023, and its stablecoin provisions became applicable on June 30, 2024. It creates two categories of stablecoins: asset-referenced tokens (ARTs), which reference assets other than a single official currency, and e-money tokens, which reference only a single fiat currency.¹⁵⁶ This dual classification contrasts with the unified “payment stablecoin” category of the GENIUS Act.

MiCAR employs a markedly different regulatory philosophy from the GENIUS Act. Where the American legislation focuses on operational requirements and bankruptcy protections, MiCAR emphasizes conduct obligations and strict liability.¹⁵⁷

MiCAR imposes duties to act honestly, fairly, and professionally, and establishes strict liability for any misleading information in white papers. Any contractual provision attempting to exclude or limit this liability is “deprived of legal effect.”¹⁵⁸ The GENIUS Act imposes no comparable affirmative duties.

The sharpest divergence concerns redemption, for “MiCAR makes redemption an unconditional statutory right that cannot be contractually limited except in very narrow regulatory circumstances.”¹⁵⁹ ART holders have “a right of redemption at all times against the issuers”; EMTs must be redeemable at any time and at par value; both provisions explicitly prohibit redemption fees.¹⁶⁰ The GENIUS Act regulates redemption and requires disclosure of fees. The legal nature of the resulting right and the scope of issuer discretion over eligibility remain unsettled, as explained above.

MiCAR requires segregation, authorized custody, and limitation to high-quality assets, but stops short of granting holders direct proprietary rights, creating quasi-proprietary protection through operational segregation.¹⁶¹ The GENIUS Act goes further by amending the Bankruptcy Code to exclude reserves from the estate entirely, but the resulting framework is internally contradictory.¹⁶²

For decentralized protocols, these protections encounter the difficulty examined in the section on issuer identity. MiCAR directs obligations toward identifiable intermediaries even where they cannot control the protocol.¹⁶³

What Systemic Risks Do Stablecoins Pose to Financial Stability?

Typical non-bank stablecoin issuers must entrust their reserves to third-party custodians such as commercial banks, which exposes issuers and holders alike to the credit and operational risk of custodian failure, a vulnerability that neither can fully monitor or control.¹⁶⁴ March 2023 supplied the demonstration. Circle held uninsured cash reserves at Silicon Valley Bank, and the bank failed over a weekend when the traditional payment rails were closed. Panic selling drove USDC to $0.88, the peg failing “not because reserves were inadequate in fact, but because the rails that connect tokens to dollars were closed.”¹⁶⁵ Market discipline arrived as panic rather than as gradual repricing, and “a regulatory regime that relies on holders to detect problems and deficiencies ex ante does not produce good money.”¹⁶⁶

The asymmetry is structural. Stablecoin issuers promise continuous availability on blockchain networks that never close, yet they must re-enter the traditional banking system to honor redemption requests, a system that operates on business days and working hours.¹⁶⁷ A bank run can be halted by closing doors or pausing over a weekend; stablecoin issuers remain vulnerable at all times, lacking the braking mechanisms that protect banks, namely Federal Reserve liquidity facilities and FDIC resolution authority.¹⁶⁸

The GENIUS Act supplies no protection that would enhance the information insensitivity of stablecoin claims by reducing dependence on third-party custodians. It does not require issuers to hold reserves in Federal Reserve accounts, and it explicitly denies federal insurance. Though stablecoin issuers may themselves enjoy deposit insurance as customers of banks, that protection belongs to the issuer, not to stablecoin holders.¹⁶⁹

Why Do Stablecoins Matter for the Future of Payments, Commercial Law, and Financial Regulation?

New forms of money do not emerge often. For most of American history, transformations in the monetary system have arrived in discrete waves: the shift from commodity money to paper currency, the creation of the Federal Reserve, and the rise of bank deposits as the dominant medium of exchange. Should current growth projections hold, “stablecoins will fundamentally reshape the architecture of the payment system and alter the landscape of private money in ways not seen in generations.”¹⁷⁰

The policy stakes extend beyond the stablecoin market: “financial regulation too often proceeds without adequate attention to the private-law foundations upon which regulated money instruments rest.”¹⁷¹ The bankruptcy provisions of the GENIUS Act fail precisely because Congress attempted to retrofit special protections onto a claim whose legal nature was not fully considered. A more coherent approach would first determine how stablecoins function, what novel capabilities they possess, and what rights holders actually have, and then allow regulatory treatment to flow as a logical consequence.¹⁷² Market forces are unlikely to supply the missing protections, for “market dynamics currently reward network effects over private law quality”; Tether and Circle dominate the market “despite offering lackluster legal protections to their customers and token holders.”¹⁷³

The lessons generalize. As new monetary instruments emerge, lawmakers must “settle the private-law nature of the claim before designing the public-law regime around it.”¹⁷⁴

What Are the Key Unresolved Legal and Regulatory Questions About Stablecoins?

The GENIUS Act and MiCAR are substantial advances, yet six questions of private law remain unresolved after both.

First, the GENIUS Act does not specify whether the obligation of the issuer to redeem runs to the owner of the stablecoin, to the person in control of it, or whether the right is tokenized such that it travels with the digital asset itself. This ambiguity undermines negotiability and creates uncertainty in every stablecoin transaction.¹⁷⁵

Second, the GENIUS Act supplies no coordinated framework for determining when a peer-to-peer stablecoin transfer extinguishes the payor’s debt or allocating responsibility in intermediated transfers. Parties must rely on contractual terms and other applicable law without the dedicated finality rules available for established payment systems.¹⁷⁶

Third, the bankruptcy provisions of the GENIUS Act are internally contradictory, as examined above, and the remedy is undetermined. Whether to replace them with a perfected security interest in reserve assets under UCC Article 9 remains open. A separate question concerns Federal Reserve master account access for qualifying issuers, which would address their dependence on private reserve custodians.¹⁷⁷

Fourth, neither the GENIUS Act nor MiCAR provides insurance for stablecoin holders. An industry-funded insurance mechanism modeled on the Securities Investor Protection Corporation (SIPC) would mutualize failure risk and enhance the information insensitivity of stablecoin claims.¹⁷⁸

Fifth, both MiCAR and the GENIUS Act defer the regulation of decentralized stablecoins to future study, and delay carries a cost of its own. “The longer studies extend, the more entrenched decentralized stablecoins become, which has the potential to constrain future regulatory options through simple path dependence.”¹⁷⁹

Sixth, decentralized stablecoins maintain dollar pegs, facilitate payments, and serve as trading collateral exactly as their centralized counterparts do, yet the legal treatment they receive is entirely different. Whether the law should address what stablecoins functionally do or how they are structurally organized remains an open question.¹⁸⁰