A dollar-backed stablecoin looks deceptively simple: a user provides $1, the issuer creates one digital token, and that token can later be redeemed for approximately $1.
The business model becomes much more interesting after the dollar arrives.
Instead of leaving billions of dollars idle, major stablecoin issuers generally hold reserves in highly liquid assets such as U.S. Treasury bills, government money-market funds, bank deposits and overnight repurchase agreements.
Those assets can earn interest.
The stablecoin holder still owns a token designed to remain worth $1, while the issuer can retain some or most of the income generated by the assets backing it.
That gap between what the user receives and what the reserve assets earn is one of the most important economic engines behind the stablecoin industry.
How Stablecoin Reserves Work
Imagine a company issues 10 billion stablecoins, each redeemable for one dollar.
To maintain full backing, it needs roughly $10 billion of qualifying reserve assets.
Those reserves might include:
- short-term U.S. Treasury bills;
- cash at regulated banks;
- government money-market funds;
- overnight Treasury-backed repo;
- other highly liquid assets permitted by the issuer's regulatory framework.
A Treasury bill does not need to increase dramatically in price to make the model profitable. It simply pays a yield.
If an issuer had $10 billion of reserves earning an average 4% annually, the simplified gross income would be:
$10 billion × 4% = $400 million per year
Meanwhile, the stablecoin holder still has a $1 token rather than a security paying that 4% yield.
This is why scale matters enormously.
A stablecoin issuer with $100 billion of reserve assets can potentially generate billions of dollars of annual interest income even without charging ordinary users a large transaction fee.
Coinpaper's guide to stablecoin payments explains the other side of the system: stablecoins can move continuously over blockchain networks while traditional banks, custodians and reserve managers still operate behind the scenes.
| Reserve asset | Liquidity | Typical yield | Primary purpose |
|---|---|---|---|
| U.S. Treasury bills | Very high | Tracks short-term Treasury yields | Core reserve asset; combines liquidity, capital preservation and interest income |
| Government money-market funds | Very high | Close to short-term money-market rates | Diversifies reserves while keeping funds highly liquid |
| Overnight / short-term repo | High | Usually close to policy and short-term secured rates | Earns yield on cash backed by high-quality collateral such as Treasuries |
| Bank deposits and cash | Very high | Usually lower than T-bills | Provides immediate liquidity for redemptions and operating needs |
| Other cash equivalents | Moderate to high | Varies by instrument and credit quality | Adds diversification and potential yield while maintaining relatively short maturities |
Circle Shows How Important Reserve Income Can Become
Circle provides an unusually clear example because it is publicly listed and files detailed financial statements with the SEC.
Circle reported $667.7 million of reserve income in the second quarter of 2026, compared with only $33.6 million of other revenue.
Reserve income represented 95.2% of total revenue during the quarter.
Circle says its USDC and EURC reserves include bank cash and investments in the Circle Reserve Fund. The company earns interest and dividends from those assets.
The formula is essentially:
stablecoins in circulation × reserve yield = reserve-income opportunity
That also creates an important relationship with Federal Reserve policy.
Circle said average daily USDC circulation increased 25.2% year over year during Q2 2026, which contributed about $147.4 million of additional reserve income. But lower interest rates reduced reserve income by approximately $113.9 million.
In other words, more stablecoins can increase revenue, while Fed rate cuts can reduce the amount earned on each reserve dollar.
Circle ended Q2 with approximately $73.3 billion of USDC in circulation.
Tether Uses the Same Basic Engine at Much Larger Scale
Tether's reserve structure is different, but the underlying principle is similar.
Tether says USD₮ is fully backed by reserves that include traditional currencies, cash equivalents and other assets. It publishes reserve information and quarterly independent reserve reports.
By the end of Q2 2026, Tether reported approximately $184.6 billion of USDT issuance, a $4.11 billion reserve buffer and $1.5 billion of quarterly net operating profit.
Readers looking specifically at Tether can also use Coinpaper's deeper guide to how Tether makes money, which covers reserve income alongside its other revenue sources.
The broader lesson is that a stablecoin company can start to resemble a very unusual combination of a payment network and a giant fixed-income portfolio.
It issues digital dollars to users while investing much of the backing in conservative income-producing assets.
RLUSD Uses a More Restricted Institutional Reserve Model
Ripple's RLUSD demonstrates how regulatory requirements can determine what an issuer is allowed to hold.
RLUSD reserves can include U.S. Treasury bills with three months or less remaining to maturity, government money-market funds, overnight Treasury-backed reverse repos and eligible bank deposits.
Ripple reported $1.98 billion of RLUSD reserve funds against $1.87 billion circulating as of Aug. 20, 2026. The company publishes monthly third-party reserve attestations.
The stablecoin has expanded rapidly, with Coinpaper tracking recent RLUSD growth as Ripple pushes further into institutional payments and settlement.
RLUSD itself is explicitly not designed to generate returns for users. Its terms state that the token is intended as a payment mechanism rather than an investment designed to produce profit.
That distinction matters.
Why Doesn't the Stablecoin Holder Get the Treasury Yield?
Because owning a conventional payment stablecoin generally gives the holder a claim to the token's redemption value—not ownership of the investment income produced by the reserve portfolio.
If $1 of reserves earns 4%, the token does not automatically become worth $1.04.
It is designed to remain around $1.
The income can instead help the issuer pay for:
- custody;
- compliance;
- banking relationships;
- distribution partners;
- technology;
- employees;
- liquidity;
- capital buffers;
- shareholder or corporate profits.
This is also why a stablecoin should not automatically be compared with a tokenized money-market fund.
A money-market fund is specifically designed to pass investment returns to investors. A conventional payment stablecoin is primarily designed to maintain a stable redemption value and function as money.
Coinpaper's comparison of bank stablecoins, tokenized deposits and CBDCs shows how different digital-dollar structures can represent fundamentally different financial claims.
