Written by: Mario Polito and Crystel Saraie
What Are Stablecoins, and Why Do They Matter?
A stablecoin is a type of cryptocurrency designed to maintain a relatively stable value by pegging it to a reserve asset (e.g. a fiat currency like the US dollar, or low‑risk assets such as short-term government bonds). [1]
At first glance, their role seems modest, they serve as a “safe harbor” within the volatile crypto world, letting participants park capital without converting back to fiat. But over time, stablecoins have evolved into a critical layer of infrastructure in the broader digital economy. [2]
Some of their key functions include:
- Liquidity and trading corridors: Stablecoins allow seamless movement between different crypto assets without relying on fiat on‑ramp/off‑ramp processes.
- Payments and remittances: Because they can settle 24/7 and cross borders with fewer intermediaries, they are increasingly used for payments, especially in regions with weak financial infrastructure. [3]
- DeFi and lending / borrowing: Many decentralized finance (DeFi) protocols use stablecoins as collateral or medium of exchange to minimize volatility risk. [2]
- Tokenization of real-world assets: In systems that issue digital representations of real assets (real-estate tokens, securities, etc.), stablecoins act as the “cash leg”, i.e. the liquid medium through which these assets are bought and sold. [4]
Because of these roles, stablecoins have become deeply embedded in crypto ecosystems, not just optional tools, but essential infrastructure.
Scale, Growth & Systemic Relevance
The stablecoin market has grown markedly. Recent reports indicate that the total supply of stablecoins has surpassed USD 300 billion, a clear sign of their systemic significance. [5]
That scale places them on par with large financial institutions or money market funds in terms of potential systemic impact. [5]
The rapid growth has attracted attention not only from the crypto community but also from central banks, financial regulators, and policymakers globally, precisely because stablecoins now sit at the intersection of private innovation and public monetary systems.
Risks and Challenges
As stablecoins assume greater importance, several structural and regulatory risks come to light:
1. Peg Stability & Reserve Integrity
A stablecoin must maintain its peg (e.g. 1 token = 1 USD). If the reserves backing it are illiquid, opaque, or mismanaged, there is risk of depegging or runs (mass redemptions). [4]
Ensuring that reserves are truly liquid, over‑collateralized where needed, and transparent is a key challenge regulators are wrestling with.
2. Regulatory Arbitrage & Cross‑Border Complexity
The global nature of crypto means stablecoin issuers can set up shop in more permissive jurisdictions, which may create loopholes or arbitrage opportunities. This makes regulating them uniformly more difficult. [3]
For example, the European Union’s regulation (MiCA) imposes strict rules on stablecoin issuers within the bloc, but it faces challenges in enforcing equivalence on foreign issuers whose tokens circulate inside Europe. [7]
3. Financial Stability & Contagion Risks
Given how many protocols, lending platforms, and markets now rely on stablecoins, instability in one major stablecoin could ripple across the entire crypto economy. A failure or sudden liquidity crunch might lead to cascading effects. [4]
4. Abuse, Money Laundering & Illicit Finance
Stablecoins, because of their relative stability and ease of movement, can be misused for illicit activity, sanction evasion, or money laundering. [3]
Policymakers see the need to incorporate strong anti‑money laundering (AML) and know‑your-customer (KYC) rules into any regulatory approach to stablecoins. [3]
Recent Regulatory Moves: U.S., EU, U.K. & Beyond
United States: The GENIUS Act
A landmark development in 2025 was the passage of the GENIUS Act (Guiding and Establishing National Innovation for U.S. Stablecoins), which creates the first federal regulatory framework for payment stablecoins. [6]
Key features include:
- 100% reserve backing: Stablecoin issuers must fully back each token with liquid U.S. dollars or short-term treasuries. [6]
- Transparency and disclosure: Issuers must publish regular reports on reserve composition. [6]
- Limiting what issuers can do: The Act prohibits stablecoin issuers from paying interest (i.e. yield) to token holders, which draws a distinction between stablecoins and bank deposits. [1]
- Jurisdiction over foreign issuers: If a foreign stablecoin issuer offers tokens to U.S. users, they are subject to compliance obligations if their home regime is deemed inadequate. [1]
- Enforcement & rulemaking: The U.S. Treasury is required to propose rules for implementation, and it has already solicited public comment. [9]
The Act is intended to bring certainty to the stablecoin space in the U.S., spurring innovation while safeguarding consumers and the financial system. [1]
However, observers note hurdles remain. Some financial institutions are planning stablecoin launches under the new law, but scaling, compliance costs, and technical design remain significant challenges. [8]
European Union: MiCA
In the EU, the Markets in Crypto‑Assets Regulation (MiCA), effective as of December 2024 for stablecoins, is the bloc’s comprehensive statute covering crypto assets. [3]
Under MiCA:
- Stablecoin issuers must meet reserve, transparency, and redemption requirements.
- The regulation distinguishes “e‑money tokens” and “asset-referenced tokens,” capturing different stablecoin models.
- Some gaps remain: notably enforcement on foreign issuers, particularly in multi-issuer stablecoins spanning both EU and non-EU jurisdictions. [7]
European regulators, including the European Systemic Risk Board (ESRB), have raised warnings about multi-jurisdictional stablecoin schemes that could weaken the resilience of EU financial systems during stress. [7]
U.K. regulators have also shown interest: for instance, the Bank of England has signaled that widely used stablecoins in the UK should be regulated similarly to banks, including depositor protections. [10]
Other Jurisdictions & Global Trends
- Some Asian economies like Hong Kong, South Korea, and Singapore are working on or adapting stablecoin rules to ensure they remain competitive while controlling risk. [1]
- Countries with weaker or unstable national currencies (e.g. many in the “Global South”) often adopt stablecoins for remittances, savings, or as a hedge. In those markets, stablecoins can play a dual role of financial inclusion and resilience.
Innovation vs Stability
Stablecoins present a paradox: they seek to be flexible, interoperable, and programmable, yet also must be as stable, transparent, and trustworthy as traditional money. Reconciling those demands is no small feat.
Innovation Imperatives
- Programmability: Smart contracts allow stablecoins to include conditional logic (e.g. automated settlements, bundling with other services).
- Interoperability: They can move across blockchains, integrate with DeFi stacks, and interact with tokenized real-world assets. [4]
- Global reach: Stablecoins permit cross-border, 24/7 settlement without needing multiple correspondent banks or fiat rails.
Stability & Trust Requirements
- Robust reserves: Liquidity, quality, and governance of backing assets matter intensely.
- Transparency & auditing: Users must trust that issuance matches reserves.
- Legal clearance: Clarity on whether stablecoins are money, commodities, securities, or payments infrastructure.
- Consumer protection & enforcement: In event of failures, customers must have recourse.
Policymakers and technologists must negotiate tradeoffs: too strict regulation could stifle experimentation; too lax oversight risks crises.
One promising direction is hybrid monetary ecosystems, in which central bank digital currencies (CBDCs), tokenized deposits, and private stablecoins coexist with private issuers anchored by central bank or public reserves. Some academic work suggests such architectures could preserve innovation while reducing systemic risk. [4]
What to Watch Going Forward
- Implementation of stablecoin regulation
U.S. regulators and the Treasury are working on rules under the GENIUS Act (and soliciting comments). How strict or permissive those rules are, especially on reserve types, redemption, and foreign issuers, will shape the market’s trajectory. [1] - Stablecoin competition and fragmentation
Different designs (fully backed fiat, algorithmic, hybrid, yield-bearing) may compete. Users may shift among stablecoins depending on safety, transparency, and yield. - Cross-border regulatory cooperation
Stablecoins inherently cross jurisdictions. Without alignment or equivalence frameworks, regulatory arbitrage and instability could emerge. [3] - CBDC / central bank responses
Many central banks are exploring or piloting digital currencies. The relationship between stablecoins and CBDCs (competition or complement) will be pivotal. - Stress events & resilience testing
The first major depegging or stablecoin liquidity crisis will be a defining moment. Will markets and regulations hold up? - Adoption in real-economy use cases
Use in payroll, retail payments, cross-border remittances, or government disbursements could push stablecoins further into mainstream finance.
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[1] World Economic Forum. (2025, March). Stablecoins: Cryptocurrency on the rise in financial systems. https://www.weforum.org/stories/2025/03/stablecoins-cryptocurrency-on-rise-financial-systems/
[2] European Central Bank (ECB). (2022, July). Stablecoins’ role in crypto and beyond: functions, risks and policy. Macroprudential Bulletin, Issue 18. https://www.ecb.europa.eu/press/financial-stability-publications/macroprudential-bulletin/html/ecb.mpbu202207_2~836f682ed7.en.html
[3] International Monetary Fund (IMF). (2025, September). Stablecoins and the future of finance. Finance & Development. https://www.imf.org/-/media/Files/Publications/Fandd/Article/2025/09/fd-september-2025.ashx
[4] Zhang, L. (2025). SoK: Stablecoins for Digital Transformation,Design, Metrics, and Application with Real World Asset Tokenization as a Case Study. arXiv. https://doi.org/10.48550/arXiv.2508.02403
[5] Axios. (2025, October 2). Stablecoin hype grows, total supply cracks $300 billion. https://www.axios.com/2025/10/02/stablecoin-supply-300-billion
[6] The White House. (2025, July 17). Fact sheet: President Donald J. Trump signs GENIUS Act into law. https://www.whitehouse.gov/fact-sheets/2025/07/fact-sheet-president-donald-j-trump-signs-genius-act-into-law/
[7] Reuters. (2025, October 2). EU risk watchdog calls for urgent safeguards on stablecoins. https://www.reuters.com/business/finance/eu-risk-watchdog-calls-urgent-safeguards-stablecoins-2025-10-02/
[8] Reuters. (2025, August 12). Companies plan stablecoins under new law, but experts say hurdles remain. https://www.reuters.com/legal/government/companies-plan-stablecoins-under-new-law-experts-say-hurdles-remain-2025-08-12/
[9] U.S. Department of the Treasury. (2025, October 7). Treasury issues request for comment related to the Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act). https://home.treasury.gov/news/press-releases/sb0228
[10] Reuters. (2025, October 1). Widely used stablecoins need to be regulated like money, BOE’s Bailey says. https://www.reuters.com/sustainability/boards-policy-regulation/widely-used-stablecoins-need-be-regulated-like-money-boes-bailey-says-2025-10-01/