The $1 promise: can you actually use it?
A stablecoin trades near $1 because of a redemption promise: hand in one token, receive one dollar. But if anxious markets push the exchange price to $0.97, not every holder can go to the issuer and collect $1. Who the promise is open to, and on what terms, determines how safe the coin really is.
This post walks through how market price and redemption differ, who can redeem directly, and what legal rights holders have over reserves. It compares outcomes for different holders in a hypothetical price slip and lists what to check.
Price stability and the redemption promise
A stablecoin's market price is set by supply and demand on exchanges. Redemption is a separate process in which the issuer takes back tokens and pays out fiat currency. The two stay close because participants with redemption rights buy below $1 to redeem, and mint new tokens to sell above $1.
The BIS Financial Stability Institute's report on stablecoin regulation explains that the stability stablecoins promise ultimately rests on their reserves and redemption arrangements, and that regulatory responses are being built around exactly those elements. A stable market price depends on confidence that redemption works.
Who can redeem directly?
Many fiat-backed stablecoins offer direct redemption only to institutions or large holders that have contracted with the issuer and completed identity checks. Minimum redemption sizes are often high, and fees and processing times are common.
Most individuals can only sell on an exchange at the market price. In normal times the difference is negligible; in stressed markets, outcomes for those who can redeem and those who cannot can diverge sharply.
A hypothetical redemption scenario
The table compares how different holders can turn tokens into cash when the exchange price has fallen to $0.97. Issuer redemption is assumed to require a $100,000 minimum, charge 0.1%, and take two business days.
| Holder | Tokens | Available route | Amount received | Time |
|---|---|---|---|---|
| Institution with redemption rights | 1,000,000 | Direct redemption with issuer | $999,000 | About 2 business days |
| Same institution, in a hurry | 1,000,000 | Sell on an exchange | ≈ $970,000 plus spread | Immediate |
| Individual | 1,000 | Exchange sale only | ≈ $970 | Immediate |
| Individual, on a DEX | 1,000 | Swap on a decentralized exchange | ≈ $965 incl. price impact and fees | Minutes |
The same token yields $0.999 for an eligible institution and around $0.97 for an individual. If the price does not return to $1, that gap becomes a realized loss.
Reserves and legal rights
How well the redemption promise is protected in law also matters. If the issuer fails, whether holders have a priority claim on the reserves or must share with other creditors depends on the issuer's jurisdiction and terms of service.
The Financial Stability Board's 2023 recommendations call for holders to have a clear and robust right of redemption and for reserves to be kept separate from the issuer's other assets. Check how the terms describe redemption rights and whether they say reserves are held separately.
Costs, timing, and jurisdiction
Redemption terms differ widely: minimum amounts, fees, processing times, operating hours, supported banks and countries, and identity checks. Knowing them in advance tells you what options you would have in a hurry.
Terms often set out conditions under which the issuer can suspend or limit redemptions. Processing can slow when requests surge in a stressed market, and redemptions may wait until banks reopen after a weekend.
It is worth running through the scenario before you need it. Write down, for your own holdings, which route you would actually use on a bad day, how long it would take, and roughly what you would receive.
Reading the filings
Before holding or using a stablecoin, review its redemption terms in this order.
- Read the issuer's terms for who can redeem, minimum amounts, fees, and processing times.
- If you cannot redeem directly, identify which exchanges you would use in a hurry and how liquid the token is there.
- Find holders' rights in an issuer insolvency and whether reserves are held separately, in the terms and regulatory disclosures.
- Check the conditions under which redemptions can be suspended or limited.
- Identify the issuer's regulator and what obligations that regime places on redemption rights.
Limits of the distinction
Good redemption terms mean little if operational problems at the issuer or its banks delay payments while the market price keeps falling. A redemption promise is only as good as the issuer's ability to honor it.
The scenario and terms here are hypothetical. When assessing a real stablecoin, use the issuer's latest terms and regulators' publications, noting when each was last updated, and confirm the route by which you could actually receive $1 before relying on a $1 market price.