When purchasing a dollar-backed stablecoin, it is natural for a user to ask where the funds backing such a digital currency are held. The answer is simple – the money will be stored outside the blockchain.

A fiat-backed stablecoin is an asset issued by companies that have reserves meant to ensure the stability of the asset. Such reserves may contain cash deposits in the company’s bank accounts, short-term US Treasury bills, and any other acceptable cash equivalents.

For instance, USDC and USDT are famous examples of dollar-backed stablecoins. However, information regarding their reserves is published by their issuers, and the structure of these reserves differs from each other.

US Treasury bill is a type of debt security issued by the US government. This paper is not cash; however, it is fairly liquid and widely used in reserves of such stablecoins.

It should be noted that the money backing the stablecoin is not within the digital coin itself. The coin is created within a blockchain network, while the cash itself is stored elsewhere.

Upon issuance of stablecoins, the issuer usually gets either money or eligible assets in exchange. Subsequently, the tokens can be moved from one blockchain address to another.

In case eligible clients redeem stablecoins via the issuer, the company repays the relevant fiat currency and withdraws the tokens from the system. However, regular people might need to trade stablecoins through an exchange instead of dealing with the issuer.

The purpose of these reserves is to ensure these transactions occur and help stabilize the price of the stablecoin, which is often pegged at one US dollar for each token.

However, there is a crucial factor to keep in mind: all stablecoins are not created equal in terms of assets they hold, custody, and redemptions process.

That is where reserve reports come into play: they allow one to learn about the financial assets an issuer holds and compare the value of these assets to its outstanding tokens. Additional information can be revealed through independent reviews, but the quality of such reports also matters.

Thus, the price target of $1 for a stablecoin is supported by financial assets of the issuer and its ability to fulfill its obligations rather than the fact of blockchain presence.