Stablecoin

• 1. Introduction

  ›

  Stablecoins reached a market capitalization of $316 billion in October 2025, with daily trading volume of $156 billion. According to the Bank for International Settlements, 90 percent of that market was concentrated in just two tokens: Tether and USDC. The name carries an implicit promise. These instruments are designed to hold their value against a fixed anchor, whether the US dollar, a commodity, or another currency. Yet multiple stablecoins have historically failed to maintain that value. They first appeared in 2014, when investors in highly volatile cryptocurrencies needed somewhere to park money between trades. Since then, their reach has expanded well beyond the trading desk. As of October 2025-95 percent of all stablecoins are backed by fiat currency. Of those fiat-backed coins, 97 percent are denominated in US dollars. Whether that concentration of privately issued dollar instruments strengthens or disrupts global finance was a question central banks were actively debating by early 2026.

• 2. Building the Peg

  ›

  Tether's USDT and Circle's USDC are the best-known fiat-backed stablecoins. Each issuer holds a pool of reserve assets: government bonds, commercial paper, repurchase agreements, or bank deposits. A third-party custodian maintains those reserves to uphold the peg. For euro-pegged alternatives, Circle's EURC, EUR Tether, and Stasis EUR serve the same function. The structure of fiat-backed stablecoins closely resembles money market funds. Both face a similar contagion risk: large-scale redemptions can force rapid asset sales, depressing prices and triggering further redemption demands.

  Cryptocurrency-backed stablecoins use other cryptocurrencies as collateral rather than fiat reserves. Smart contracts allow a decentralized network to track the US dollar price without a central custodian. A secondary function is converting a cryptocurrency into ERC20 format, enabling it to trade on a different blockchain.

  PAX Gold and Tether Gold represent the commodity-backed approach, linking coin value to physical gold rather than any national currency. In the fourth category, algorithmic stablecoins hold no reserve assets, or only partial reserves, relying on algorithms to balance supply and demand. The European Central Bank's position is that algorithmic stablecoins should be treated as unbacked crypto-assets. Celo Dollar, Tron's USDD, and Kava's USDX are prominent examples.

  Algorithmic designs have proved the most fragile. They are vulnerable to a self-reinforcing collapse called a death spiral, where falling prices trigger accelerating rounds of minting and selling. The full mechanics of that failure played out in 2022 at a scale that erased tens of billions in market value within days.

• 3. Money Without Borders

  ›

  Planet Money described the role of stablecoins in cryptocurrency trading as similar to casino chips, since they simplify buying and selling before a trader eventually cashes out into real money. That analogy, reasonable in 2014, had grown too narrow for what stablecoins had become by 2025.

  According to a 2025 International Monetary Fund report, stablecoin cross-border flows surpassed those of unbacked crypto assets in early 2022. The IMF found that Asia and the Pacific region carry the most stablecoin activity. After adjusting for GDP, the majority of stablecoin flows move outward from North America to other regions. The IMF estimated stablecoin cross-border flows at $1.4 trillion in 2024, compared to a global cross-border payment market of roughly one quadrillion dollars. In advanced economies, traditional systems such as SWIFT still dominate. Among emerging markets and developing economies, stablecoins have claimed the largest share of cross-border transactions.

  A 2025 study in the journal Telematics and Informatics surveyed 866 US-based adults who had sent remittances within the previous year. Of those, 26 percent reported using stablecoins for cross-border transfers, and 34 percent used them alongside other methods. A University of Cambridge study identified 24/7 settlement capability as the most cited reason for choosing stablecoins: transfers can move outside normal banking hours, at any time of day.

  In Venezuela, the bolivar has suffered prolonged hyperinflation, compounded by sanctions and capital controls. Some residents have turned to US dollar-denominated stablecoins to preserve their savings. By January 2026, those coins were reportedly used in ordinary domestic transactions. A Standard Chartered report warned that dollar stablecoins could pull as much as $1 trillion out of bank deposits in developing countries, as individuals seek protection against sudden currency depreciation.

  Since 2019, Oxfam has distributed humanitarian aid in Vanuatu using US dollar stablecoins. By 2022, that program had registered 35,000 people across the Pacific region and distributed around $2 million. The nonprofit ImpactMarket reported distributing over $1 million in Celo Dollar stablecoins to more than 18,000 beneficiaries across 102 locations in Africa. Some local merchants at those sites began accepting the tokens directly as payment. The usefulness of stablecoins in all these applications depended on the peg holding. In 2022, the most prominent algorithmic stablecoin showed what happens when it does not.

• 4. The Death Spiral

  ›

  Terraform Labs was founded by Do Kwon, and its flagship stablecoin, TerraUSD, known as UST, carried a defining promise: it would maintain a one-to-one peg with the US dollar without holding any fiat reserves. Instead, UST was linked to a second Terra network token called LUNA. The mechanism offered arbitrage incentives. If UST fell below $1, traders could buy it cheaply and redeem it for $1 worth of LUNA. If UST rose above $1, traders could mint new coins by locking in $1 of LUNA and sell them at a profit.

  To drive adoption, Terraform Labs created the Anchor protocol. The protocol offered UST depositors a yield of 19.5 percent, far above what US Treasuries paid at the time. The high rate attracted a large volume of UST into the protocol. The entire mechanism assumed that demand for both UST and LUNA would remain robust. Without that underlying demand, the arbitrage logic had no floor.

  In May 2022, UST broke its peg. Its price plunged to 10 cents, while LUNA fell to virtually zero from an all-time high of $119.51. The collapse wiped out almost $45 billion of market capitalization in a single week. An additional factor was TerraUSD's proof-of-stake design. As LUNA's price fell, validators sold their stakes, allowing actors with malign intent to become dominant validators on the network, accelerating the breakdown.

• 5. The Trust Deficit

  ›

  Tether's USDT is the world's largest stablecoin by market capitalization. When Tether launched, it claimed its coins were fully backed by fiat currency. That claim came under scrutiny in October 2021, when the company failed to produce reserve audits for the collateral behind its minted tokens. The Commodity Futures Trading Commission fined Tether $41 million for deceiving consumers. The CFTC's investigation found that Tether held enough fiat reserves to back its stablecoin only 27.6 percent of the time during the period from 2016 to 2018. Since then, Tether has issued assurance reports on USDT's backing, though some speculation persists about its use of Chinese commercial paper as reserves. As of February 2026, Tether had still never completed a full audit by an independent accounting firm.

  In March 2023, Circle's USDC temporarily lost its dollar peg during a banking crisis in the United States. Signature Bank, Silvergate Bank, and Silicon Valley Bank all collapsed, and USDC's reserves were held at those failing institutions. The de-pegging was temporary, but it illustrated how even well-regarded stablecoins carry counterparty risk tied to the health of their banking partners.

  US Treasuries, which form the backbone of many fiat-backed stablecoin reserves, lose value when interest rates rise. That creates a solvency risk: if rates increase sharply, the reserves backing a stablecoin may fall below the value of the coins in circulation. Some issuers address this by concentrating holdings in short-duration securities, which are less sensitive to rate changes.

  Professor Helene Rey, writing in the IMF's Finance & Development, noted that advances in quantum computing receive almost no attention in stablecoin risk discussions. Quantum computers capable of breaking public-key cryptography could allow attackers to compromise the currency networks stablecoins rely on. Research by the Massachusetts Institute of Technology identified a separate vulnerability: flaws in the logic of smart contracts could let issuers lose control of the coin supply or the network itself. Cross-chain bridges present another attack vector, capable of causing deposit and redemption failures.

  Hyun-Song Shin, governor of the Bank of Korea, identified a structural fragmentation that sits above any individual issuer. Stablecoins on different blockchains are not interoperable with each other, fragmenting the ecosystem compared with fiat money, which benefits from network effects. When high traffic drives up transaction fees, users face pressure to migrate to cheaper blockchains, keeping the ecosystem divided. The same features that made stablecoins attractive for legitimate transfers had by 2024 attracted a different kind of user entirely.

• 6. Shadows and Sanctions

  ›

  In January 2024, the United Nations Office on Drugs and Crime reported on stablecoin use by organized crime. USDT had become the cryptocurrency of choice for groups engaged in cyberfraud and money laundering in East and Southeast Asia. The Financial Action Task Force found that stablecoins provide a relatively stable medium for moving money compared with volatile alternatives. Their liquidity, interoperability, and ease of cross-border transfer make them attractive for money laundering, terrorism financing, sanctions evasion, and proliferation financing.

  Reuters reported in 2023 that groups designated as terrorist organizations by Israel, the United States, and other countries had shifted away from bitcoin. They were using stablecoins on the Tron blockchain instead, preserving the value of transferred funds rather than accepting bitcoin's price volatility.

  A rouble-pegged stablecoin called A7A5 was launched by Russia's Promsvyazbank and Moldovan oligarch Ilan Sor as a tool for cross-border payments under Western sanctions. Russian businesses used it for settlements, and the Russian state deployed it as part of an influence campaign. In September 2025, Russia's central bank formally approved A7A5 as a digital financial asset available for use by Russian importers and exporters.

  In October 2025, a UN Multilateral Sanctions Monitoring Team reported that North Korea had used stablecoins to evade sanctions on military transfers. The team alleged that North Korean officials sold satellite communications systems to a buyer in Laos and a portable air defense system to a buyer in Sudan. In both transactions, the buyers paid in USDT. By January 2026, the Central Bank of Iran was reportedly accumulating stablecoins while the country faced international sanctions. Some governments were passing laws to encourage stablecoin adoption; others moved to ban them outright. Both choices carried consequences for which currencies would govern cross-border transactions.

• 7. Dollar Dominance

  ›

  In July 2025, the United States passed the GENIUS Act. The legislation authorized banks and other financial institutions to issue stablecoins backed by fiat currency or US Treasuries. At the time of passing, the bill was expected to generate substantially greater demand for US Treasuries from stablecoin issuers. Scholars in China and Singapore described the GENIUS Act as a strategic move to consolidate the dollar's global position. Both saw it as an attempt to expand demand for American government debt. In November 2025, Stephen Miran at the Federal Reserve Board of Governors confirmed stablecoins were increasing demand for US Treasuries. He described them as "contributing to the dollar's dominance." A BIS estimate, using data from 2021 to 2025, found that stablecoin demand lowers 3-month Treasury bill yields by 2-2.5 basis points. The BIS described the effect as comparable to small-scale quantitative easing.

  Jurgen Schaaf, an adviser to the European Central Bank, warned that US dollar stablecoin adoption could erode European monetary sovereignty and financial stability. Agnes Benassy-Quere, Deputy Governor of the Banque de France, echoed that concern. Francois Villeroy de Galhau, the bank's Governor, warned that Europe's monetary sovereignty was directly threatened. A March 2026 ECB research paper mapped the specific mechanisms. Adoption of US dollar stablecoins would import American monetary policy into Europe. It would weaken central banks' ability to affect short-term interest rates and complicate liquidity management. In extreme cases, the ECB research warned, Europe's monetary policy tools could become ineffective. Christine Lagarde, president of the European Central Bank, called the digital euro a "strategic priority" in direct response to US legislation.

  Lesetja Kganyago, Governor of the South African Reserve Bank, stated that US dollar stablecoins were being used to undermine African currencies. He expressed concern that some African countries could lose their monetary sovereignty entirely. In November 2025, Canada's government under Prime Minister Mark Carney announced proposed legislation to regulate stablecoin issuers. The bill would require issuers to maintain asset reserves, govern redemption policies, and protect users' personal information. Canada described the legislation as a direct response to the US GENIUS Act.

  The European Union's Markets in Crypto-Assets Regulation took effect for stablecoin assets on the 30th of June 2024. In September 2025, a consortium of nine European banks announced a planned MiCAR-compliant stablecoin, responding to US dollar dominance in the market. Hong Kong's Stablecoin Bill passed in May 2025. The Hong Kong Monetary Authority issued stablecoin licenses to HSBC and Standard Chartered in April 2026. Japan's first yen-pegged stablecoin launched in October 2025, following regulatory approval granted to fintech company JPYC in August 2025. Kyrgyzstan released USDKG, the first national stablecoin, in November 2025, backed by gold and pegged to the US dollar. In Wyoming, a Stable Token Act passed by the legislature in March 2023 enabled a first state-backed stablecoin, which launched in January 2026.

  In mainland China, stablecoins are illegal. In October 2025, the People's Bank of China told Ant Group and JD.com to abandon plans to issue stablecoins in Hong Kong. China's Securities Regulatory Commission banned renminbi-denominated stablecoins inside and outside China in February 2026, citing currency issuance as a matter of sovereignty. Andrew Bailey, governor of the Bank of England, warned that stablecoins risked pulling money out of the banking system. The UK's Financial Conduct Authority launched a sandbox programme in February 2026 to trial stablecoin products in controlled conditions. Under the proposed UK regulation, individuals would face a cap of 20,000 pounds on stablecoin holdings. In February 2026, US legislation on interest-bearing stablecoins stalled in Congress due to opposition from the banking sector. The rules governing even domestic stablecoin issuance, in the country whose GENIUS Act had set the global tempo, remained unsettled.