Source: Chainalysis; Compiled by Baishui, Golden Finance
Stablecoins have quietly become a powerful force in the global cryptocurrency market, accounting for more than two-thirds of the trillions of dollars in cryptocurrency transactions recorded in recent months.
Unlike most cryptocurrencies, which often experience dramatic price fluctuations, stablecoins are pegged 1:1 to less volatile assets, such as fiat currencies or commodities, to maintain a consistent and predictable value.
Globally, the momentum for stablecoins as a medium of exchange and a store of value is strong, filling the gaps left by traditional currencies, particularly in regions with currency instability and limited use of the US dollar (USD). Businesses, financial institutions (FIs), and individuals are leveraging stablecoins for various use cases, from international payments to liquidity management, and to hedge against currency fluctuations. Compared to traditional financial systems, stablecoins enable faster and more cost-effective transactions, accelerating global adoption.
As the momentum around cryptocurrency regulation continues to grow, stablecoins are becoming a focal point in discussions about 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 are primarily issued on networks such as Ethereum and Tron, combining the powerful capabilities of blockchain technology with the financial stability required for real-world cryptocurrency use cases.
In 2009, the launch of Bitcoin revolutionized the world’s financial infrastructure by introducing a decentralized peer-to-peer trading system, eliminating the need for intermediaries. However, its limited supply and speculative trading dynamics led to severe price volatility, making its native token, Bitcoin (BTC), difficult to use as a medium of exchange. Similarly, when Ethereum emerged years later, it built on Bitcoin's foundation, extending the functionality of cryptocurrencies to programmability through smart contracts. This innovation spurred the rise of decentralized finance (DeFi), but like Bitcoin, Ethereum's native token, Ether (ETH), also suffered from significant price volatility.
Stablecoins first emerged in 2014, combining the technological advantages of blockchain (such as transparency, efficiency, and programmability) with the financial stability needed for widespread adoption. By addressing the issue of cryptocurrency price volatility, stablecoins unlock new use cases beyond trading and speculation, attracting a broad range of cryptocurrency users, including retail and institutional users.
Types of stablecoins
Stablecoins maintain their value through various mechanisms designed to ensure price stability.
Fiat-pegged stablecoins
Fiat-pegged stablecoins are by far the most popular type of stablecoins, pegged 1:1 to the value of traditional currencies, with the US dollar and euro (EUR) being the most common benchmarks. The stability of these stablecoins comes from reserves held in fiat currencies or equivalent assets that serve as collateral. Examples include Tether (USDT) and USD Coin (USDC), both pegged to the US dollar, and Stasis Euro (EURS), pegged to the euro.
Commodity-pegged stablecoins
Commodity-pegged stablecoins are tied to the value of physical assets such as gold, silver, or other tangible commodities. These stablecoins allow users to gain exposure to commodity investments without directly owning the commodities. 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 offers stability backed by gold.
Cryptocurrency-backed stablecoins
Cryptocurrency-backed stablecoins are supported by reserves of other cryptocurrencies. These stablecoins often use over-collateralization (i.e., the value of assets held in reserve exceeds the pegged value) to mitigate the inherent volatility of their underlying assets. For example, Dai (DAI) is supported by cryptocurrencies like ETH and is maintained through a smart contract system within the MakerDAO protocol. Users deposit collateral to mint Dai, ensuring its stability, even as the collateralized cryptocurrencies experience volatility.
Treasury-backed stablecoins
Treasury-backed stablecoins, such as Ondo's USDY and Hashnote's USYC, differ from traditional fiat-backed stablecoins supported by cash reserves or liquid assets. Backed by US Treasury bonds and repurchase agreements, they provide yield directly to holders, essentially acting as tokenized money market funds, attracting investors seeking safety, passive income, and regulatory consistency.
Algorithmic stablecoins
Algorithmic stablecoins maintain their value through programmed mechanisms that adjust supply based on market demand without relying on direct collateral. Examples of algorithmic stablecoins include Ampleforth (AMPL), which dynamically adjusts its supply to stabilize prices, and Frax (FRAX), which is a partially algorithmic stablecoin that combines collateral with algorithmic adjustments. Ethena's USDe is a synthetic stablecoin pegged to the US dollar, using crypto assets and automatic hedging to maintain its dollar value without directly holding fiat currency. While these models are innovative, they face challenges in maintaining long-term stability, as seen in the collapse of TerraUSD (UST) in 2022, highlighting the risks associated with purely algorithmic stabilization mechanisms.
Stablecoins in the cryptocurrency market
Beyond the speculative realm, stablecoins play a significant role in the cryptocurrency market, providing a reliable medium of exchange, a store of value, and a bridge between TradFi and cryptocurrencies. As important liquidity providers, stablecoins underpin much of the activity in decentralized finance (DeFi), centralized exchanges (CEXs), and cross-border payments.
As we see below, the stablecoin market has matured globally, replacing BTC as the preferred asset for everyday transactions.
Regions such as Latin America and Sub-Saharan Africa are embracing stablecoins as a means to hedge against local currency instability, providing more reliable means of transaction and value preservation. In these regions, retail adoption of stablecoins is primarily driven by their utility for low-cost remittances, safe savings in currency-volatile areas, and access to DeFi services such as lending and staking.
While stablecoins are becoming increasingly popular among institutions, most of their growth is driven by transfers under $1 million—this serves as our benchmark for non-institutional activity, which we examine in our annual cryptocurrency geography report. Below, we explore the growth of retail and professional-scale stablecoin transfers from July 2023 to June 2024 compared to the same period last year.
Latin America and Sub-Saharan Africa are the fastest-growing regions for retail and professional-scale stablecoin transfers, with year-over-year growth exceeding 40%. East Asia and Eastern Europe follow closely with growth rates of 32% and 29%, respectively.
Meanwhile, retail stablecoin activity has seen significant growth in markets like North America and Western Europe, although the pace of growth is slower, likely due to robust local financial infrastructure, even as institutional investors in these regions increasingly adopt stablecoins for liquidity management, settlement, and entry into cryptocurrencies. Notably, Western Europe hosts the world's second-largest merchant services market, with the UK leading the region with a 58.4% year-over-year growth rate. Stablecoins dominate these services, consistently capturing 60-80% of market share each quarter, as illustrated below.
In the Middle East and North Africa, stablecoins and altcoins have captured a larger market share, surpassing traditional dominant assets like BTC and ETH, especially in Turkey, Saudi Arabia, and the UAE.
Notably, Turkey's stablecoin trading volume as a percentage of GDP far exceeds that of the world.
In East Asia, interest in stablecoins surged following Hong Kong's launch of a stablecoin sandbox. The forthcoming stablecoin regulations will pave the way for stablecoins to be listed for retail trading, potentially bolstering Hong Kong's web3 ambitions.
In Central Asia, South Asia, and Oceania, stablecoins are widely used for cross-border trade and remittances, bypassing the challenges of traditional banking. Countries like Singapore have enhanced confidence in stablecoins through regulatory frameworks, making stablecoins essential tools for both retail and institutional users.
Global stablecoin policy and regulation
Stablecoins have become a priority for global regulators as they are rapidly adopted in the global financial system and play an increasingly important role across various use cases. Governments and regulators are working to address the challenges of creating frameworks that encourage innovation while ensuring consumer protection, financial stability, and compliance with anti-money laundering and counter-terrorism financing (AML/CFT) standards.
European Union (EU)
The EU has launched the Markets in Crypto-Assets Regulation (MiCA), aimed at creating a unified framework for crypto asset issuers and service providers (including stablecoins) within the EU. MiCA represents a significant shift from a regulation focused on anti-money laundering (introduced by the Fifth Anti-Money Laundering Directive) to a comprehensive regulatory framework establishing prudential and conduct obligations. MiCA focuses on enhancing consumer protection, ensuring market integrity, and financial stability. The stablecoin framework of MiCA will take effect on June 30, 2024, while the regulations governing crypto asset service providers (CASPs) will come into effect on December 20, 2024. Although MiCA is a European regulation applicable to all 27 EU member states, the responsibility for licensing and supervising issuers and CASPs lies with the respective national authorities.
MiCA establishes two distinct types of stablecoins: (i) Asset-Referenced Tokens (ARTs), intended to maintain a stable value by referencing another value or a combination of rights, including one or more official currencies, commodities, or crypto assets; (ii) Electronic Money Tokens (EMTs), intended to maintain a stable value by referencing the value of an official currency (such as the euro or US dollar). ART and EMT issuers in the EU must obtain the relevant MiCA license, including publishing a detailed white paper and complying with strict rules regarding governance, reserve asset management, and redemption rights.
EMTs (considered both crypto assets and funds) serve as a means of payment, while ARTs are viewed as a means of trading, requiring issuers to report transaction activities in more detail. Additionally, ARTs may be subject to issuance restrictions. Major stablecoins, referred to as 'significant' stablecoins, face stricter regulations, including higher capital requirements and reserve asset obligations, directly overseen by the European Banking Authority (EBA) rather than national regulators. While MiCA has the potential to become a global standard, challenges such as unclear national implementation and overlapping classifications highlight the need for additional guidance to ensure smooth implementation and adoption.
Singapore
The Monetary Authority of Singapore (MAS) has completed the country's stablecoin regulatory framework, focusing on single-currency stablecoins (SCS) pegged to the Singapore dollar or any G10 currency in circulation in Singapore. The framework emphasizes value stability, capital adequacy, redemption, and disclosure to ensure prudent robustness and consumer protection. Stablecoin issuers that meet all the requirements of this framework can apply to be recognized as 'MAS-regulated stablecoins.'
Hong Kong
Hong Kong is a special administrative region of China with a different legal and regulatory framework from mainland China. This separation allows Hong Kong to develop progressive regulatory policies around stablecoins and other crypto assets. The Hong Kong Monetary Authority (HKMA) has established a regulatory framework for stablecoin issuers, recognizing the rapid evolution of the digital currency landscape. Even as legislation nears completion, the HKMA has launched a sandbox allowing industry stakeholders with compelling use cases to develop and test their business models, facilitating two-way discussions on regulation and risk management. Three projects were included in the sandbox in July 2024.
Japan
Japan is one of the first countries to establish a regulatory framework for stablecoins. This framework places a high emphasis on stability and oversight, allowing banks, trust companies, and money transfer service providers to issue fiat-backed stablecoins under strict reserve requirements. Major companies like Mitsubishi UFJ Financial Group (MUFG) are reportedly exploring opportunities in stablecoins, but the market is still in its infancy, with no stablecoins listed on local exchanges or registered with electronic payment service providers (EPSPs). Recently, Japan's Financial Services Agency has been reviewing stablecoin regulations and considering international experiences.
United States
Regulation of stablecoins in the US is still ongoing, with significant uncertainty and controversy. While stablecoins like USDC and USDT are widely used for payments and financial services, the lack of a comprehensive regulatory framework poses challenges for both issuers and users. Initiatives to address this issue include proposed legislation, such as the stablecoin bill introduced by the House Financial Services Committee in 2023, aimed at establishing clear rules for issuers regarding reserves, transparency, and anti-money laundering (AML) compliance.
Major stablecoin issuers
While there are currently hundreds of stablecoins in circulation, most are issued by Tether, followed by Circle. Other issuers, though holding smaller market shares, are actively reshaping the stablecoin landscape.
Tether (USDT)
Tether (USDT) is the largest stablecoin by market capitalization, accounting for the vast majority of the stablecoin supply and providing liquidity for numerous blockchains. Tether's reserve and financial transparency have been scrutinized, but the company claims that audits and market stress tests demonstrate its solid standing. Tether holds nearly $100 billion in US Treasury bills, with most of its assets managed by Cantor Fitzgerald, making its reserve assets comparable to major countries. Tether continues to expand its product range, including UAE Dirham-backed tokens and gold-backed stablecoins, focusing on markets where these assets provide tangible value.
Circle (USDC)
Circle issues USDC, the second largest stablecoin by market capitalization. USDC is known for its transparency, with reserves verified weekly. The reserves are held in cash and short-term US government bonds, providing users with a high level of transparency and assurance.
Paxos
Paxos issues Pax Dollar (USDP) and provides infrastructure for PayPal's stablecoin PayPal USD (PYUSD) and other global stablecoin projects. Paxos emphasizes transparency and trust, adhering to portfolio management guidelines and publishing monthly attestation reports to verify reserves.
PayPal (PYUSD)
PayPal has entered the stablecoin market with PayPal USD (PYUSD), issued in partnership with Paxos. PYUSD is designed for payments, backed by reserves managed by Paxos, and provides regular transparency reports to the public.
Use cases of stablecoins
Stablecoins were once primarily used for cryptocurrency trading, but they have now become versatile tools for everyday use cases, providing broad utility for both the native cryptocurrency ecosystem and TradFi.
Gateway to DeFi
Stablecoins are the backbone of many DeFi protocols, facilitating lending and yield farming. They are free from price volatility and are ideal for liquidity pools, reducing impermanent loss and maintaining efficiency in decentralized exchanges (DEXs). Stablecoins can also enable global financial services, allowing users in economically unstable regions to participate in the DeFi market without bearing the impact of local currency fluctuations.
Payments and peer-to-peer (P2P) transactions
Stablecoins are increasingly used for everyday payments and P2P transfers. They can process transactions quickly and cost-effectively compared to traditional banking systems, often requiring only minimal fees, making them an attractive choice for users. In P2P transactions, stablecoins provide individuals with a simple and secure way to exchange value without intermediaries. This is particularly valuable in areas where reliable banking systems are unavailable.
Cross-border transactions and remittances
Cross-border payments and remittances are among the most transformative use cases for stablecoins. They offer a faster and cheaper alternative to traditional remittance services, which often involve high fees and slow processing times. Migrant workers, who often lack or have limited access to banking services, use stablecoins to send money home, while businesses use them to settle international invoices. Stablecoins provide a solution to bypass the inefficiencies of the traditional financial system, enhancing financial inclusion and reducing friction in cross-border transactions.
For example, sending a $200 remittance from Sub-Saharan Africa using stablecoins is approximately 60% cheaper compared to traditional fiat-based remittance methods, as shown below.
Foreign exchange (FX) and trade financing
For foreign exchange and trade financing, stablecoins enable businesses to transact in globally accepted digital currencies, reducing reliance on intermediaries and lowering risks associated with exchange rate fluctuations. Stablecoins simplify transactions for importers and exporters, providing a stable and transparent medium for international trade, especially in regions with limited access to foreign exchange.
Value storage in economic instability or inflation
Stablecoins have become the preferred store of value in regions facing economic instability or high inflation. 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 local currency fluctuations. This use case is particularly effective in emerging markets, where access to stable financial instruments is limited and there is a strong need for direct access to USD.
Stablecoins often trade at a premium in high-inflation areas, reflecting users' willingness to pay for stability and faster fund movement. Currency instability in emerging markets can lead to significant GDP losses over time, further driving demand for stablecoins.
Illegal activities in the stablecoin ecosystem
While stablecoins have gained significant attention due to their legitimate use cases, they are also exploited by high-risk and illicit actors for various illegal activities. Their stability and global accessibility make them an attractive tool for bad actors attempting to circumvent financial controls and avoid detection—although the inherent transparency and traceability of blockchain often make this a poor choice.
Although we estimate that less than 1% of on-chain transactions are illegal, stablecoins have been used for activities such as money laundering, fraud, and sanction evasion. Due to their relatively high liquidity and acceptance in cryptocurrency exchanges, stablecoins can be used for quick cross-border value transfers without relying on traditional financial institutions.
Using stablecoins to evade sanctions
As countries like Russia explore alternatives to circumvent Western financial restrictions, practices of evading sanctions through stablecoins and other cryptocurrencies are becoming increasingly prominent. Entities in sanctioned regions may use stablecoins to facilitate international trade or transfer funds to entities in non-sanctioned jurisdictions. These activities take advantage of the anonymity of blockchain transactions to obscure the source of funds, often through complex networks of wallets and exchanges. While large-scale sanction evasion remains challenging due to liquidity constraints in the cryptocurrency market and the transparency of blockchain transactions, smaller-scale activities (e.g., fund transfers involving sanctioned entities and political public figures) pose security and compliance risks.
How stablecoin issuers cooperate with law enforcement
Stablecoin issuers have intensified their efforts to combat financial crime, supporting global law enforcement and regulatory investigations. Issuers like Tether work closely with global enforcement agencies, financial crime units, and regulatory bodies like the Financial Crimes Enforcement Network (FinCEN) to monitor transactions in real-time using Chainalysis and identify suspicious activities. Most centralized stablecoin issuers also have the power to freeze or permanently delete or 'burn' tokens in wallets associated with confirmed criminal activities, thus preventing illegal transactions and aiding in the recovery of stolen funds.
Which stablecoin issuers can destroy and freeze tokens?
Stablecoins issued by centralized services, such as USDC (Circle), USDT (Tether), BUSD (Paxos), and TUSD (Techteryx), can be frozen or destroyed by their issuers to comply with regulations or prevent illegal activities. In contrast, decentralized stablecoins, such as DAI (MakerDAO), FRAX (Frax Finance), and LUSD (Liquity), are governed by protocols and smart contracts, thus not subject to freezing or destruction by any centralized authority. The balance between compliance and user autonomy is an important consideration in decentralized technology.
The future of stablecoins
Stablecoins not only represent a crucial intersection between blockchain and traditional financial systems but also open up new avenues for economic participation. Supported by regulatory advancements aimed at providing clarity and building trust between users and institutions, adoption rates are steadily increasing across various regions and industries. As frameworks like Europe's MiCA and guidelines in markets such as Singapore and Japan take shape, stablecoins will gain further legitimacy and integrate into the mainstream financial system.
The future of stablecoins is not without challenges. Regulatory uncertainty in major markets, exploitation by illicit actors, and issues of reserve transparency remain, and if not effectively addressed, these problems could undermine market confidence and hinder broader adoption. On the other hand, stablecoins provide significant opportunities for financial inclusion, particularly in underserved regions, and are actively revolutionizing payments, remittances, and trade financing by lowering costs and increasing speed. The role of stablecoins in creating new financial products and simplifying cross-border trade further underscores their transformative potential.
With the continuous advancement of regulation and technology, stablecoins have the potential to unleash new opportunities, narrow the gap between economies, and achieve greater global financial connectivity. Their ongoing development will play a core role in defining the future of cryptocurrencies and traditional finance (TradFi).
