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Stablecoins have quietly become a major presence in the global cryptocurrency market, accounting for more than two-thirds of the trillions of dollars in cryptocurrency transactions recorded in the past few months.
Unlike other cryptocurrencies that are prone to dramatic price fluctuations, Stablecoins are pegged 1:1 to fiat currencies or commodities with low volatility to maintain a stable, predictable value.
Globally, Stablecoins are gaining momentum as a medium of exchange and store of value, filling the gaps left by traditional currencies, especially in regions where currencies are unstable or access to the US dollar (USD) is limited. Businesses, financial institutions (FIs), and individuals are using Stablecoins for a wide range of applications, from international settlements to liquidity management and hedging against exchange rate risks. The ability to facilitate faster and more cost-efficient transactions compared to traditional financial systems is accelerating the adoption of Stablecoins worldwide.
As the regulatory landscape around cryptocurrencies intensifies, Stablecoins are emerging as a central point of discussion in the debate over the technologies shaping the future of finance.
What are Stablecoins?
Stablecoins are programmable digital currencies, typically pegged 1:1 to fiat currencies like the US dollar. Stablecoins issued on networks like Ethereum and TRON combine the financial stability needed for practical use cases of cryptocurrencies with the power of blockchain technology.
The introduction of Bitcoin in 2009 revolutionized the global financial infrastructure by introducing a decentralized peer-to-peer transaction system without intermediaries. However, the limited supply and speculative trading trends led to extreme price volatility, making the native token Bitcoin (BTC) difficult to use as a medium of exchange. Similarly, Ethereum, which emerged a few years later, expanded the capabilities of cryptocurrencies with the addition of smart contract programming functionality on top of Bitcoin's foundation. This innovation drove the rise of Decentralized Finance (DeFi), but like Bitcoin, Ether (ETH), Ethereum's native token, also suffered from significant price fluctuations.
Stablecoins, first introduced in 2014, combine the technical benefits of blockchain (transparency, efficiency, programmability, etc.) with the financial stability required for widespread adoption. By addressing the issue of cryptocurrency price volatility, Stablecoins have opened up new use cases beyond trading and speculation, appealing to a wide range of cryptocurrency users, including individuals and institutional investors.
Types of Stablecoins
Stablecoins maintain their value through various mechanisms designed to ensure price stability.
Fiat-Collateralized Stablecoins
Fiat-collateralized Stablecoins are the most popular type of Stablecoin, pegged 1:1 to traditional currency values. The most common benchmarks are the US dollar and the Euro (EUR). These Stablecoins maintain stability by holding fiat currency or equivalent assets as collateral. Examples include US dollar-pegged Tether (USDT) and USD Coin (USDC), and Euro-pegged Stasis Euro (EURS).
Commodity-Collateralized Stablecoins
Commodity-backed Stablecoins are linked to the value of physical assets such as gold, silver, and other commodities. These Stablecoins allow users to gain exposure to the commodities without directly owning them. For example, PAX Gold (PAXG) is a Stablecoin backed by gold reserves, with each token representing one troy ounce of gold stored in a secure vault. Another example is Tether Gold (XAUT), which similarly provides stability through gold-backed collateral.
Crypto-Collateralized Stablecoins
Crypto-collateralized Stablecoins are backed by reserves of other cryptocurrencies. These Stablecoins often use over-collateralization to mitigate the inherent volatility of the underlying assets. For instance, Dai (DAI) is collateralized by cryptocurrencies like ETH and maintained by the MakerDAO protocol's smart contract system. Users deposit collateral to mint Dai, ensuring the stability of Dai despite the fluctuations in the underlying cryptocurrency.
Treasury-Backed Stablecoins
Treasury-backed Stablecoins like Ondo's USDY and Hashnote's USYC differ from traditional fiat-collateralized Stablecoins backed by cash reserves or liquid assets. These Stablecoins are backed by US Treasury securities and repurchase agreements, effectively functioning as tokenized money market funds that provide regulated, safe, and passive income for investors seeking yield-bearing assets.
Algorithmic Stablecoins
Algorithmic Stablecoins rely on programmed mechanisms to maintain their value, without direct collateral backing. Examples of algorithm-based Stablecoins include Ampleforth (AMPL), which dynamically adjusts its supply to stabilize the price, and Frax (FRAX), a partially algorithmic Stablecoin that combines collateralization and algorithmic adjustments. Ethena's USDe is a synthetic US dollar-pegged Stablecoin that maintains the dollar value without directly holding fiat currency, using cryptocurrency and automated hedging. While innovative, these models have faced challenges in maintaining long-term stability, as evidenced by the 2022 collapse of TerraUSD (UST), highlighting the risks associated with pure algorithmic stabilization mechanisms.
Stablecoins in the Crypto Asset Market
Excluding the speculative realm, stablecoins play a crucial role in the crypto asset market as a reliable medium of exchange, store of value, and a bridge between traditional finance and crypto assets. Stablecoins, serving as important liquidity providers, underpin many activities in decentralized finance (DeFi), centralized exchanges (CEX), and cross-border remittances.
The stablecoin market has grown significantly worldwide and has surpassed Bitcoin as the preferred asset for everyday transactions.
In regions like Latin America and Sub-Saharan Africa, stablecoins are embraced as a hedge against the instability of local currencies, providing more reliable transactions and a means of preserving value. In these regions, the practical utility of low-cost remittances, safe savings in volatile currencies, and access to decentralized finance (DeFi) services like lending and staking have greatly promoted the adoption of stablecoins by merchants.
While stablecoins are gaining popularity among institutional investors, much of their growth is driven by sub-$1 million transfers, which we use as a benchmark for non-institutional activity in our annual Geography of Cryptocurrency report. We examined the growth in retail and professional-scale stablecoin transfers from July 2023 to June 2024, compared to the same period the previous year.
The regions experiencing the fastest growth in retail and professional stablecoin transfers are Latin America and Sub-Saharan Africa, with year-over-year (YoY) growth rates exceeding 40%. East Asia and Eastern Europe follow, with YoY growth rates of 32% and 29%, respectively.
In markets like North America and Western Europe, while retail stablecoin activity has seen significant increases, the growth is more moderate. This is likely due to the presence of robust financial infrastructure in these regions, where institutional investors are adopting stablecoins for liquidity management, payments, and crypto asset exposure. Notably, Western Europe is the world's second-largest merchant services market, with the UK driving growth in the region at 58.4% YoY. In these services, stablecoins account for 60-80% of market share, maintaining a stable proportion quarter-over-quarter.
Across the Middle East and North Africa, stablecoins and altcoins are gaining market share, outpacing the traditionally dominant BTC and ETH in countries like Turkey, Saudi Arabia, and the United Arab Emirates.
Notably, Turkey is leading the world in terms of stablecoin transaction volume as a percentage of GDP.
In East Asia, Hong Kong's launch of a stablecoin sandbox has garnered significant interest from potential issuers. If stablecoin regulations are implemented, the path for stablecoins to be listed for retail trading could be opened, providing a tailwind for Hong Kong's Web3 ambitions.
In the Central and Southern Asia and Oceania region, stablecoins are widely used to bypass traditional banking challenges and facilitate cross-border transactions and remittances. Countries like Singapore have enhanced the credibility of stablecoins through regulatory frameworks, making them an essential tool for both individual and corporate users.
Stablecoin Policy and Regulation
As stablecoins rapidly proliferate and expand their role in the global financial system, they have become a priority for regulators worldwide. Governments and regulatory authorities are grappling with the challenge of creating frameworks that foster innovation while ensuring consumer protection, financial stability, and compliance with anti-money laundering (AML) and counter-terrorist financing (CFT) standards.
European Union (EU)
The European Union (EU) has introduced the "Markets in Crypto-Assets (MiCA)" regulation, which establishes a unified framework for crypto assets, including stablecoins, and their service providers within the EU. MiCA represents a significant shift from the previous AML-focused regulation (introduced through the 5th AML Directive) to a comprehensive regulatory framework that sets prudential and conduct requirements. MiCA focuses on strengthening consumer protection and ensuring the integrity and financial stability of the market.
The MiCA framework for stablecoins will come into effect on June 30, 2024, while the regulation of Crypto Asset Service Providers (CASPs) is scheduled to be implemented on December 20, 2024. MiCA is an EU-level regulation, applicable to all 27 member states, but the responsibility for issuing licenses and supervising issuers and CASPs lies with the national authorities of each member state.
MiCA defines two types of stablecoins: (i) Asset-Referenced Tokens (ARTs), which aim to maintain a stable value by referencing one or more official currencies, commodities, crypto-assets, or a combination thereof; and (ii) Electronic Money Tokens (EMTs), which aim to maintain a stable value by referencing a single official currency like the EUR or USD. Issuers of ARTs and EMTs within the EU must obtain a MiCA license, complying with strict rules on white paper disclosure, governance, reserve asset management, and redemption rights.
EMT, which is considered both a virtual asset and a fund, functions as a means of settlement, but ART is considered an exchange medium, and the issuer needs to report more detailed transaction activity. Furthermore, ART may be subject to issuance restrictions. Major stablecoins, so-called "significant" stablecoins, face stricter regulations, including direct supervision by the European Banking Authority (EBA) rather than national regulators, higher capital ratio requirements, and reserve asset obligations. MiCA has the potential to become a global standard, but challenges such as unclear implementation in individual countries and overlapping classifications require additional guidance to ensure smooth implementation and adoption.
Singapore
The Monetary Authority of Singapore (MAS) has finalized its stablecoin regulatory framework, focusing on single-currency stablecoins (SCS) pegged to the Singapore dollar or G10 currencies circulating in Singapore. This framework stipulates requirements for value stability, capital adequacy, redemption, and disclosure to ensure soundness and consumer protection. Stablecoin issuers that meet all the framework's requirements can apply to be recognized as "MAS-regulated Stablecoins".
Hong Kong
Hong Kong, as a special administrative region of China, operates under a distinct legal and regulatory framework from mainland China. This separation allows Hong Kong to pursue progressive regulatory policies around stablecoins and other cryptocurrencies. The Hong Kong Monetary Authority (HKMA) has recognized the rapidly evolving digital money landscape and developed a regulatory framework for stablecoin issuers. As the legal framework enters its final stages, HKMA has launched a sandbox to enable industry participants with compelling use cases to develop and test their business models, facilitating two-way discussions on regulation and risk management. In July 2024, three projects were accepted into the sandbox.
Japan
Japan is one of the first countries to establish a regulatory framework for stablecoins, focusing on stability and supervision. This framework allows banks, trust companies, and fund transfer service providers to issue stablecoins backed by legal tender under strict reserve deposit requirements. While major companies like MUFG are exploring the potential of stablecoins, the market is still in its early stages, with no stablecoins currently listed on domestic exchanges or registered electronic payment intermediary service providers (EPISPs). Recently, the Financial Services Agency has reviewed the rules for stablecoins, considering international insights.
United States
Stablecoin regulation in the United States remains an ongoing challenge, with significant uncertainty and ongoing debates. Stablecoins like USDC and USDT are widely adopted in payments and financial services, but the lack of a comprehensive regulatory framework has created issues for both issuers and users. Efforts to address this include legislative proposals, such as the Stablecoin Bill introduced in the House Financial Services Committee in 2023, which aims to establish clear rules for issuers regarding reserve requirements, transparency, and anti-money laundering (AML) compliance.
Major Stablecoin Issuers
While hundreds of stablecoins are in circulation, the majority are issued by Tether, followed by Circle. Other issuers, though smaller in market share, are actively shaping the stablecoin landscape.
Tether (USDT)
Tether (USDT) is the largest stablecoin by market capitalization, accounting for the majority of stablecoin supply and providing liquidity across numerous blockchains. Tether has faced scrutiny over its reserves and financial transparency, but the company has sought to demonstrate its robust position through audits and market stress tests. Tether holds nearly $100 billion in US Treasury bills, with most of its assets managed by Cantor Fitzgerald, placing it in a comparable position to major countries in terms of reserve assets. Tether continues to expand its product offerings, including tokens backed by the United Arab Emirates dirham and gold, focusing on markets where these assets can provide tangible value.
Circle (USDC)
Circle issues the second-largest stablecoin, USDC, which is known for its weekly reserve attestations that provide high levels of transparency and assurance to users. The reserves are held in cash and short-term US Treasuries.
Paxos
Paxos issues the Pax Dollar (USDP) and provides infrastructure for other stablecoin projects, including PayPal's stablecoin, PayPal USD (PYUSD). Paxos emphasizes transparency and reliability, adhering to portfolio management guidelines and publishing monthly attestation reports to verify its reserves.
PayPal (PYUSD)
PayPal has entered the stablecoin market through a partnership with Paxos, issuing "PayPal USD (PYUSD)". PYUSD is designed for payments and backed by reserves managed by Paxos, with regular transparency reports made publicly available.
Stablecoin Use Cases
Stablecoins, once primarily used for cryptocurrency trading, have now become a versatile tool, serving a wide range of applications in both the crypto-native ecosystem and traditional finance (TradFi), addressing everyday use cases.
Onramp to DeFi
Stablecoins are the backbone of many decentralized finance (DeFi) protocols, facilitating lending, borrowing, and yield farming. Their price stability makes them ideal for liquidity pools, reducing impermanent loss and maintaining the efficiency of decentralized exchanges (DEXs). Stablecoins also enable global access to financial services, allowing users in economically unstable regions to participate in the DeFi market without exposure to local currency volatility.
Payments and P2P Transactions
Stablecoins are increasingly being used for everyday payments and P2P remittances. Their ability to process transactions quickly and cost-effectively, often with lower fees compared to traditional banking systems, make them an attractive option for users. In P2P transactions, stablecoins provide a simple and secure way to exchange value without the need for an intermediary, which is particularly valuable in regions with limited access to reliable banking systems.
Cross-Border Payments and Remittances
Cross-border payments and remittances are one of the most innovative use cases for stablecoins. Stablecoins offer a faster and more affordable alternative to traditional remittance services, which often come with high fees and slow processing times. Migrant workers, who often lack bank accounts or are underbanked, can use stablecoins to send money to their families, and businesses can use them to settle international invoices. Stablecoins provide a solution to the inefficiencies of the traditional financial system, enhancing financial inclusion and reducing frictions in cross-border transactions.
For example, sending $200 from sub-Saharan Africa can be around 60% cheaper using stablecoins compared to traditional fiat-based remittance methods.1
Foreign Exchange (FX) and Trade Finance
In foreign exchange and trade finance, stablecoins allow companies to transact in a globally accepted digital currency, reducing their reliance on intermediaries and mitigating risks associated with fluctuating exchange rates. Stablecoins simplify transactions for importers and exporters, providing a stable and transparent means for international trade, especially in regions with limited access to foreign currency.
Store of Value in Economic Instability and Inflation
In regions facing economic instability and high inflation, stablecoins have become a preferred store of value. By pegging their value to assets like the US dollar, stablecoins provide individuals and businesses with a way to maintain purchasing power and protect their assets from the volatility of their local currencies. This use case is particularly impactful in emerging markets, where access to stable financial products is limited, and there is a strong demand for direct access to the US dollar.
In high-inflation regions, stablecoins are often traded at a premium, reflecting users' willingness to pay for stability and rapid movement of funds. The instability of currencies in emerging markets can lead to significant GDP losses in the long term, further driving the demand for stablecoins.
Illicit Activities in the Stablecoin Ecosystem
While stablecoins have gained significant attention for their legitimate use cases, they have also been misused by bad actors to engage in various illicit activities. Their stability and global accessibility make them an attractive tool for those seeking to evade financial regulations and evade detection, although the inherent transparency and traceability of blockchains often makes this an inappropriate choice.
It is estimated that less than 1% of on-chain transactions are illicit, but stablecoins have been used for money laundering, fraud, and sanctions evasion. Stablecoins' relatively high liquidity and acceptance on cryptocurrency exchanges allow them to be used to rapidly transfer value across borders without relying on traditional financial institutions.
Stablecoins Used for Sanctions Evasion
The use of stablecoins and other cryptocurrencies to evade sanctions has gained attention as countries like Russia seek alternative ways to circumvent Western financial sanctions. Entities in sanctioned regions may use stablecoins to facilitate international trade or transfer funds to businesses in non-sanctioned jurisdictions. These activities often involve obfuscating the source of funds through complex wallet and exchange networks, exploiting the anonymity of blockchain transactions. While large-scale sanctions evasion remains challenging due to liquidity constraints in the cryptocurrency market and the transparency of blockchain transactions, smaller-scale activities, such as the movement of funds by sanctioned entities or individuals in positions of power, can still pose security and compliance risks.
How Stablecoin Issuers Cooperate with Law Enforcement
Stablecoin issuers are enhancing their efforts to combat financial crime and cooperate with global law enforcement agencies and regulatory authorities. Issuers like Tether use Chainalysis to monitor transactions in real-time, identifying suspicious activity, and work closely with global law enforcement, financial crime units, and regulatory bodies like the US Treasury's Financial Crimes Enforcement Network (FinCEN). Most centralized stablecoin issuers also have the ability to freeze or permanently delete or "burn" tokens in approved wallets, helping to stop illicit transactions and assist in the recovery of stolen funds.
Issuers of Stablecoins that Can Burn or Freeze Coins
Centralized stablecoins issued by services like USDC (Circle), USDT (Tether), BUSD (Paxos), and TUSD (Techteryx) can be frozen or burned by the issuers for compliance purposes and to prevent illicit activities. In contrast, decentralized stablecoins like DAI (MakerDAO), FRAX (Frax Finance), and LUSD (Liquity) are managed by protocols and smart contracts, so they are not subject to centralized freezing or burning.
The Role of Blockchain Intelligence
While stablecoins bring significant benefits to the financial system, addressing misuse by bad actors is a critical challenge. Chainalysis plays a key role in detecting and preventing illicit activities involving stablecoins. Through real-time monitoring, Chainalysis can identify assets that have been frozen or burned, trace fund flows, and map networks of high-risk wallets across multiple blockchains.
The Future of Stablecoins
Stablecoins are not only a crucial link between blockchains and traditional finance, but also open new avenues for economic participation. As regulatory progress aims to build transparency and trust between users and institutions, their adoption continues to expand across regions and industries. Frameworks like the EU's MiCA and guidelines in markets like Singapore and Japan are shaping the legitimacy and integration of stablecoins into mainstream finance.
Challenges remain for the future of stablecoins, including regulatory uncertainty in key markets, misuse by bad actors, and questions around reserve transparency. Effective responses are crucial to maintain market trust and enable broader adoption. At the same time, stablecoins present significant opportunities for financial inclusion, especially in underserved regions, and are actively transforming payments, remittances, and trade finance through cost reduction and speed. Their role in creating new financial products and enhancing cross-border commerce further underscores their transformative potential.
As regulation and technology progress, stablecoins hold the promise of unlocking new opportunities, bridging economic divides, and enabling more global financial connectivity. The evolution of stablecoins will play a central role in defining the future of crypto assets and traditional finance.
