Stablecoins

How to Check What Actually Backs a Stablecoin

The article above sets out the categories. The practical question for anyone holding one is narrower: what is actually behind this token, and how would I know if that changed.

Start with the distinction between an attestation and an audit. An attestation is a third party confirming that reserves existed at a moment in time, usually a month end, in the composition the issuer described. An audit is a far more rigorous examination of the issuer’s financial statements as a whole. Most major stablecoins publish attestations. Fewer publish full audits. Both are useful and they are not equivalent, and the language issuers use tends to blur the difference.

Then look at composition rather than the headline figure. Reserves fully covering the supply can be held in very different things: cash at a bank, short-dated government paper, commercial paper of varying quality, or other crypto assets. Those carry different risks, and the risk that matters is whether the assets can be sold quickly at face value during a period when many holders want out at once. A reserve that is adequate on paper and slow to liquidate is the classic run problem, and it is why the reserve mix matters more than the coverage ratio.

For crypto-collateralised stablecoins the equivalent question is the collateral ratio and what happens when it falls. For algorithmic designs there may be no reserve at all, in which case the peg depends entirely on market incentives continuing to function during stress, which is the condition under which they have historically failed.

The habits that follow are simple. Know which issuer you are exposed to rather than treating “stablecoin” as one asset, since USDC and USDT have materially different reserve profiles and disclosure practices. Check where the disclosures live before you need them. And where a balance is large enough to matter, split it across more than one issuer, for the same reason you would not hold one bank. The exchange holding it carries its own risk on top, which is what proof of reserves and checking an exchange’s reserves address. Whether the venue is licensed to operate in Australia is a separate question worth asking alongside it, and the risks of leaving assets on an exchange apply to a stablecoin balance exactly as they do to anything else.

Depegs: What Actually Happens, and What to Do

A stablecoin trading below its peg is not a single event with a single meaning, and the response depends on which kind you are looking at.

Small, brief deviations are normal. A few tenths of a percent during volatile periods reflects supply and demand on a particular venue rather than anything about the reserves, and it usually resolves as arbitrage closes the gap. Treating routine noise as a crisis is its own kind of expensive.

Sustained deviation is different, and it tends to follow a recognisable sequence. Confidence in the backing is questioned, holders sell, the price on secondary markets falls below the peg, and the discount itself becomes evidence for the original doubt. Where redemption directly with the issuer is available and functioning, the gap is closeable and usually closes. Where redemption is restricted, slow, or limited to large institutional holders, retail holders can only exit through the market, at the market’s price.

That last point is the one worth internalising in advance. The redemption mechanism is what makes a peg credible, and most individual holders have no direct access to it. Your exit is the secondary market, priced by other people’s panic.

Practical positioning: understand before you hold whether the peg is maintained by reserves you could theoretically redeem against, by over-collateralisation that can be liquidated, or by an incentive design with no assets behind it. Watch redemption functioning rather than price, because restrictions appear before the price fully reflects them. And treat a large stablecoin balance as a position with counterparty risk rather than as cash, which is what it actually is. Using stablecoins as a hedge in a downturn covers the role they play in a portfolio. The regulated alternative being developed by central banks, covered in the rise of CBDCs, is designed to remove exactly this risk, at the cost of a different set of trade-offs.

Using Stablecoins in Australia

Two practical matters affect Australian holders specifically, and both are routinely missed.

Moving into a stablecoin is a disposal. Converting Bitcoin to USDC is not “going to cash” for tax purposes. It is a disposal of the Bitcoin, and a CGT event, with the gain or loss calculated in Australian dollars at the time of the swap. The 12-month CGT discount is decided on the holding period of the asset you disposed of, not on how long you then sit in the stablecoin. The mental model that stablecoins are a safe harbour you can retreat to without consequence is the single most costly misunderstanding here, and it produces tax liabilities people did not know they were creating. Converting to stablecoins covers the treatment and crypto-to-crypto swaps covers the general rule.

They are US dollar exposure, not Australian dollar exposure. Almost every major stablecoin is pegged to USD. Holding one from Australia means holding a currency position, and the AUD value of that holding moves with the exchange rate even while the peg holds perfectly. A quiet quarter for the stablecoin can be a meaningful gain or loss in the currency you actually spend.

Beyond that, the practical route in and out runs through an exchange, so the on-ramp and off-ramp costs and the eventual sale for AUD are part of the round trip. For anyone using stablecoins in a business rather than as an investor, GST on crypto payments is a separate question again, and the Australian crypto tax overview sets the framework around all of it. Where they earn their place today is moving value between countries, which global crypto payments covers in detail.