What Stablecoin Reserves Actually Are
Reserves are not abstract. They are real financial assets held across a chain of third parties. USDC, for example, holds its reserves in a mix of cash, US Treasury bills and overnight repo, with around 80% sitting in a BlackRock-managed money market fund custodied at BNY Mellon. Tether reports roughly 79% of its reserves in US Treasuries, alongside smaller holdings in other assets.
The practical point is that a stablecoin’s backing lives across commercial banks holding cash, custodian banks holding s. ecurities, and fund managers running money market funds. That is the custody chain, and it is where the real loss scenarios sit.
The Loss Scenarios in The Custody Chain
Each link carries its own exposure. Cash and securities can be lost through fraud, theft, employee dishonesty, forgery, or the social engineering of payment instructions. A custodian or counterparty can fail. And as reserves increasingly move on-chain, a new layer of risk appears.
Tokenised money market funds and Treasury products are now a multi-billion-dollar asset class. BlackRock’s tokenised BUIDL fund alone passed one billion dollars in 2024. When reserves are held in tokenised form, smart contract failure and private key compromise become part of the reserve risk, not just an exchange’s problem.
How Insurance Responds
No single policy answers all of this. The exposures map to several distinct covers that have to work together.
Crime insurance responds to theft, fraud, embezzlement, forgery and social engineering, the human and criminal attacks on the funds and the flows around them.
Specie insurance covers physical and in-custody loss of high-value assets. Historically that meant bullion, art and cash, but the specie market has expanded to cover cryptocurrency held in cold storage, protecting against theft, physical loss or damage of the storage media and the loss of keys held by a custodian.
For tokenised or digital-asset reserves, digital asset cover comes into play, and it is best understood as a set of separate policies rather than one product, because the exposures are still evolving.
Around these sit Directors and Officers cover, for the individuals accountable to regulators, and Professional Indemnity, for the issuance and redemption service itself.
Where The Gaps Are
Two realities make this harder than buying a single policy.
The first is capacity. Industry estimates have suggested that only a small fraction of crypto assets are insured at all, and the dedicated crypto insurance market is still measured in low single-digit billions of dollars. Individual custody programmes typically carry limits in the hundreds of millions, with around one billion dollars the upper end available in the market. Set that against stablecoins with tens of billions, in some cases well over one hundred billion, in circulation, and it is clear that available limits rarely match the full value of the reserves behind a large stablecoin.
The second is structure. Custodian indemnities, banker liabilities and the way each cover is worded vary by provider and by jurisdiction. Bought one at a time, from different markets, gaps open up between the wordings that no one owns until a loss tests them.
What Issuers and Applicants Should Do
The work is not collecting policies. It is mapping where the reserves actually sit, matching cover to each point in the custody chain, and making sure crime, specie and digital asset wordings line up so nothing falls between them. For an issuer applying for or holding a licence, a coordinated view of reserve cover is also a clear way to demonstrate proactive risk management to a regulator.
This is a recommendation, not a regulatory checklist, and the right structure depends on the jurisdiction, the custodians and how much of the reserve is tokenised.
Continuum advises on and arranges these covers as a coordinated programme, so the protection behind the 1:1 promise is as solid as the promise itself. Contact us for a non-obligation discussion of reserve exposure.
