What if the stablecoin used for redemption loses its peg?

You receive the stated number of stablecoins, not a dollar amount. If the stablecoin trades below $1.00 when you sell it, you receive less; if you redeem it with the issuer at par, you depend on the issuer's redemption working. In March 2023, after Circle disclosed $3.3 billion of USDC reserves at Silicon Valley Bank, USDC traded well below $1.00 on exchanges for a weekend before recovering once deposits at the failed bank were protected.

Who bears the risk between the fund's payment and my receipt of dollars?

You do, once the fund has paid you the stablecoin. The fund's obligation is discharged when it delivers the agreed settlement asset; what happens to that asset afterwards is your exposure. Read whether the documents define payment as dollars or as the stablecoin.

Does the GENIUS Act remove the risk?

It reduces it. The Act limits payment stablecoins to permitted issuers, requires reserves backing outstanding coins one for one in specified liquid assets with regular public disclosure, and treats compliant payment stablecoins as not securities. Under SEC staff guidance, its effective date is the earlier of January 18, 2027 or 120 days after federal banking regulators issue implementing rules. Reserves and supervision lower the risk of a lasting loss; they do not remove short-term price moves, operational outages or freezes.

Can a stablecoin issuer freeze my redemption proceeds?

Yes. Major stablecoin contracts let the issuer block addresses, for example under sanctions or court orders. Proceeds sent to a blocked address, or an address the issuer blocks later, cannot be moved until released.

Does a fund that holds several money funds reduce this risk?

It can reduce dependence on one redemption route. AltStreet's Ondo review notes that OUSG's spread across several tokenized money funds helped during a March 2025 interruption in Circle's BUIDL redemption route.

Stablecoin Settlement Risk

Custody & Settlement

Definition

Stablecoin settlement risk is the exposure a holder takes when a transaction settles in a stablecoin rather than in dollars at a bank. A stablecoin is a token its issuer promises to redeem at a fixed value, backed by reserves; it is a claim on that issuer, not a deposit and not central bank money. When a tokenized fund pays redemption proceeds in USDC, or accepts subscriptions in it, the holder owns that claim between receiving the stablecoin and converting it to dollars. During that window the stablecoin's market price can fall below par (a depeg), its issuer can delay or limit redemptions, the issuer can freeze addresses, and the network can be congested. The risk is usually small and short, but it is a different risk from the fund's own, and it concentrates in exactly the stress events, such as a bank failure affecting reserves, when holders most want to exit.

Why it matters

Tokenized funds settle in stablecoins because stablecoins move on the same chains as the tokens, at any hour, which is what makes instant redemption possible. The cost is a second issuer between the fund and the holder's bank account. The BIS and CPMI describe the underlying principle as the singleness of money: settlement in central bank money is not subject to fluctuating exchange rates between public and private forms of money. Private stablecoins can trade away from par, and their redemption runs through their issuer's banks and processes. For most redemptions the window is short and the risk negligible. In a banking or market stress, the stablecoin and the fund can be affected at the same moment, which is when the window matters. Holders who redeem in a stablecoin should plan the conversion step, and should know which settlement asset the fund's documents treat as payment.

Common misconceptions

•A stablecoin is not a dollar deposit. It is a claim on its issuer, backed by reserves.
•Redeeming a fund into USDC does not end your exposure. It changes it to USDC's issuer until you convert.
•A depeg does not require reserves to be lost. Uncertainty about access to reserves is enough to move the price.
•Instant redemption depends on the stablecoin's own redemption working. An interruption there can stall the instant route.
•Regulation lowers but does not remove the risk. Short-term price moves, outages and freezes remain.

Technical details

A worked timeline

Saturday 2:00 a.m.: a holder redeems $1,000,000 of a Treasury fund through an instant route and receives 1,000,000 USDC.

Saturday 2:05 a.m.: the fund's obligation is discharged; the holder now owns 1,000,000 USDC.

Saturday morning: if USDC trades at $0.99 on exchanges and the holder sells, the holder receives about $990,000.

Monday: if the holder instead redeems USDC with its issuer at par, dollars arrive on the issuer's banking schedule, assuming redemption is operating normally.

Exposure: about two days of stablecoin issuer risk, chosen by the holder's conversion route.

What can go wrong in the window

Depeg: the stablecoin's market price falls below par on doubts about reserves or access to them.

Redemption interruption: the issuer or a route to it slows, limits or pauses redemptions.

Freeze: the issuer blocks an address under its contract powers.

Network problems: congestion, outages or high fees delay transfers.

Counterparty: an exchange used to convert fails or halts withdrawals.

Subscriptions in stablecoins

Valuation: the documents say whether the fund credits a stablecoin at par or at a market price.

Acceptance: some funds accept several stablecoins only for manual subscriptions (Ondo accepts PYUSD and RLUSD for manual OUSG subscriptions, with USD wire standard).

Conversion: the fund converts to dollars to buy assets, taking a short exposure itself.

Rejection: a subscription in a stablecoin the fund cannot process may be returned, with network costs.

Reducing the risk

Choose dollar settlement when timing allows.

Convert promptly through the issuer or a reliable venue, and know the route before redeeming.

Avoid concentrating large balances in one stablecoin in stress conditions.

Read the fund's definition of payment and its stablecoin acceptance terms.

How investors apply the term

Investors usually apply this term by tying the definition back to the controlling documents and then asking which cash flows, rights, restrictions, or valuation assumptions it changes. A useful review looks at the term alongside fees, leverage, liquidity, reporting frequency, and manager discretion rather than treating it as a standalone concept.

The practical diligence test is simple: identify who benefits if the assumption is wrong, who has control when conditions change, and what evidence the investor receives after closing. Terms that cannot be reconciled to documents, cash movements, and monitoring data should be treated as marketing shorthand until proven otherwise.

Frequently asked questions

What if the stablecoin used for redemption loses its peg?: You receive the stated number of stablecoins, not a dollar amount. If the stablecoin trades below $1.00 when you sell it, you receive less; if you redeem it with the issuer at par, you depend on the issuer's redemption working. In March 2023, after Circle disclosed $3.3 billion of USDC reserves at Silicon Valley Bank, USDC traded well below $1.00 on exchanges for a weekend before recovering once deposits at the failed bank were protected.
Who bears the risk between the fund's payment and my receipt of dollars?: You do, once the fund has paid you the stablecoin. The fund's obligation is discharged when it delivers the agreed settlement asset; what happens to that asset afterwards is your exposure. Read whether the documents define payment as dollars or as the stablecoin.
Does the GENIUS Act remove the risk?: It reduces it. The Act limits payment stablecoins to permitted issuers, requires reserves backing outstanding coins one for one in specified liquid assets with regular public disclosure, and treats compliant payment stablecoins as not securities. Under SEC staff guidance, its effective date is the earlier of January 18, 2027 or 120 days after federal banking regulators issue implementing rules. Reserves and supervision lower the risk of a lasting loss; they do not remove short-term price moves, operational outages or freezes.
Can a stablecoin issuer freeze my redemption proceeds?: Yes. Major stablecoin contracts let the issuer block addresses, for example under sanctions or court orders. Proceeds sent to a blocked address, or an address the issuer blocks later, cannot be moved until released.
Does a fund that holds several money funds reduce this risk?: It can reduce dependence on one redemption route. AltStreet's Ondo review notes that OUSG's spread across several tokenized money funds helped during a March 2025 interruption in Circle's BUIDL redemption route.