A fiat-backed stablecoin is a stablecoin that references a fiat currency and is backed by a reserve portfolio intended to support redemption at the target value.
Fiat-backed stablecoins are usually issued by a legal entity that creates tokens against funds received through the primary issuance process and holds or invests corresponding reserve assets. Reserves can include bank deposits, short-term government securities, reverse repurchase agreements, and other permitted liquid assets. The reserve portfolio and the issuer's ability to meet redemptions are central to the stabilization mechanism. Reserve backing does not establish that every secondary-market holder has a direct contractual right to redeem with the issuer.
Reserve backing concerns the assets supporting the stablecoin. Redemption access concerns which holders can use the issuer's primary redemption channel and on what terms.
The quality, liquidity, custody, and legal treatment of reserves affect the issuer's ability to meet redemptions and maintain confidence during periods of stress.
A dollar-denominated issuer may hold cash and short-term government securities against tokens that are intended to be issued and redeemed at one dollar.