A stablecoin may function as cash inside a trading strategy without giving the fund the legal protections of cash in a bank account.
The fund holds a token. Its value may depend on an issuer, a reserve portfolio, banks and custodians, a redemption process, smart contracts, and market makers. If the token is wrapped or bridged, another layer sits between the fund and the original issuer. During stress, a quoted one-dollar price does not ensure that the fund can redeem its full balance when needed.
Stablecoin diligence should therefore begin with the fund’s actual use. A token held overnight for settlement presents a different risk from the same token used as long-term liquidity, posted as collateral, or concentrated at one exchange. The manager needs to connect reserve information and legal rights to access, timing, and loss under those conditions.
Define what “stable” is supposed to mean
Stablecoins use different mechanisms and give holders different rights. Some are issued against reserves and promise redemption at a reference value. Others rely on overcollateralized crypto assets, protocol incentives, or algorithmic mechanisms. A token may target one U.S. dollar without offering direct redemption to every holder.
The diligence file should identify:
- the issuer and relevant legal entity;
- the mechanism intended to maintain value;
- the holder’s contractual or statutory rights, if any;
- who may redeem and under what conditions;
- the reserve assets and where they are held;
- the token contract and supported networks;
- freeze, blacklist, upgrade, and administrative powers; and
- whether the fund holds the native token or a wrapper issued by another party.
Marketing terminology does not answer these questions. “Fully reserved,” “cash-backed,” and “redeemable” must be tested against governing terms, reports, and the fund’s eligibility.
The GENIUS Act changes the issuer framework, not the fund’s diligence obligation
The Guiding and Establishing National Innovation for U.S. Stablecoins Act, known as the GENIUS Act, became law on July 18, 2025. The Act creates a federal framework for permitted payment stablecoin issuers and includes requirements concerning one-to-one reserves composed of specified assets, public redemption policies, timely redemption procedures, monthly reserve disclosures, accounting-firm examination, officer certification, and restrictions on rehypothecation.
The framework is still being implemented. As of August 12, 2026, the Office of the Comptroller of the Currency’s broader implementing measure remains a proposed rule. FinCEN and the Office of Foreign Assets Control have also proposed anti-money-laundering and sanctions-program requirements, and FinCEN and banking agencies have proposed customer-identification-program requirements for permitted issuers. Fund documents should distinguish enacted statutory requirements from proposed implementing details that may change before adoption.
The Act’s issuer standards are meaningful, but a one-to-one reserve requirement does not guarantee immediate redemption or eliminate market loss. The fund still must ask whether it has a direct claim, whether it is an eligible customer, which intermediary processes redemption, how long the process takes, what fees or minimums apply, and how an issuer or reserve-custodian insolvency would affect the claim.
Nor should the fund assume that deposit insurance on a reserve bank account passes through to every token holder. The identity of the depositor, account structure, applicable limits, and legal status of the holder’s claim require separate analysis.
Veritas Global’s analysis of stablecoins under the SEC framework and the GENIUS Act provides additional regulatory context. The fund-level question is narrower: how does this particular holding behave in the portfolio?
Reserve quantity and reserve quality are different tests
A monthly report may state that reserve assets equal or exceed outstanding tokens. The manager should also examine composition, duration, credit exposure, liquidity, custody, encumbrance, and reporting scope.
Cash held at a bank creates exposure to that bank and to the account structure. Treasury bills create market and settlement considerations even when credit risk is low. Repurchase agreements add collateral, counterparty, and operational terms. A money market fund introduces another vehicle and its own portfolio. The location and legal segregation of reserves can matter as much as the asset label.
The manager should understand what an attestation or examination covers. A report may test specified reserve information at month-end without providing a full financial-statement audit, continuous assurance, confirmation of every liability, or a legal opinion on holder rights. A delay in publication, change in accounting firm, qualification, or mismatch between circulating supply and reported liabilities should trigger review.
The analysis should not stop at the issuer. Several stablecoin issuers can use the same bank, custodian, money market fund, or settlement provider. A fund that holds three tokens may still have one underlying financial-institution dependency.
Redemption capacity belongs in the liquidity model
The fund may obtain liquidity in two ways: sell the token in a secondary market or redeem it with the issuer or an authorized intermediary. Those paths can produce different prices, timing, documentation, and counterparty exposure.
For direct redemption, the manager should confirm eligibility, onboarding status, minimum amounts, fees, processing hours, banking rails, settlement currency, contractual suspension rights, and the destination account. A policy that says the fund “can redeem” is not operational if the account has never been approved or the required bank cannot receive proceeds.
For secondary sales, market depth and venue access matter. The displayed price may remain close to one dollar for small trades while a large sale moves the market. During a depeg, exchanges may suspend deposits or withdrawals, market makers may retreat, and the banking system may be closed.
Periodic redemption or withdrawal tests can verify the path. The test should record the request time, approval, token burn or transfer, cash receipt, fees, and any intermediary. It should not be so predictable that it substitutes for stress planning.
Freeze and blacklist powers create both protection and exposure
Many issuer-controlled stablecoins include the ability to freeze addresses, block transfers, upgrade contracts, or respond to legal process. Those powers can help stop theft and support compliance. They also mean the fund’s ability to transfer can depend on the issuer’s decision and the accuracy of its controls.
Diligence should examine the legal and technical basis for these powers, how they are authorized, the process for mistaken freezes, and whether the fund can contact an escalation team. A fund should know whether a custodian or exchange can separately restrict the token even when the issuer does not.
Sanctions and anti-money-laundering controls can affect redemption and transfer. The manager should disclose that assets may be delayed, frozen, blocked, or rejected where the facts warrant, while avoiding the suggestion that a service provider’s screening eliminates the fund’s own applicable obligations.
Wrappers and bridges can sever the direct connection
A token with the same brand may exist natively on one network and through a bridge or wrapper on another. The wrapped token may represent a claim on locked native tokens, depend on a multisignature committee, or rely on smart-contract and oracle functions. The original issuer may have no direct obligation to redeem the wrapper.
The fund’s systems should identify the contract address and network, not only the ticker. Limits should look through wrappers to the underlying stablecoin while separately measuring bridge, contract, and operator exposure. A dashboard that combines all versions at one dollar can conceal that one is frozen, undercollateralized, or illiquid.
This distinction also matters in incident response. Sending a wrapped token to the native issuer’s redemption address may not produce cash and may destroy value. Custody and transfer procedures should maintain verified network-specific instructions.
Concentration should reflect the stablecoin’s role
A fund may view stablecoins as temporary settlement assets and allow a larger balance than it would for a speculative token. That choice should not make the exposure invisible.
The limit framework can measure:
- gross exposure by issuer and token;
- look-through exposure to reserve banks and custodians where data permits;
- amount held at each exchange or lending counterparty;
- amount posted as collateral or locked in a protocol;
- native and wrapped exposure by network;
- immediately redeemable versus operationally restricted balances; and
- reliance on one stablecoin for subscriptions, redemptions, margin, or payroll.
The manager should define warning levels, hard limits, measurement timing, exceptions, and the response to a breach caused by market movement. If a stablecoin falls to $0.90, measuring the limit only at current value can make the percentage look smaller precisely as risk grows. Token units, cost, redemption claim, and stressed value may all be relevant.
Valuation cannot assume the peg by policy
Carrying every stablecoin at one dollar regardless of observable conditions can misstate net asset value. The valuation policy should identify its primary price, redemption evidence, alternate sources, and price-challenge triggers.
Triggers may include a material secondary-market deviation, redemption suspension, reserve-report issue, bank or custodian event, abnormal mint or burn activity, contract exploit, issuer enforcement action, or divergence among networks. The committee should document whether the fund can access direct redemption and how that affects fair value under the applicable accounting framework.
The fund should also reconcile accrued interest or rewards carefully. If a venue pays yield on a stablecoin balance, that yield may arise from lending or another counterparty arrangement rather than from the stablecoin itself. The manager should not describe the combined position as an ordinary cash balance.
Disclosures should state the dependency, not just the depeg risk
Offering materials often warn that a stablecoin may lose its peg. Investors also need to understand how the strategy uses the token and what a disruption would affect. Material disclosure may address settlement, collateral, liquidity, issuer and reserve exposure, redemption, freezes, smart contracts, wrappers, venues, and concentration.
Due-diligence answers should match daily operations. If the fund tells investors that stablecoins are held only briefly, records should support the typical and stressed holding period. If it says it maintains multiple settlement assets, it should know whether those alternatives depend on the same bank or exchange.
A stablecoin policy is credible when it treats the asset as a chain of enforceable rights and operational dependencies. Veritas Global advises digital asset funds on stablecoin diligence, counterparty terms, investment limits, valuation, and offering disclosure. If your treasury policy treats every dollar-linked token as cash, contact us to review the exposures behind the balance.
Disclaimer: This article is provided for general informational purposes only and does not constitute legal, financial, accounting, investment, sanctions, or other professional advice. It does not create an attorney-client relationship. Stablecoin rights and risks depend on the issuer, structure, terms, network, intermediaries, jurisdiction, and facts. Readers should consult qualified advisers before acting.
