Definition ∞ A reserve backed token is a digital asset whose value is pegged to and collateralized by an underlying reserve of assets, such as fiat currency, commodities, or other cryptocurrencies. The issuer maintains these reserves to ensure that each token can be redeemed for its corresponding value, aiming for price stability. This mechanism provides confidence in the token’s value by linking it to tangible or liquid holdings. Stablecoins are a prominent example of reserve backed tokens.
Context ∞ Reserve backed tokens, particularly stablecoins, are a central focus in financial news due to their growing role in digital asset markets and potential for broader payment use. Regulatory bodies are actively scrutinizing the transparency and auditability of these reserves to ensure stability and consumer protection. Debates often revolve around the quality and composition of collateral, and the regulatory frameworks required to oversee their operation.
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