The UK’s proposed legislation for cryptoassets define fiat-backed stablecoins as “stablecoins that seek to maintain a stabilised value of the cryptoasset by reference to, and which may include the holding of, one or more specified fiat currencies”.
Fiat-backed stablecoins are a specific category of crypto-assets that aim to maintain a stable value relative to a specified asset (typically US dollars or Euros) held by a regulated institution (e.g. bank), or a pool or basket of assets, and provide perceived stability when compared to the high volatility of unbacked crypto-assets. By contrast, algorithm-based stablecoins seek to use algorithms to increase or decrease the supply of stablecoins in response to changes in demand (FSB, 2020).
This type of stablecoin holds its reserves in a bank vault or with a trusted financial custodian.