What Is a Stablecoin? How They Work and the Risks

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A stablecoin is a crypto asset that aims to keep a stable value relative to an asset or a basket of assets, such as a government currency. "Stable" describes the aim. It doesn't mean your money is safe, and no stablecoin is legal tender in Australia.

The short version

Moneysmart calls stablecoin a "marketing term". Its crypto assets page, updated on 15 October 2026, explains that stablecoins use different methods to try to maintain their value. The same label covers some very different designs, so the method is what you need to look at.

According to Moneysmart, crypto assets are not legal tender in Australia, even Australian dollar stablecoins, and are not widely accepted as payment. Moneysmart also says most crypto are high-risk investments and that you need to be prepared to lose everything you put in. A stablecoin is still a crypto asset, with the same risks of holding and sending one.

How stablecoins try to stay stable

Moneysmart describes three ways stablecoins try to hold their value:

• External asset backing: Tokens are backed one for one by an external asset, such as government currency, gold or securities.
• Backing worth more than the tokens: A mix of assets supports the stablecoins, with those assets worth more than the stablecoins issued.
• Algorithms: The arrangement uses algorithms that control supply and demand.

So the word "stablecoin" alone tells you very little. A coin backed by cash in a bank and a coin held steady by an algorithm carry quite different risks.

Fiat-backed stablecoins and redemption

Most of the stablecoins people use are linked to a government currency, usually the US dollar. The company that issues them says it holds reserves to back each token, and that you can redeem a token for one unit of the currency (redemption "at par"). USDC and USDT, two US dollar stablecoins, show how issuers describe this. These are the issuers' own statements, checked on 30 October 2026, not our view and not a recommendation.

Circle's statements about USDC

Circle says USDC is redeemable one for one for US dollars. Circle says it is backed by highly liquid cash and cash-equivalent assets held separately from Circle's operating funds.

Circle says most of the USDC reserve is held in the Circle Reserve Fund, a government money market fund managed by BlackRock. Circle's reserve breakdown lists the rest as bank deposits, short-dated US Treasuries and overnight reverse Treasury repo agreements.

Circle says reserve holdings are disclosed weekly. Circle also says a Big Four accounting firm provides monthly third-party assurance, under AICPA attestation standards, that reserves are greater than USDC in circulation.

Tether's statements about its tokens

Tether says all Tether tokens are pegged one to one with a matching fiat currency and are fully backed by Tether's reserves. Tether says information about tokens in circulation is typically published daily and that the issuer's assets exceed its liabilities.

Tether publishes reserves reports each quarter and says they are "not financial statements". Our page on USDC and USDT sets the two side by side.

Australian dollar stablecoins

An AUD stablecoin aims to maintain a value relative to the Australian dollar. Moneysmart gives AUDM, AUDF and AUDD as examples. We mention them only because Moneysmart does; it isn't a recommendation.

According to Moneysmart, even Australian dollar stablecoins are not legal tender in Australia. For tax, the ATO says crypto assets are not money, so an AUD stablecoin is a crypto asset like any other. And as ASIC's guidance below shows, whether a coin tracks the Australian or the US dollar doesn't change how ASIC is likely to classify it.

Risks

Issuer and reserve risk

A reserve-backed coin is only as good as the reserve and the issuer's promise to redeem. You are relying on what the issuer says about its reserves and on the reports it publishes. A claim about one coin tells you nothing about another.

Moneysmart says there is usually no product disclosure statement or prospectus for crypto assets, although developers may publish a whitepaper.

Platform failure, hacks and wallet access

Moneysmart says many crypto providers are not licensed at this time, so you may not be protected if a platform fails or is hacked. Moneysmart also says there is currently no public register for checking the legitimacy of crypto exchanges. Read more about how to check a crypto exchange.

According to Moneysmart, a wallet has a private key, a secret code that lets you access your tokens. Losing that key usually means losing the crypto. A software wallet may be held by you or by a trading platform on your behalf.

Moneysmart says a hardware wallet stores private keys on a secure device that is not connected to the internet, which can make it harder for hackers. Read more about hot and cold wallets. Moneysmart warns that if a hacker steals your crypto, there is little hope of getting it back.

Wrong addresses and transaction fees

Moneysmart identifies sending crypto to the wrong address as a risk. It also warns about overpaying transaction fees, sometimes called gas fees, or underpaying and losing the fee and transaction. These apply to stablecoins as much as to any other crypto.

How Australian law treats stablecoins

ASIC's information sheet INFO 225, updated in October 2025, looks at what a digital asset actually does when deciding whether it's likely to be a financial product. The name on the label doesn't decide it.

In Example 18, ASIC describes a non-interest-bearing stablecoin issued at par and redeemable on demand at par. It is backed by high-quality liquid assets and bank deposits and used for payments. ASIC says this arrangement is likely a non-cash payment facility, which is a financial product. Whether it is linked to Australian or US dollars does not change that assessment.

In Example 6, ASIC describes a yield-bearing stablecoin whose holders receive new tokens from returns on the reserve. ASIC says that arrangement is likely an interest in a managed investment scheme.

ASIC also identifies class relief under the Stablecoin and Wrapped Token Relief Instrument 2025/867. It gives distributors of eligible stablecoins and wrapped tokens relief from needing an AFS licence, market licence or clearing and settlement facility licence. The relief covers eligible coins and distributors only.

Separately, under the Corporations Amendment (Digital Assets Framework) Act 2026, new laws for digital asset platforms and tokenised custody platforms commence on 8 April 2027. See the digital asset platform law from 8 April 2027 for more about those changes.

Tax

The ATO's explanation of crypto assets, updated on 19 August 2026, expressly lists USDC as a stablecoin. The ATO says there are no special tax rules for crypto assets: treatment depends on how you acquire, hold and dispose of the asset.

As a general rule for investors, the ATO says crypto assets are taxed as capital gains tax assets. Each crypto asset is a separate asset for tax, even when held in the same wallet. Businesses trading crypto may need to treat it as trading stock or ordinary income.

So swapping bitcoin for a stablecoin, or a stablecoin back to Australian dollars, can be a CGT event. Read about crypto tax in Australia, and speak to a registered tax agent about treatment that depends on your circumstances.

Frequently asked questions

What is a stablecoin trying to do?

Moneysmart says a stablecoin aims to maintain a stable value relative to an asset or basket of assets. It may use external asset backing, a mix of assets worth more than the tokens, or algorithms controlling supply and demand.

Are stablecoins safe?

Not by definition. Moneysmart says most crypto are high-risk investments, and identifies risks including platform failure, hacking, lost private keys, wrong addresses and transaction fees.

Is an AUD stablecoin legal tender?

No. Moneysmart says crypto assets, including Australian dollar stablecoins, are not legal tender in Australia and are not widely accepted as payment.

Are all stablecoins treated the same under Australian law?

No. ASIC's examples describe a payment stablecoin as likely a non-cash payment facility and a yield-bearing arrangement as likely an interest in a managed investment scheme. The features of the arrangement matter.

Do stablecoins have special tax rules?

The ATO says there are no special tax rules for crypto assets and lists USDC as a crypto asset. Treatment depends on how you acquire, hold and dispose of the asset. A registered tax agent can explain how that applies to your circumstances.