Stablecoins Explained: How They Work, Types, Uses, and Risks (2026 Guide)

A stablecoin is a cryptocurrency designed to track the price of a fiat currency such as the U.S. dollar or a specific asset. It aims to avoid the large price swings typical of Bitcoin, making it easier to use for transfers and payments. However, its price is not guaranteed to stay fixed, and there is a risk that the peg could break.

How It Works: What Backs the Price

Stablecoins are classified by how they are backed to keep their prices stable. The main models are the following.

• Fiat-collateralized: The issuer holds an equal amount of fiat currency, bank deposits, government bonds, or similar assets, and these assets back the token.
• Crypto-collateralized: Another cryptocurrency is deposited as collateral to support the token's value.
• Algorithmic: No collateral is used; instead, the supply is automatically expanded or contracted to adjust the price.

In general, fiat-collateralized stablecoins are relatively easy to understand, but the issuer's asset management and transparency become critical. Algorithmic stablecoins have experienced sharp price collapses in the past, so they require especially careful understanding.

Main Types and Their Position in Japan

In Japan, the amended Payment Services Act, which took effect in June 2023, divides stablecoins into two broad categories. One is the "digital money-type," defined as an "electronic payment instrument." The other is the "crypto asset-type." Digital money-type stablecoins are positioned as being treated differently from traditional crypto assets such as Bitcoin.

Overseas, U.S. dollar-pegged stablecoins and others are widely used. Which tokens can be handled in Japan and how they are treated for tax purposes vary by country, region, and time period, so be sure to check the latest rules before using them.

Use Cases: The Foundation for Transfers, Payments, and Trading

Stablecoins are used in the following situations:

• Cross-border remittances: Can be faster and cheaper than bank-based transfers
• Base currency in crypto trading: Used as a temporary refuge from highly volatile assets
• Payment applications: Their use in online payments and business-to-business settlements is under consideration

An analytical article from NTT Data reports that stablecoin trading volume and payment amounts have grown significantly in recent years. However, these figures vary in substance depending on the nature of the transactions, so the size of the market alone cannot be used to judge safety or long-term potential.

Risk: When the Price Peg Breaks

Stablecoins also carry risks that differ from those of general cryptocurrencies.

• Price risk: The price may drift away from the asset it is pegged to, potentially resulting in a loss of principal.
• Issuer risk: It can be difficult for users to verify whether the reserve assets are sufficient and properly managed.
• Technology and hacking risk: Losses may occur due to smart contract bugs or unauthorized access.
• Regulatory risk: Laws and regulations in a country or region may change, potentially restricting how stablecoins can be handled or used.

It is important to understand that "a stablecoin is not a guarantee of principal."

Things to Check Before You Use It

When dealing with stablecoins, check the issuer's disclosures, the composition of its reserve assets, and the operational status of the exchange you plan to use. For guidance on choosing an exchange, see our Crypto Exchange Comparison. Information that changes over time, such as fees and supported coins, should always be confirmed on each service's official website for the latest details.

Summary

Stablecoins are crypto assets designed to track the price of fiat currencies or other assets, and they are widely used for remittances, payments, and as a foundation for trading. It is important to understand how they work and the different types available, and to consider them carefully within your own comfortable limits, taking into account the risk that the price peg may break down and the differences in regulation. This article is provided for informational purposes only and does not recommend the purchase of any specific product.

Risks and Disclosures

Risk: Crypto assets are highly volatile, and you may lose some or all of your principal. This article is a general explanation based on information as of 2026-10-27. It does not constitute investment solicitation or advice, nor a recommendation of any specific asset. Whether trading is permitted and how it is taxed varies by country and region, so be sure to check the regulations in your country of residence and the latest terms of each exchange before using any service.

Affiliate Disclosure: This article may contain affiliate (advertising) links, and this site may earn a commission at no additional cost to readers. Commissions do not influence our evaluations.

Frequently Asked Questions

Are stablecoins guaranteed to preserve principal?

No, stablecoins are not guaranteed to preserve your principal. They are designed to track a target value, but depending on their reserves and structure, the price can deviate, and you could lose part of your investment.

How are stablecoins classified in Japan?

Under the Amended Payment Services Act, which took effect in June 2023, stablecoins are divided into two categories: "electronic payment instrument-type" and "crypto asset-type." Please check the latest regulatory information for details.

What are the main risks of stablecoins?

The main risks include the price drifting away from its peg, risks related to how the issuer manages its reserve assets, losses from hacks or technical failures, and the impact of changes in regulations.

What should I check before using stablecoins?

It is important to review the issuer's disclosures, the composition of its reserve assets, the reliability of the exchanges you use, and the fees and supported services, and to confirm the latest details on official websites.