Stablecoins are rapidly becoming core infrastructure for the global financial system. They enable faster settlement, cheaper cross-border payments and more efficient on- and off-ramps between traditional and digital markets. But as adoption grows, so do the questions from financial institutions: What makes one stablecoin safer than another? Which issuance models are most aligned with global banking standards?

The answer comes down to the regulatory framework overseeing issuance (or lack thereof) and the strength of the reserves backing the stablecoin. Trust company-issued stablecoins – digital tokens fully backed by cash and U.S. Treasuries, held in bankruptcy-remote trust accounts and supervised by state or federal banking regulators – stand apart as the most regulated and safest form of issuance, providing banks and global enterprises with confidence in the integrity of the instrument.

Not All Licenses Are Created Equally

First, it's vital to differentiate between being licensed or registered and being supervised by a regulator. A state money transmitter license, like those held by USDC's issuer Circle, mandates adherence to specific state rules for offering products to state residents. State licensors do not oversee the stablecoin product or its reserves. This lack of comprehensive regulatory supervision over reserves allows issuers to invest them as they see fit. 

Additionally, registration of the issuer does not equal regulatory supervision of the token. Most stablecoin issuers are registered with FinCEN, requiring them to properly onboard customers and file Suspicious Activity Reports with the US government. While FinCEN plays an essential role in combating financial crime through these rigorous anti-financial crime hygiene standards, it does not guarantee the security or 1:1 backing of reserve funds with US dollars. Registration with FinCEN is a fundamental requirement for any financial service provider, demonstrating adherence to crucial anti-financial crime measures, but it does not constitute regulation of the digital asset itself. The registration of an issuer, therefore, does not equate to the supervised regulation of the token.

Differences in Issuance and Structure: Trust Company and Non-Trust Company Stablecoins

Trust Company-Issued Stablecoins

A trust company is a special purpose financial institution chartered and supervised by state or federal banking regulators in the US. Trust companies, particularly those regulated under the Office of the Comptroller of the Currency (OCC) and the New York Department of Financial Services (NYDFS), are held to rigorous prudential standards designed to protect client assets.

Trust company-issued stablecoins have critical safeguards that others do not:

• Bankruptcy remoteness: Reserves are held in trust, segregated from the issuer’s corporate balance sheet. Holders of a trust-issued stablecoin have a direct legal claim to the reserves. In the event of insolvency, these stablecoin holders will be able to recoup funds at par value with the dollar. Additionally, the issuer cannot lend out any customer assets and the regulator monitors that the trust company adheres to these practices.
  
  

• Rigorous regulatory oversight: Trust companies are subject to capital requirements, compliance examinations and ongoing supervision. The regulator consistently examines all aspects of the company to ensure it is adhering to the rules and laws.
  
  

• Transparent and high-quality reserves: Trust company charters require reserves to be held in cash and short-term U.S. Treasuries—assets with near-zero credit and liquidity risk. There is a limited list of financial instruments that the trust company can invest the reserve, which ensures consumer safety. 

Non-Trust Company Stablecoins

Most stablecoins in the US market today are issued by entities that are not regulated as trust companies - neither Circle nor Tether currently issue their stablecoins in the US from trust companies. Instead, they may operate as money service businesses (MSBs), money transmitter licensees (MTLs), limited liability corporations or entities registered under no clear regulatory regime. While these issuers often claim to back tokens with high-quality reserve assets, a regulatory regime is not ensuring this is the case.

Key concerns with non-trust company issuers include:

• Weaker risk management: Within the US, stablecoin issuers operating as MSBs or using MTLs to offer services in specific states are not required to operate with stringent risk management practices. Oversight is often limited to anti-money laundering compliance rather than prudential supervision and soundness of reserves.
  
  

• Unclear recourse: In the event of insolvency, these stablecoin holders may be considered unsecured creditors, leaving them without direct legal claims to reserves. This means the end consumer is unlikely to recoup funds at par value with the dollar or any recoup would be significantly delayed.
  
  

• Opaque reserves: Reserves may include riskier assets, long-dated instruments or securities that are not always liquid or held in bankruptcy-remote accounts. These issuers do not have regulations they must follow for how the reserves can be invested.

How does this protection play out in real life? 

During the U.S. regional banking crisis in March 2023, both USDC and USDT temporarily lost their 1:1 peg to the dollar. USDC fell as low as $0.87 after Circle disclosed that $3.3 billion of its reserves were held at Silicon Valley Bank (SVB), which had just collapsed and entered FDIC receivership. Market participants worried those funds might be unrecoverable, creating panic selling pressure. USDT also briefly traded below $1 as investors rotated into other assets and overall market confidence in stablecoins weakened. 

These dislocations highlighted how reserve composition and counterparty exposure directly affect stablecoin stability—and why holding reserves in high quality liquid assets, under a trust framework, provides stronger protection in times of systemic stress.

Why This Matters for Regulated Institutions

As global financial institutions evaluate how to integrate stablecoins into their ecosystem, the issuance model becomes a defining factor. Trust company-issued stablecoins offer:

• Regulatory confidence: Backed by a bank-grade supervisory regime.
  
  

• Legal certainty: Holders retain direct claims to reserves in the event of issuer distress.
  
  

• Market credibility: Transparent reserves eliminate the risks of hidden leverage or illiquidity.
  
  

For banks and enterprises seeking to operate at global scale, only trust company-issued stablecoins—like those from Paxos—provide the security, compliance and transparency necessary to build durable financial infrastructure.

Conclusion

Stablecoins are no longer fringe instruments—they are becoming embedded in the pipes of global finance. But the risks of weak regulatory structures and opaque reserves are real. For banks and large institutions, the safest path is clear: stablecoins issued through a regulated trust company, fully backed by cash and short-term U.S. Treasuries.

This is the model Paxos pioneered in 2018 and the model that meets the standards of the world’s largest financial institutions—and the only model that can scale with the trust and resilience the financial system demands.\

This post is provided for informational purposes only and does not constitute legal advice. Readers should consult their own legal counsel regarding any legal matters or requirements relevant to their specific situation. Paxos makes no representations or warranties regarding the legal accuracy, completeness, or suitability of the information contained herein.