A Guide to Stablecoins: Majority Fiat Backed Stablecoins—usdt, Usdc, PYUSD

In Part One of ARK’s four-part guide to stablecoins, we introduced stablecoins and contextualized their development. I argued that the design of each type of stablecoin includes tradeoffs and consequences for holders. This article—Part II of ARK’s Guide—focuses on “Majority Fiat-Backed Stablecoins” and outlines how companies manage their reserves, including the mechanisms that maintain the stability and durability of their stablecoins: governance and compliance, token access and integration, and yield and incentive distribution. The Majority Fiat-Backed stablecoins covered here are: USDC (Circle) USDT (Tether) PYUSD (PayPal US Dollar) The most popular stablecoin type, majority-fiat backed stablecoins, dominate global crypto markets and account for more than 85% of the $313 billion supply.1 Now that Congress has passed the GENIUS Act, majority fiat-backed stablecoins are the only eligible options for issuers intending to offer payment stablecoins in the US. The majority-fiat backed stablecoin market is and has been a duopoly, with industry incumbents—Circle’s USDC and Tether’s USDT—dwarfing all competitors. PayPal’s US Dollar (PYUSD) is one of many new entrants attempting to challenge their dominance. In the remainder of this Guide, we analyze the Majority Fiat-Backed stablecoins, USDC, USDT, and PYUSD in terms of our five key criteria: Transparency: Clarity and verifiability of reserves, real-time tracking, and user-led analysis Durability: Peg stability, insurance mechanisms, external dependencies, and ability to preserve value Sovereignty: Censorship and seizure resistance, trust surface, and real ownership Accessibility: Usability, integrations, liquidity, and user experience Incentives: Native mechanisms that either reward holders or otherwise share value with users

Composition Of Reserves The reserves of majority-fiat backed stablecoins have similar structures, typically consisting of US-denominated cash and cash equivalents like short-term U.S. Treasury securities. Variations in the reserves of majority-fiat backed stablecoins stem from differences in their respective business strategies, regulatory authority, and risk appetite. The charts below illustrate the reserve compositions of USDC, USDT, and PYUSD. Source: ARK Investment Management, based on data from Tether, data as of December 31, 2025.2 For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security or cryptocurrency. Note: *(Lefthand chart): Cash owed is subtracted from Cash held at regulated institutions for accuracy purposes. Snapshot as of December 31, 2025. Source: ARK Investment Management, based on data from Circle, Paxos, and Stablecoin Insider, data as of December 31, 2025.3 For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security or cryptocurrency. While each stablecoin is backed ≥75% by fiat-based assets, the composition of their reserves varies, as each issuer targets a different combination of assets to maintain stability. Aligning with its US-centric operations and recent initial public offering (IPO), Circle holds all of its reserves in US-denominated cash and cash equivalents, mostly repo agreements and short-term Treasury bills. Similarly, for the same reason, all PYUSD’s reserves are in USD-denominated cash and cash equivalents—mostly cash and repo agreements. Paxos issues and manages PYUSD, operating under the supervision of the New York Department of Financial Services (NYDFS). In contrast, Tether has been focused on the rest of the world, with ~46% of USDT supply on the Tron blockchain that dominates in Latin America, Africa, and Asia.4 USDT is the stablecoin most frequently used on Tron by a wide margin.5 Tether is headquartered and licensed in El Salvador6 as a Digital Asset Service Provider (DASP)7 and has more latitude than US/EU counterparts to choose the reserves that will back USDT. As a result, Tether has backed USDT with the following reserves: ~24% in bitcoin, precious metals, secured loans, and other investments, and ~76% across various fiat-backed assets. Reserves backing USAT, its recently launched US focused stablecoin, are required to comply with the GENIUS Act reserve requirements to be considered an eligible payments stablecoin. The reserve management of majority-fiat backed stablecoins has been centralized, based not only on the issuer’s strategic vision but also on the regulatory environment. Centralization gives the issuer more control and thus flexibility to meet its objectives, which is important in adapting to various regulations. Transparency Of Reserves Majority fiat-backed stablecoin providers release audits and other reports to reassure investors about the integrity of their reserves. Typically released quarterly or monthly and endorsed by reputable third parties, the reports offer transparency, adding to issuer credibility, as illustrated on the main websites below. USDT (Tether): https://tether.to/en/transparency/?tab=usdt USDC (Circle): https://www.circle.com/transparency PYUSD (Paxos): https://www.paxos.com/pyusd-transparency Note: Links to stablecoin issuer websites are provided for informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security or cryptocurrency.

Reserves Custodians We list the Reserve Custodians/Managers of each majority fiat-backed stablecoin below. Cash & Cash Equivalents: Cantor Fitzergerald, Deltec Bank & Trust, Ansbacher Limited, Capital Union Bank, Far East International Bank, Capital Union, and others Bitcoin: Undisclosed (either stored in non-custodial wallets with private keys held by Tether OR held with a third party custodian) Precious Metals: Undisclosed Secured Loans: Undisclosed Other Investments: Undisclosed Source: ARK Investment Management, based on data from Tether, Aave, Blackrock, rwa.xyz, and Circle, data as of December 31, 2025.8 For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security or cryptocurrency. Nearly all majority fiat-backed stablecoin issuers use qualified custodians for their fiat reserve assets, including Treasuries and cash equivalents. Tether’s is the exception, with undisclosed custodians and storage methods for bitcoin and other non-fiat assets. In contrast, Blackrock manages most of Circle’s reserves in a specialized government money market fund,9 and Paxos Trust Company legally holds and manages the PYUSD reserves under its New York State Charter while utilizing qualified institutions for safekeeping and settlement in accordance with NYDFS.10 Anchorage Digital Bank will issue USAT, and Cantor Fitzgerald will custody and manage its reserves. Because Anchorage is positioned as the sole crypto bank with an Office of the Comptroller of the Currency (OCC) license, this framework will remove a layer of counterparty risk and custodian fees to which other issuers are subject. Circle is one of many in the process of applying for a federal bank charter, for which the OCC has granted conditional approval.11 While stablecoin custody arrangements present minimal risks relative to multi-collateral-backed or synthetic dollar models, their designs vary in durability. Placing all assets in segregated, bankruptcy-remote accounts at qualified institutions, for example, Paxos offers the strongest safety guarantees to token holders, even from its own hypothetical bankruptcy, as it legally isolates the reserves and places stringent limits on reserve lending and/or rehypothecation. That said, custodian-level risks cannot be eliminated. Taking a different tack, Circle holds the majority of USDC reserves in a Blackrock 2a-7 government money market fund,12 which does not offer the same guarantees as Paxos. While segregating USDC reserves from Circle’s corporate balance sheet, this structure is exposed to risks associated with Blackrock. Custodians of USDT reserves include a variety of banks and asset managers, but those for Tether’s USAT will be required to comply with the GENIUS Act reserve requirements with Anchorage Digital as the issuer. Our research suggests that an event that subjects custodians to counterparty risk is unlikely, as all listed custodians are qualified institutions within highly regulated markets. Nonetheless, investors should understand that edge-case scenarios, while highly unlikely, are possible. Depegging Risk And External Dependencies The peg stability of majority fiat-backed stablecoins hinges on two types of factors: those endogenous to the stablecoin design and those exogenous to issuer control. Endogenous factors involve the sovereign powers acting as the creditors of the reserves backing the stablecoin, specifically their insolvency and inability to service debt, as well as operational risks associated with the issuer and custodian(s) of the stablecoin, such as: The solvency risks of the holding institutions and custodians responsible for managing the reserves. The operational integrity and risk management of the issuer itself. While the risk of these factors is low, the collapse of Silicon Valley Bank (SVB) illustrated the fragility of the ecosystem when reserves are stored within fractional-reserve banks, as discussed in Part 1 of ou

Governance The governance of majority-fiat backed stablecoins is issuer-driven and centralized. Circle (USDC), Tether (USDT), and Paxos/PayPal (PYUSD) control their infrastructure, smart contracts, and all upgrade decisions. This structure enables rapid iteration and regulatory alignment but depends upon the issuer’s integrity and judgment. Compliance Major issuers of fiat-backed stablecoins have satisfied regulators with robust compliance frameworks. As delineated in the GENIUS Act, sections 4(a)(6)(b) and 2(16)(A),19 US regulators require each issuer to embed freeze functionality in its stablecoin token contract and enable immediate intervention when required. With subpoenas or sanctions, regulators can mandate freezes or seizures, or burning stablecoins payments. Token transfers are traceable onchain, and parties wishing to interact directly with USDC, USDT, or PYUSD—whether minting, burning, or accessing advanced features—must complete KYC verification. Additionally, the fiat reserves backing these stablecoins, typically cash and short-term U.S. Treasuries, fall under anti-money laundering (AML) requirements and the Bank Secrecy Act.20 This regulatory oversight limits user privacy and censorship resistance significantly. Interestingly, regulatory positioning is not a strong indicator of how actively a stablecoin issuer undertakes actions to assist US regulatory agencies, as Tether froze ~30x more USDT between 2023 and 2025 than Circle did USDC.21 Despite USDT’s offshore positioning and Circle’s US regulated operations, Tether froze ~$3.3 billion worth of assets throughout this period, while Circle froze ~$109 million of assets.22 The variation stems from a difference in regional operations and approach, as 53% of Tether’s frozen USDT was on the Tron network, and 38% of blacklisted addresses were handled in coordination with US law enforcement.23 Circle takes a more conservative approach, with a marginal USDC supply on Tron and only freezing USDC under court or regulatory orders.24

Liquidity The scale of a stablecoin plays an important role in its accessibility. As noted earlier, deep or thin liquidity can impact exchange- or ecosystem-specific risk. Based on the blockchain networks that host over $1 billion of a stablecoin’s supply, USDC meets that threshold on the six major networks hosting strong DeFi ecosystems. While more abundant, USDT meets the threshold on five major networks. Most of USDT’s supply is on Ethereum and Tron, Tron highlighting USDT’s dominance in the global south. PYUSD, which has not hit escape velocity, has surpassed the billion-dollar mark only on Ethereum, fluctuating above and below the 1 billion mark on Solana. Source: ARK Investment Management, based on data from Artemis and Nansen Wallet, data as of December 31, 2025.25 For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security or cryptocurrency. Note: Data from onchain providers may be over or understated depending on the wallet clustering methodology of the provider. Data marked with “*” refers to data obtained from onchain wallet clustering methods. “CEX” = Centralized Crypto Exchange. “DEX” = Decentralized Crypto Exchange. Source: ARK Investment Management, based on data from OKX, Kraken, Binance, ByBit, Pancakeswap, and Uniswap as of December 31, 2025.26 For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security or cryptocurrency. Exchange balances indicate the venues on which users are trading tokens and also signal the existence of accessible on/off-ramps, as shown in the “Stablecoin Supply Across Top CEXs and DEXs” table above. USDT dominates the Asian CEXs (Binance, OKX, and ByBit), while USDC dominates on Coinbase and Kraken. PYUSD’s exchange liquidity is nascent, in line with trader demand. Integrations While users can access most stablecoins through the majority of blockchains and exchanges, access to majority-fiat backed stablecoins requires native on-chain integrations to support smart contract networks that provide mint/redeem and other core functionality. New integrations often require networks to onboard stablecoins and pay distribution fees. Listed below are the blockchains with native issuance for each of the stablecoins. Note: Integration refers to access to the core developer API set of the issuer natively, on the blockchain. Source: ARK Investment Management, based on data from Tether, Circle and Paxos as of December 31, 2025.27 For informational purposes only and should not be considered investment advice or a recommendation to buy, sell, or hold any particular security or cryptocurrency. USDC is the most widely available by network integration, but USDT and PYUSD, while less natively integrated, outsource to LayerZero’s OFT (Omnichain Fungible Token) for cross-chain functionality.28

Yield And Incentives The most significant source of revenue generated by these majority fiat-backed stablecoins is the yield earned on their Treasury reserves which, in turn, relies heavily on interest rate projections. Historically, stablecoin issuers have not passed the yield on to token holders because of securities law-related regulations that the GENUIS Act crystallized in Section 4(a).29 While stablecoin issuers cannot return any of the yield they earn to holders, they can participate in exogenous opportunities to return yield through separate products or partners. The situation is a point of contention in the construction of crypto market structure legislation, however, and it remains to be seen if this feature will persist. Coinbase’s rewards program, which pays users ~3.5%30 to hold USDC on its platform, is the most notable example. Additionally, users can redeploy their tokens in yield-bearing products through Decentralized Finance (DeFi) protocols or CeFi (Centralized Finance) products.

While they are the least aligned with crypto native properties like censorship resistance and decentralization, fiat-backed stablecoins are the most durable, liquid, and trusted type of stablecoin. Their centralized architecture and regulatory alignment have legitimized blockchain-based finance beyond the crypto ecosystem, while their liquidity and resilience have contributed to the growth and stability of DeFi. Although the fiat-backed model offers less room for innovation, variations in distribution, custody, and oversight should allow issuers to differentiate their products and carve out distinct niches. With the passage of the GENIUS Act, fiat-backed stablecoins should be positioned for strong growth, especially as major financial and technology companies accelerate their entry into the space. Parts III and IV of our Stablecoin Guide will explore multi-collateral and synthetic-dollar models, alternatives that aim to achieve price stability without compromising as much on decentralization, censorship resistance, and control. Important Information Stablecoins aim to maintain a stable value, but they are not risk-free. Their value and stability depend on the issuer’s reserves, governance, and market conditions. Factors such as reserve mismanagement, regulatory changes, technical vulnerabilities, or loss of market confidence may cause a stablecoin to lose its peg or become illiquid. Users should conduct their own research, understand the underlying mechanisms and risks, and not rely on stablecoins as a guaranteed store of value. Glossary Of Terms “DeFi” or decentralized finance is an emerging financial system using blockchain and cryptocurrencies to enable direct transactions between individuals and businesses. “CeFi” or centralized finance refers to financial services and platforms provided by centralized entities, such as banks and exchanges, that manage user accounts and transactions. Fiat currency is a type of government-issued currency, authorized by government regulation to be legal tender. The U.S. dollar is an example of fiat currency.