ISSUE 2 OF 6 · THE DIGITAL DOLLAR PERILS SERIES

Stablecoins look like cash. They are not cash. They are credit instruments issued by private companies, and the events of March 2023 demonstrated what happens when the underlying credit fails. The portfolio responses to this risk are worth examining, none of them are clean, and the right answer depends on the family.

Stablecoins are routinely described as digital dollars. The description is misleading. A stablecoin is not a dollar. It is a claim on the issuer for a dollar, conditional on the issuer's solvency, the integrity of the reserves, and the operational continuity of the redemption mechanism. Each of those conditions has failed in the recent history of the industry, and the structural reasons for the failures remain in place.

For a family office that holds stablecoins as cash equivalents in a treasury operation, the conventional accounting treatment does not always match the actual credit profile of the instrument. The asset on the balance sheet is closer to a money-market position with no FDIC backing than to a bank deposit or a Treasury bill.

Circle's USDC dropped to 87 cents in March 2023 because 8 percent of its reserves were stuck at Silicon Valley Bank.

In March 2023, USDC depegged sharply during the collapse of Silicon Valley Bank. The stablecoin dropped to approximately $0.87 in secondary market trading. Circle later confirmed that approximately $3.3 billion, or roughly 8 percent of USDC's total reserves at the time, was held at SVB and was inaccessible during the bank's failure. The peg was restored within days as the FDIC took over SVB and Circle confirmed access to the funds, but the depeg event illustrated a structural property that did not disappear when the price recovered.

Every dollar-pegged stablecoin sits on top of a reserve composition. The reserves are held at banks, in Treasury bills, or in commercial paper. Each of those components has counterparty risk. A bank can fail. Commercial paper can default. Treasury bills can lose mark-to-market value during interest rate shocks. The stablecoin is no more solvent than the worst component of its reserve stack.

Tether's reserve composition history has been the subject of regulatory enforcement.

Tether, the issuer of USDT and the largest stablecoin by market capitalization at approximately $162 billion as of mid-2025, has faced regulatory enforcement related to historical disclosures about its reserves. In 2021, Tether settled with the New York Attorney General over claims that the company had misled customers about reserve backing during prior periods. Tether's reserve attestations since then have moved toward greater transparency, and in March 2025 the company announced it was engaging a Big Four accounting firm to conduct a full audit.

The current state of Tether's reserves is publicly disclosed in quarterly attestations. The reserves include U.S. Treasury bills, secured loans, Bitcoin, and other instruments. The composition has improved meaningfully since the 2021 enforcement period. The structural point remains. A USDT holder is a credit claimant on Tether, with priority and recovery depending on the legal status of the reserves and the jurisdiction of resolution. That is a different position than holding cash.

The Terra collapse demonstrated what happens when the peg mechanism is algorithmic rather than collateralized.

Terra's UST stablecoin collapsed in May 2022, wiping out roughly $40 billion in market value within days. Terra was an algorithmic stablecoin that maintained its peg through arbitrage with a sister token rather than through dollar-denominated reserves. When confidence in the arbitrage mechanism broke, the peg collapsed and could not be restored. The Terra collapse is not directly comparable to USDT or USDC because the architecture is different. It is, however, a precedent that any stablecoin holder should understand.

The GENIUS Act, passed in July 2025, prohibits algorithmic stablecoins from being classified as payment stablecoins under U.S. federal regulation. The reserve-backed model is now the only permissible structure for U.S.-regulated stablecoins. That removes one historical failure mode. It does not remove the counterparty risk inherent in any reserve-backed stablecoin.

CBDCs replace private-issuer credit risk with sovereign and policy risk.

A central bank digital currency is a direct liability of the central bank. It eliminates the private-issuer credit risk that affects stablecoins. The trade-off is that the holder's claim is now directly against the state, and the state has every tool of monetary policy and capital control to modify, restrict, or expire that claim. The PBOC's January 2026 reclassification of e-CNY as a deposit liability rather than as digital cash is an example of how the legal character of a CBDC holding can shift through administrative action.

For a family office, replacing private-issuer credit risk with sovereign credit risk and policy risk is not automatically a portfolio improvement. It is a substitution of one set of structural risks for another, with the additional consequence that the new set is harder to diversify because the issuing entity is also the regulator.

The portfolio responses available, and what each one costs.

A family office facing this risk has several responses available. The conventional approach is to limit stablecoin exposure to transactional purposes only and keep dollar reserves in FDIC-insured deposits, short Treasury bills, and money-market funds where the regulatory protections are clearer. This is a defensible composition. The cost is increasing operational friction as cross-border settlement, vendor payments, and emerging-market exposure increasingly move onto digital rails where conventional banking infrastructure is impractical.

Diversification within the digital monetary category is another option. Multiple GENIUS Act stablecoin issuers, sized as credit exposures rather than cash equivalents, with explicit per-issuer limits. This addresses single-issuer concentration but does not eliminate the structural counterparty risk that the category carries as a whole.

Some families will consider an allocation to Bitcoin, which has no issuer to fail but introduces price volatility that has to be managed within the portfolio framework. Bitcoin has historical drawdowns of more than 70 percent from peak to trough. Downside-protected Bitcoin structures address the volatility concern by capping participation in price decline. The trade-off is the operational and tax positioning work required to integrate the position into existing governance. Bitcoin is one of several defensible responses, not the only one.

The question to think through.

The conventional accounting treatment of stablecoins as cash equivalents does not always match their actual credit profile. That is the structural point worth holding onto regardless of how the family responds. Whatever the portfolio composition ends up being, the family office should know what each instrument actually is, what it depends on, and how it behaves in stressed conditions.

Issue Three of the Digital Dollar Perils Series examines the programmability question. Money that can expire, money that can be restricted to specific merchants, money that can be frozen at an address. Full piece in next week's newsletter.

How does your office think about counterparty risk in cash-equivalent positions as the monetary system digitizes?

Veritas Bitcoin Strategies works with single and multi-family offices and post-exit founders on Bitcoin allocation strategy and downside-protected structures. More at familyofficebitcoin.com/services.

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