Fiat backed stablecoins are digital assets that maintain financial reserves in fiat currency held by regulated institutions such as banks.

Examples:

• USDT – Tether Cryptocurrency (Started in 2014)
• USDC – USD Coin (Started in 2018)
• BUSD – Binance USD (Started in 2019)
• GBPT – Poundtoken (Started in 2022)
• EUROC – Euro Coin (Started in 2022)

They are the most commonly used, accepted, transacted and trusted type of stablecoin. The stability of fiat-backed stablecoins is reliant on transparency and adequate reserves. 

It is most often that 1 real world currency = 1 stablecoin, as these are backed and pegged at a 1:1 basis. 

Fiat is the most commonly used collateral for stablecoins. Their financial reserves are maintained in fiat currencies held by regulated institutions such as banks where money is held in a bank vault or left with a trusted financial custodian. 

Fiat-backed stablecoin reserves are weighted as a mix of cash and cash equivalents like commercial paper. Their stability is dependent on the entity maintaining significant reserves and compliance with both auditors and regulators to provide transparency about these reserves. (The two largest stablecoins by market cap, Tether (USDT) and USD Coin (USDC) are fiat backed.)

• Stability compared to ‘speculative’ cryptocurrencies and digital assets, the volatility (if any), is often minimal, more akin to the FX market than traditional cryptocurrency.
• Easy to understand as the structure of being backed by fiat is a common concept in traditional finance and in a ‘yet to be proven’ world which is associated and labelled by the behaviour of bad actors and greedy companies, having a likeness to the traditional finance sector is something which instils faith in consumers. 
• Worldwide strength in the specific asset backing it helps with credibility and confidence. For example, with dollar pegged stablecoins, the asset which is backing them is the world’s dominant reserve currency, the US Dollar ($).
• Heavily regulated and involves nationwide input for this regulation, thus making it secure for consumers to have faith in and to transact with.
• Centralised, meaning the majority controller(s) ensure the peg is maintained and they have a duty and priority to ensure the safest use of the stablecoin continues to grow and scale. (In order to maintain the 1:1 peg)

• Centralised fiat backed stablecoins can be less transparent, so auditors are used and conducted to improve transparency. This makes it harder to have complete trust in the stablecoin and the system behind it as users are at the mercy of less transparency and then also at the mercy of auditors to be able to do their due diligence and conduct a thorough audit.

For more information, visit our complete guide to stablecoins.