Under the hood: reserves, minting, redemption and freezes

What sits in the reserve

The idea is simple. For every token in circulation, the issuer keeps roughly one dollar of assets that can be turned into cash quickly. The token is a claim; the reserve is what pays it.

Four kinds of asset do almost all the work. A Treasury bill is a short loan to the US government, usually one to three months, that pays interest and can be sold on any business day. A repo, short for repurchase agreement, is an overnight loan of cash to a bank or dealer, secured by government bonds that the lender keeps if the borrower fails. A money-market fund is a savings pot that buys very short government debt and lets investors take cash out at short notice. Bank deposits make up the rest, and they are the part that pays redemptions on the day.

Circle, the issuer of USDC, keeps most of its reserve in the Circle Reserve Fund, a government money-market fund managed by BlackRock. Circle's annual report for 2025 put about 88% of USDC reserves in that fund, with the remainder as cash at banks. BNY Mellon has been the primary custodian of those assets since March 2022. In this setup BlackRock decides what to buy, BNY holds the assets, and Circle owns the obligation to token holders. Three different firms each hold one piece.

Tether's book is wider. Its attestation for 30 June 2026 showed about 115 bn USD in US Treasuries, with the rest in cash, repo, money-market funds, secured loans, gold and bitcoin. The gold and bitcoin together were worth about 24.6 bn USD. Those assets move in price, so they work as a capital buffer for Tether rather than as dollar-for-dollar backing.

The choice of asset matters. A Treasury bill almost never loses value, but cash in a bank carries the bank's own risk. That was the lesson of 10 March 2023, when US regulators seized Silicon Valley Bank while Circle had about 3.3 bn USD of USDC reserves there. The reserve was never lost, yet USDC traded down to about 0.87 USD over the weekend because nobody could reach the money. The history chapter tells the full story.

Attestation versus audit

A reserve is only as good as the evidence that it exists. Two kinds of document provide that evidence, and they prove different things.

An attestation is an accountant's opinion that management's statement about the reserve is fairly presented on a specific date. The accountant checks the balances for that day, often the last day of a month or quarter, and signs. It says nothing about the other days. An issuer could in theory borrow assets to look good on the reporting date and return them afterwards, which is why an attestation is often called a snapshot.

An audit looks at a whole period. The auditor tests internal controls, follows transactions through the year, and gives an opinion on the financial statements as a whole. It is slower, more expensive, and much harder to dress up.

In September 2026 neither of the two largest issuers had published a full annual audit of the reserve itself. Circle is a listed company, so Deloitte audits Circle's corporate accounts and separately attests the USDC reserve each month. Tether publishes quarterly attestations by BDO under the ISAE 3000 assurance standard. Paxos, which issues PayPal's PYUSD, moved its monthly reserve attestations to KPMG in February 2025, and holds the reserve in a trust that keeps it apart from Paxos's own money if the company fails.

US law will raise the floor. The GENIUS Act, the US stablecoin law signed on 18 July 2025, requires monthly reserve reports examined by a registered public accounting firm and signed by the chief executive and finance officer. Issuers with more than 50 bn USD in circulation must also publish an annual audited financial statement, a line only USDT and USDC crossed in September 2026.

The same act limits reserves to cash, insured deposits, Treasury bills of 93 days or less, repo backed by those bills, and government money-market funds. Gold and bitcoin are outside that list, which is one reason Tether announced a separate US token, USAT, issued through Anchorage Digital Bank. The regulation chapter covers the rest.

Minting and redemption, step by step

Minting creates new tokens; redemption destroys them and pays out dollars. Both run on two layers at once: the bank, where dollars move, and the blockchain, where tokens move. Neither layer can see the other, so people and software connect them.

Take a market maker that wants 10 mn USD of USDC. The steps run like this:

1. The client, already verified through know-your-customer checks, wires dollars to the issuer's bank account.
2. The issuer's operations team sees the wire arrive, usually the same or the next business day.
3. An authorised key calls the mint function on the token contract. Tether's contract calls the same step issue.
4. The contract adds 10 mn tokens to the client's address and raises the total supply.
5. The treasury team invests the new dollars in bills, repo or the money-market fund.

The contract never checks a bank balance. It trusts whoever holds the minting key, and the key holder trusts the bank. Circle Mint, the desk through which verified clients create and redeem USDC, is where those two trusts meet.

Redemption reverses the order. The client sends tokens to an address the issuer controls and files a request through a portal. The issuer checks the request, calls burn to destroy the tokens, and wires the dollars. The burn and the payout are separate events. Depending on the issuer and the amount, the dollars can arrive the same day or up to about five business days later.

Transfers between holders are the one step with no issuer involved. Once tokens sit at an address, they move like any other token on the chain, in seconds, at any hour. This is why the peg chapter calls the redemption window, not the transfer, the thing that holds the price: only a verified client can take a token back to the issuer, and everyone else sells to someone who can.

The token contract and its keys

A stablecoin contract starts from ERC-20, the standard token interface on Ethereum: balances, transfers, approvals. Issuers then add powers that the standard does not have. Those powers are where the control sits.

Circle's contract, called FiatToken, splits the powers into named roles. A masterMinter decides who may mint and sets a limit for each minter. Each minter can create and destroy tokens up to that limit. A pauser can stop all transfers. A blacklister can block a single address. An owner reassigns roles, and a separate admin controls upgrades. Splitting the roles means that a leaked minting key cannot also freeze funds or change the code.

Tether's USDT contract puts issuance, redemption, blacklisting, confiscation and pausing behind one owner, a wallet that needs three of six signatures. A multisig is a wallet that only acts when a set number of named key holders sign, written as three-of-six. It protects against one stolen key, but every power sits behind the same group of signers.

Upgradeability is the ability to replace a contract's logic while token balances stay at the same address. USDC uses a standard proxy: a small contract that stores balances and forwards every call to a logic contract that Circle can swap. USDT on Ethereum uses an older upgrade pattern of Tether's own. DAI, the original token of the Sky protocol (formerly MakerDAO), cannot be upgraded at all, which is why moving to the newer USDS required a migration rather than a code swap.

The other designs show that "who controls it" has more than one answer. Sky runs changes through a token-holder vote, and a winning proposal then waits 48 hours in a timelock before it can execute. That delay gives the market two days to react to a bad change. Ethena, issuer of USDe, keeps its token contract fixed but controls minting through a separate contract with capped damage: a compromised minting role could create at most 100,000 USDe without backing before a guardian role shuts minting and redemption down.

Freezes in practice

A freeze, also called blacklisting, is the issuer's power to stop one address from sending tokens. The tokens stay visible on the chain but cannot move. Issuers use it for sanctions orders, court orders, stolen funds and fraud.

The two large issuers built the same power in different ways. When Circle freezes an address, the tokens stay there and Circle can later unfreeze them. It has no function to destroy them on its own. Tether has a second function, destroyBlackFunds, that burns the tokens at a frozen address and removes them from supply. So a USDT freeze can end in confiscation, while a USDC freeze is a hold.

Tether has used the power since 2017 and uses it far more often. The security firm BlockSec counted 9,597 blocked USDT addresses holding about 5.69 bn USD on Ethereum and Tron by 26 July 2026. Circle acts mostly on court orders; blockchain analytics firm AMLBot counted 372 addresses and about 109 mn USD frozen by Circle between 2023 and 2025. The two counts cover different time windows, but the gap in scale is plain.

The first well-known sanctions freeze came in August 2022, when the US Treasury's sanctions office designated addresses tied to the Tornado Cash mixer. Circle froze about 75,000 USD of USDC at those addresses. That case set the pattern that the GENIUS Act later made law: a US payment-stablecoin issuer must have the technical ability to block, freeze and reject transactions when a lawful order arrives.

Not every stablecoin can do this. DAI has no freeze function in its contract, and USDe has no blacklist on the token itself. For a holder, the freeze is a trade-off. It lets an issuer return stolen funds and satisfy regulators, and it means the dollar in your wallet can be stopped by a company you have never dealt with.

What to watch next

• Final GENIUS Act rules on reserves and reporting: the Office of the Comptroller of the Currency has said it aims for a final rule by November 2026. The exact reporting format and reserve limits will decide how much more issuers must disclose.
• A full reserve audit from Tether: Tether has never published a full audit by one of the four largest accounting firms. A completed audit of the reserve, rather than a quarterly attestation, would change how the market prices tail risk on USDT.
• Gold and bitcoin in Tether's book: these assets are not allowed in a US-regulated reserve. Watch whether they shrink, move to a separate entity, or stay as Tether's buffer outside the US.
• Freeze volumes after US enforcement starts in 2027: once issuers are formally treated as financial institutions under US anti-money-laundering law, Circle's freeze counts may rise toward Tether's.
• Admin-key disclosures: the number of signers behind Circle's upgrade key and Ethena's admin role is not public. Any disclosure, or a move to timelocks like Sky's, would reduce a risk holders currently cannot measure.