Stablecoins are digital tokens designed to maintain a fixed value against a conventional currency. This means, for example, that one dollar-denominated stablecoin is intended to be worth, and can be redeemed for, one US dollar.
The fixed value distinguishes stablecoins from other digital assets, such as Bitcoin or Ethereum, whose prices can rise or fall dramatically within hours, making stablecoins more practical for payments, savings and everyday transactions.
They can be stored in a mobile wallet or on a computer and transferred to anyone in the world, at any time, almost instantly.
Since the first stablecoin was launched in 2014, the market has since grown to encompass more than 170 active stablecoins. However, two issuers, Tether, with its USDT token, and Circle, with USDC, account for approximately 90% of the total market.
Most stablecoins are denominated in US dollars, which has given the sector a strong geopolitical dimension alongside its purely financial characteristics.
How do stablecoins maintain the peg?
Different stablecoins use different methods to hold their fixed value, and the choice of method has significant consequences for stability and risk.
The most common and most robust approach is full collateralisation. The issuer holds a pool of real assets, in the form of cash and short-dated government bonds, in segregated reserve accounts and issues one token for every dollar held. Holders can redeem their tokens at any time in exchange for the underlying dollar, much as one might withdraw cash from a bank. This model, used by Tether and Circle, is currently the dominant form and the one that regulators have moved to formalise.
A second approach uses cryptocurrency as collateral but requires borrowers to post more collateral than the value of the stablecoins they receive, to provide a buffer against price swings. This over-collateralised model removes reliance on a single centralised company but introduces exposure to sharp movements in cryptocurrency prices and to the reliability of the software that manages liquidations.
A third approach, the purely algorithmic stablecoin, attempted to maintain the peg through software alone, with no real assets in reserve. This model turned out to be extremely fragile. In 2022, the TerraUSD stablecoin collapsed within days, destroying approximately $40 billion of value as a loss of confidence triggered an irreversible downward spiral. The episode remains a defining moment for the sector, and every serious regulatory framework introduced since then has prohibited this model.
What are the benefits?
The appeal of stablecoins rests on the problem that moving money across borders through traditional banking channels is slow, expensive and often out of reach for people without formal banking relationships. A stablecoin transfer settles in seconds, operates around the clock, including weekends and public holidays when banks are closed, and costs a fraction of what a conventional wire transfer or remittance service charges.
Users across 15 countries surveyed by payments company BVNK reported average fee savings of around 40% compared with traditional methods. For freelancers and independent workers engaged in cross-border work, 73% said stablecoins had made it easier to take on international clients. Business-to-business stablecoin payments are now running at an annualised rate of approximately $390 billion.
These benefits are highest in economies where local currencies are weak or volatile. In Africa, 79% of adults surveyed for the BVNK Stablecoin Utility Report 2026 described holding stablecoins as a practical means of preserving savings in a stable currency and transferring money without relying on expensive intermediaries. In parts of Latin America and South Asia, dollar stablecoins function as an accessible store of value for people who have no other way of holding savings outside their depreciating domestic currency.
For businesses, stablecoins also introduce the possibility of programmable payments. These are transactions built into contracts that execute automatically when specified conditions are met, such as releasing funds upon delivery of goods or distributing wages continuously rather than in periodic batches. It is argued that these capabilities are more difficult to replicate in conventional banking infrastructure.
How are stablecoins currently used and how might that develop?
So far, however, stablecoins are predominantly used in crypto trading. Research by Deutsche Bank estimates that approximately 88–90% of stablecoin transactions are related to buying, selling and collateralising other digital assets. In other words, most crypto assets will be traded for and bought with stablecoins, rather than fiat currency. Stablecoins serve as the base currency within cryptocurrency markets and as an intermediate step between conventional money and volatile digital assets.
Cross-border payments and remittances account for a growing but still relatively small proportion of activity. Annual stablecoin transaction volumes were up 72% and reached more than $33 trillion last year, surpassing the combined throughput of Visa and Mastercard.
Institutional adoption is accelerating following the enactment of clearer regulation, particularly in the United States. Major banks including Goldman Sachs, Deutsche Bank, Citigroup and Bank of America are now actively exploring stablecoin issuance or shared institutional payment infrastructure. Société Générale has already launched both a euro-denominated and a dollar-denominated stablecoin, each compliant with European regulation.
In the last quarter alone, Visa launched a dedicated stablecoin platform putting direct pressure on Tether and Circle; more than 100 financial companies, including Visa, Mastercard, Coinbase, Stripe and BlackRock, co-created a shared stablecoin called Open USD; while the largest US banks are also separately building a shared tokenised-deposit network; and Swift began piloting 24/7 blockchain-based cross-border payments with 17 banks.
Commentary has moved on from the question that dominated a year ago, whether traditional finance would engage with stablecoin infrastructure at all, to who will control it. With Bloomberg Intelligence projecting payment flows above $50 trillion by 2030, the incumbents are no longer watching from the sidelines. Compared to the start-ups in the space, these established banks and financial companies have considerable advantages in terms of distribution, capital and an established customer base.
Analysts at Capgemini Invent forecast that stablecoins will represent 3% of all dollar payment flows in 2026, rising to 10% by 2031. One emerging and potentially significant use case is the integration of stablecoins with artificial intelligence. Agentic AI systems that carry out commercial transactions on behalf of users need a payment mechanism they can operate autonomously. Stablecoins are well-suited to this role in a way that conventional bank accounts are not.
What are the concerns?
The rapid growth of stablecoins has generated legitimate concerns alongside the enthusiasm.
The most fundamental risk is similar to a bank run. Stablecoins have no government-backed deposit insurance, and issuers cannot rely on a central bank as lender of last resort. If confidence in an issuer weakens because of doubts about reserve quality, an external financial shock or widespread panic, many holders may try to redeem their tokens at once. To meet that demand, the issuer may have to sell reserves quickly. Such distressed sales can reduce the value of the remaining assets, prompt further redemptions and create a self-reinforcing cycle.
In March 2023, Circle’s USDC, one of the most reputable stablecoins, briefly fell to 87 cents after Circle disclosed that $3.3 billion of its reserves were held at Silicon Valley Bank, which failed on 10 March 2023. The episode was resolved quickly because of the US government’s decision to guarantee all SVB deposits, which allowed Circle to recover its funds and restore the peg. But it demonstrated that even well-managed stablecoins with high-quality reserves can carry concentrated counterparty risks.
Financial crime represents a second area of concern. Stablecoin transactions are pseudonymous, moving between digital wallet addresses rather than named accounts. They require no prior relationship with an issuer. They can cross multiple blockchain networks simultaneously, making monitoring technically demanding. These features have been exploited for money laundering, sanctions evasion and fraud.
Consumer protection is a third challenge. Stablecoin transfers cannot be reversed once made. There is no equivalent of a credit card chargeback or a bank transfer recall. As mentioned, there is no deposit protection scheme. A user who treats a stablecoin wallet as equivalent to a bank account does not enjoy the protections that bank customers take for granted.
At the systemic level, the growing role of stablecoin issuers in government bond markets warrants attention. Tether and Circle collectively purchased $56.6 billion in US Treasury bills in the twelve months to June 2025, the sixth-largest source of new demand globally, ahead of Japan, Singapore and Norway. Research by the Bank for International Settlements finds that large-scale stablecoin redemptions can cause material movements in short-term government bond yields. As the sector grows, so does its capacity to transmit stress to broader financial markets.
How are stablecoins regulated?
As stablecoins have grown from a niche instrument into a significant component of the global financial system, regulators have concluded that the existing framework is insufficient, particularly in terms of financial stability. The potential for stablecoin runs to generate fire sales of government bonds, the growing exposure of banks to stablecoin-related flows, and the systemic implications of two issuers controlling 90% of a $300 billion market have all led regulators to conclude that the sector warrants formal oversight.
The protection of consumers is another focus. Without clear standards, users have no reliable way of assessing whether a stablecoin’s reserves are genuine, whether their right to redeem is enforceable or what recourse they have if something goes wrong. Several high-profile issuers have historically misrepresented the quality of their reserves, holding commercial loans and longer-dated securities rather than the cash and short-term government bonds they claimed.
Anti-money laundering is a third driver. The pseudonymous and permissionless nature of stablecoin transfers creates risks that conventional banking regulation was not designed to address. Regulators have concluded that stablecoin issuers and service providers must be subject to the same customer identification and transaction monitoring requirements as banks and money transfer businesses.
There is also a geopolitical dimension, particularly in the United States. Dollar stablecoins extend the reach of the US dollar into jurisdictions and transactions that have historically been outside the dollar system. Washington has framed stablecoin regulation partly as a mechanism for reinforcing that reach at a time when other countries are developing competing digital payment systems. For other countries, the widespread use of US dollar stablecoin could represent a loss of national sovereignty and monetary policy autonomy. Some economic areas like the European Union are therefore still considering central bank-issued digital currencies as an alternative to privately issued stablecoins.
How does regulation work?
The two most significant regulatory frameworks, the US GENIUS Act and the European Union’s Markets in Crypto-Assets regulation (MiCA), were both enacted in the past two years and have set the template for other jurisdictions.
The GENIUS Act, signed into law in the United States in July 2025, establishes a federal licensing framework for stablecoin issuers. Reserves must be held exclusively in cash or short-dated US government bonds. Other reserve types such as commercial paper, longer-dated securities, corporate debt and cryptocurrency are all excluded. Those reserves must be held in a legally separate structure so that if the issuer becomes insolvent, token holders retain priority over the reserve assets. Monthly attestations by independent auditors are also required.
Critically, issuers must build into their systems the technical ability to freeze or permanently cancel tokens, a capability that enables compliance with court orders, sanctions requirements and law enforcement requests. The GENIUS Act also classifies payment stablecoins as neither securities nor commodities, resolving a longstanding regulatory ambiguity.
The EU’s MiCA regulation follows the same broad framework, requiring stablecoin issuers to be incorporated in the EU, hold reserves in liquid assets and meet clear disclosure and redemption standards. MiCA also grants European regulators the authority to restrict the use of non-euro stablecoins if their adoption reaches a scale that could affect monetary stability, addressing concerns about the displacement of domestic currencies by dollar-denominated digital tokens.
Beyond the US and EU, Japan, Singapore, the UAE, Hong Kong, the UK, South Korea and Brazil have either enacted or are developing equivalent frameworks. All prohibit purely algorithmic stablecoins. All require reserve backing with liquid assets. And all are moving toward mandatory compliance with what regulators call the Travel Rule. This is the requirement for stablecoin service providers to identify, verify and transmit information about both the sender and recipient in every transfer. The Travel Rule is among the most technically demanding compliance requirements and is a primary focus of the Financial Action Task Force, the international standard-setter for anti-money laundering.
The direction of travel is consistent across all major jurisdictions. Stablecoins are being drawn into a framework that increasingly resembles the regulation applied to banks and electronic money institutions, with reserve requirements, licensing obligations, consumer protections and enforceable AML standards. For issuers and service providers, that framework provides the legal certainty that institutional participation has required. For regulators, it creates the tools to address the risks that come with a sector that has grown too large and too interconnected to remain outside formal oversight.
Commercial features
While in the US, the GENIUS Act has laid much of the groundwork for stablecoins, the Clarity Act would provide an even more stable legal framework for the industry that would make it easier for banks, institutional investors and payment companies to engage with the sector. The bill passed the House last year but has stalled in the Senate.
One of the most contested provisions in the Clarity Act is whether stablecoin holders should be able to earn a return on their holdings. Banks are firmly opposed, because, in their view, stablecoins backed by short-dated government bonds that also pay interest would function as a direct substitute for bank deposits and could draw savings out of the banking system and reduce the credit banks can extend to households and businesses.
The compromise in the current bill text draws a line between passive yield, akin to interest on bank deposits, which is banned, and rewards tied to active use of a platform or network, such as payments, transfers, trading and similar activities, which are permitted. But critics in the banking industry still argue the “bona fide activities” carve-out is too broad and would undermine the ban in practice.
Stablecoins have, in a relatively short time, moved from the edges of finance to a point where the largest banks, payment networks and regulators in the world are actively engaging with them.
The technology itself has largely proven its case. Transfers are fast, cheap and borderless in ways that conventional banking cannot match at scale. The regulatory frameworks now taking shape across the US, EU and beyond are converging on a common set of answers, but the commercial incentives negotiated together with them, around yield, distribution and reserve income, will shape the competitive landscape for years.
Whether the dominant players a decade from now will be the start-ups that built the market or the banks and payment companies is unresolved. What is clear is that stablecoins will be a significant part of the global financial system.