Type note: This is a category B introductory explainer. The main goal is to help readers understand where stablecoin holders stand when an issuer goes bankrupt. It requires unpacking the legal framework before making judgments.
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You might think that if you hold USDC or USDT and the issuer collapses, you can at least get your money back 1:1, right?
The answer is: not necessarily. Under the GENIUS Act, which took effect in July 2025, stablecoin holder claims are given "first priority" in the repayment order. But that does not guarantee you will get fully repaid, especially if there is a shortfall in the issuer's reserves.
First, the legal framework: stablecoin bankruptcies have special rules
The GENIUS Act added Section 5910 to Title 12 of the U.S. Code. It specifically deals with bankruptcy of permitted payment stablecoin issuers.
There are three core rules:
Priority: Stablecoin holders' redemption claims against reserve assets are senior to claims of the issuer's own creditors and all other creditors.
Holders are treated as creditors: Anyone holding a payment stablecoin is considered to hold a "claim" in bankruptcy proceedings.
Priority applies only to stablecoin holders: This priority only applies to claims arising from holding stablecoins, not to other types of claims.
King & Wood Mallesons' analysis further confirms: "In the bankruptcy proceedings of a permitted payment stablecoin issuer, the redemption claims of holders of payment stablecoins issued by that issuer have priority over the claims of the issuer and any of its other creditors against its reserve assets."
If the reserve assets are not enough to redeem all outstanding payment stablecoins, any remaining claim amount held by stablecoin holders generally has priority over any other claims against the issuer.
But there is a key precondition: reserves must be "enough"
Priority does not solve two fundamental problems:
Problem one: Reserve assets are excluded from the bankruptcy estate
The GENIUS Act clearly provides that stablecoin reserve assets are not part of the bankruptcy estate. This means that when an issuer enters bankruptcy, the reserve assets are not frozen and waiting to be divided up. Instead, they should be used directly to redeem stablecoin holders according to the priority rules.
Problem two: Reserves may actually be insufficient
FDIC Chair Travis Hill stated clearly in March 2026 that stablecoins do not qualify for FDIC insurance coverage, and widely used tokens such as USDC and USDT do not have federal deposit insurance protection. If a stablecoin issuer goes bankrupt, holders will be treated as "unsecured creditors" rather than "insured bank depositors."
Cleary Gottlieb's analysis also points out that if reserves are insufficient to pay all stablecoin holder claims, the remaining claims will be treated as general bankruptcy claims, but with first priority. However, this can add uncertainty to bankruptcy administration. Bankruptcy professionals will only be paid if the institution has enough funds to pay both them and all stablecoin holders.
Real-world example: lessons from the 2022 crypto winter
During the 2022 "crypto winter," when some crypto exchanges went bankrupt, deposited crypto assets were treated as exchange property. Users were left with only unsecured claims. The GENIUS Act changes that: stablecoin reserves are excluded from the bankruptcy estate, and holders have first priority.
But that does not mean "100% safe." One key factor is whether the issuer has truly segregated reserves from corporate operating assets. Legal scholars have pointed out gaps in Tether's and Circle's terms of service. The terms give issuers unilateral amendment rights, include disclaimers, give issuers full discretion over redemption timing and availability, and do not give holders any ownership interest in reserve assets, making holders unsecured creditors in bankruptcy.
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How should you think about this risk?
[What to do]: Understand the reserve composition and legal arrangements behind the stablecoin you hold.
[How to do it]:
Check reserve reports: Download the latest reserve report from the issuer's transparency page and confirm the composition of reserve assets.
Understand the "bankruptcy remoteness" arrangement: Confirm whether the issuer holds reserve assets in segregated custody accounts rather than mixing them with corporate operating assets.
Distinguish between USDC and USDT: The two have meaningful differences in reserve transparency and legal arrangements. Circle is a public company and is subject to SEC reporting requirements. Tether's full audit report has still not been made public, and related-party transactions and reserve details cannot be externally verified.
[Completion standard]: You can clearly explain the repayment path for the stablecoin you hold in a bankruptcy scenario: whether it would be redeemed with priority, or whether uncertainty remains.
How to verify completion: Visit the issuer's official transparency page and review the reserve report and bankruptcy segregation explanation. If the issuer clearly discloses that reserve assets are held in segregated custody and holders have priority redemption rights, that is legally clearer than stablecoins without such arrangements. If the relevant information is not transparent, you need to assess it based on your own risk appetite.
Next step: If you hold a large share of stablecoins, spend 10 minutes checking Circle's or Tether's official website for the latest reserve report and bankruptcy segregation arrangement. Confirm the proportion of highly liquid assets in the reserve composition and whether there is a clear "bankruptcy remote" structure. This information is far more useful than asking someone after you run into a problem.
