Stablecoins have quietly become a powerful force in the global cryptocurrency market, accounting for over two-thirds of the recorded trillions of dollars in cryptocurrency transactions in recent months.
Unlike most cryptocurrencies (which often exhibit extreme price volatility), stablecoins are pegged at a 1:1 ratio to less volatile assets such as fiat currencies or commodities to maintain a consistent and predictable value.
Globally, stablecoins are gaining momentum as a medium of exchange and value storage, filling the gaps left by traditional currencies, especially in areas 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 currency fluctuation hedging. Compared to traditional financial systems, stablecoins enable quicker and more cost-effective transactions, accelerating global adoption.
As regulatory momentum around cryptocurrencies continues to grow, stablecoins are becoming a focal point in discussions 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 needed for practical use cases of cryptocurrencies.
In 2009, the launch of Bitcoin revolutionized the world 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 significant price volatility, making its native token, Bitcoin (BTC), challenging to use as a medium of exchange. Similarly, when Ethereum emerged years later, it built upon Bitcoin's foundation to extend the functionality of cryptocurrencies to programmability via smart contracts. This innovation spurred the rise of decentralized finance (DeFi), but like Bitcoin, Ethereum's native token, Ether (ETH), also suffered from substantial 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 unlocked new use cases beyond trading and speculation, attracting a broad array 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 stablecoin, pegged to the value of traditional currencies at a 1:1 ratio, with the US dollar and euro (EUR) being the most common benchmarks. The stability of these stablecoins arises from reserves held in fiat currencies or equivalent assets, which act as collateral. Examples include Tether (USDT) pegged to the US dollar and USD Coin (USDC), as well as Stasis Euro (EURS) pegged to the euro.
Commodity-pegged stablecoins
Commodity-pegged stablecoins are linked to the value of physical assets such as gold, silver, or other tangible goods. These stablecoins allow users to gain investment opportunities in commodities without directly owning the goods. 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 gold-backed stability.
Cryptocurrency-backed stablecoins
Cryptocurrency-backed stablecoins are supported by reserves of other cryptocurrencies. These stablecoins typically 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 backed by cryptocurrencies like ETH and maintained through a smart contract system within the MakerDAO protocol. Users deposit collateral to mint Dai, ensuring its stability despite fluctuations in the collateralized cryptocurrencies.
US Treasury-backed stablecoins
Stablecoins backed by US Treasury, 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 yields directly to holders, essentially acting as tokenized money market funds and attracting investors seeking safety, passive income, and regulatory consistency.
Algorithmic stablecoins
Algorithmic stablecoins maintain their value through programming 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 its price, 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 dollar, using crypto assets and automated 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 2022 collapse of TerraUSD (UST), highlighting the risks associated with purely algorithmic stabilization mechanisms.
Stablecoins in the cryptocurrency market
Beyond the realm of speculation, stablecoins play a significant role in the cryptocurrency market, providing reliable mediums for trading, value storage, and bridging TradFi and cryptocurrencies. As important liquidity providers, stablecoins underpin much of the activity in decentralized finance (DeFi), centralized exchanges (CEX), and cross-border payments.
As seen below, the stablecoin market has matured globally, replacing BTC as the preferred asset for daily transactions.
Regions like Latin America and Sub-Saharan Africa are adopting stablecoins as a means to hedge against local currency instability, providing more reliable transaction and value retention methods. In these regions, retail adoption of stablecoins is primarily due to their use for low-cost remittances, safe savings in volatile currency areas, and access to lending and staking services such as DeFi.
While stablecoins are increasingly popular within institutions, most of their growth is driven by transfers under $1 million — our benchmark for non-institutional activity — which we examined in our annual Cryptocurrency Geography report. Below, we analyze the growth of retail and institutional-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 institutional-scale stablecoin remittances, with year-on-year growth exceeding 40%. East Asia and Eastern Europe follow closely, with year-on-year growth of 32% and 29%, respectively.
Meanwhile, retail stablecoin activity has seen significant growth in markets like North America and Western Europe, but the growth rate is slower, possibly due to strong local financial infrastructure, although institutional investors in these areas are increasingly adopting stablecoins for liquidity management, settlement, and entry into cryptocurrencies. Notably, Western Europe is home to the second-largest merchant services market globally, with the UK leading the region with a year-on-year growth rate of 58.4%. Stablecoins dominate these services, consistently accounting for 60-80% of market share each quarter as shown in the figure 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, particularly in Turkey, Saudi Arabia, and the UAE.
Notably, the volume of stablecoin transactions in Turkey also far exceeds the proportion of GDP compared to the rest of the world.
In East Asia, interest in stablecoins surged among potential issuers following the launch of a stablecoin sandbox in Hong Kong. The upcoming stablecoin regulations will pave the way for their listing in retail trading, potentially boosting Hong Kong's web3 ambitions.
In Central Asia, South Asia, and Oceania, stablecoins are widely used for cross-border trade and remittances, circumventing the challenges of traditional banking. Countries like Singapore have enhanced confidence in stablecoins through regulatory frameworks, making them important tools for both retail and institutional users.
Global stablecoin policies and regulations
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 regulatory bodies are working to navigate the challenges of creating frameworks that encourage innovation while ensuring consumer protection, financial stability, and compliance with anti-money laundering and counter-terrorist financing (AML/CFT) standards.
European Union (EU)
The European Union (EU) has launched the Markets in Crypto-Assets Regulation (MiCA), aimed at creating a unified crypto-assets framework for issuers and service providers (including stablecoins) operating within the EU. MiCA represents a significant shift from AML-focused regulation (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 maintaining financial stability. The stablecoin framework of MiCA will take effect on June 30, 2024, while the regulation governing crypto-asset service providers (CASP) will come into effect on December 20, 2024. Although MiCA is a piece of European legislation applicable to all 27 EU member states, the responsibility for licensing and supervising issuers and CASPs rests with the respective national authorities.
MiCA establishes two distinct types of stablecoins: (i) Asset-referenced tokens (ART), designed to maintain 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 (EMT), designed to maintain stable value by referencing the value of an official currency (such as the euro or US dollar). ART and EMT issuers within the EU must obtain the corresponding MiCA license, including publishing detailed white papers and adhering to strict rules regarding governance, reserve asset management, and redemption rights.
EMT (seen as both a crypto asset and a fund) serves as a means of payment, while ART is viewed as a means of transaction, requiring issuers to report transactional activities in greater detail. Additionally, ART 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 regulated by the European Banking Authority (EBA) rather than national regulatory bodies. 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 a regulatory framework for stablecoins in the country, 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 and robust consumer protection. Stablecoin issuers that meet all 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 is nearing 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. The framework places a strong emphasis on stability and oversight, allowing banks, trust companies, and money transfer service providers to issue fiat-backed stablecoins under strict reserve requirements. Large companies like Mitsubishi UFJ Financial Group (MUFG) are reportedly exploring stablecoin opportunities, but the market is still in its infancy with no stablecoins listed on local exchanges or registered with electronic payment service providers (EPSP). Recently, Japan's Financial Services Agency has been reviewing stablecoin regulations and considering international experiences.
United States
Stablecoin regulation in the United States is still a work in progress, 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 presents 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, although with smaller market shares, are actively changing the landscape of stablecoins.
Tether (UDST)
Tether (USDT) is the largest stablecoin by market capitalization, accounting for the vast majority of stablecoin supply and providing liquidity to numerous blockchains. Tether's reserves and financial transparency have been scrutinized, but the company points out that audits and market pressure tests have validated its solid position. Tether holds nearly $100 billion in US Treasury securities, 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, which is the second-largest stablecoin by market capitalization. USDC is known for its transparency, with weekly proof of its reserves. 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 initiatives. Paxos emphasizes transparency and trust, adhering to portfolio management principles 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 regularly provides transparency reports to the public.
Use cases for stablecoins
Stablecoins were once primarily used for cryptocurrency trading but have now become versatile tools for everyday use cases, providing broad utility for both the cryptocurrency-native 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, making them ideal for liquidity pools, reducing impermanent loss, and maintaining the efficiency of decentralized exchanges (DEXs). Stablecoins also enable global financial services, allowing users in economically unstable regions to participate in DeFi markets without bearing the brunt of local currency fluctuations.
Payments and peer-to-peer (P2P) transactions
Stablecoins are increasingly used for everyday payments and P2P transfers. Compared to traditional banking systems, they can process transactions quickly and cost-effectively, often charging minimal fees, making them an attractive choice for users. In P2P transactions, stablecoins provide individuals with a simple and secure means of value exchange without intermediaries. This is especially valuable in areas where a reliable banking system is not accessible.
Cross-border transactions and remittances
Cross-border payments and remittances are one of 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 (often unbanked or underbanked) 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, enhance financial inclusion, and reduce friction in cross-border transactions.
For example, using stablecoins to send a $200 remittance from Sub-Saharan Africa 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 using 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, particularly in areas with limited access to foreign exchange.
Value storage in economic instability or inflation
Stablecoins have become the preferred value storage in areas facing economic instability or high inflation. By pegging their value to assets like the US dollar, stablecoins offer individuals and businesses 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 direct access to USD is highly needed.
Stablecoins are often traded at a premium in high-inflation areas, reflecting users' willingness to pay for stability and faster capital flow. 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 for their legitimate use cases, they have also been exploited by high-risk and illegal actors for various illicit activities. Their stability and global accessibility make them an attractive tool for bad actors trying to circumvent financial controls and avoid detection — although the inherent transparency and traceability of blockchain often make this a poor choice.
While we estimate that less than 1% of on-chain transactions are illegal, stablecoins have been used for activities such as money laundering, fraud, and evading sanctions. Due to their relative liquidity and acceptance in cryptocurrency exchanges, stablecoins can facilitate rapid cross-border value transfers without relying on traditional financial institutions.
Using stablecoins to evade sanctions
As countries like Russia explore alternatives to bypass Western financial restrictions, the practice of evading sanctions through stablecoins and other cryptocurrencies is 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 exploit the anonymity of blockchain transactions to obscure the source of funds, often through complex networks of wallets and exchanges. Although large-scale evasion of sanctions remains challenging due to liquidity constraints in the cryptocurrency market and the transparency of blockchain transactions, smaller-scale activities (such as the transfer of funds by sanctioned entities and political figures) pose security and compliance risks.
How stablecoin issuers cooperate with law enforcement
Stablecoin issuers are ramping up efforts to combat financial crime and support global law enforcement and regulatory investigations. Issuers like Tether work closely with global law enforcement agencies, financial crime units, and regulators like FinCEN, using Chainalysis to monitor transactions in real-time and identify suspicious activities. Most centralized stablecoin issuers also have the authority to freeze or permanently delete or 'burn' tokens from wallets associated with confirmed criminal activity, thereby blocking illegal transactions and helping to recover 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, and are therefore not subject to freezing or destruction by any centralized entity. Balancing compliance and user autonomy is an important consideration in decentralized technology.
The future of stablecoins
Stablecoins not only represent a key intersection between blockchain and traditional financial systems but also open new avenues for economic participation. Supported by regulatory advancements aimed at providing clarity and building trust between users and institutions, adoption rates continue to grow across various regions and industries. As frameworks like Europe’s MiCA and guidelines from markets like 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 bad actors, and issues of reserve transparency persist, and if not effectively addressed, these problems could undermine market confidence and hinder wider adoption. On the other hand, stablecoins provide significant opportunities for financial inclusion, particularly in underserved regions, and are actively innovating payments, remittances, and trade financing by lowering costs and increasing speed. The role of stablecoins in creating new financial products and streamlining cross-border trade further illustrates their transformative potential.
As regulatory and technological advancements continue, stablecoins have the potential to unlock new opportunities, narrowing the gaps between economies and achieving greater global financial connectivity. Their ongoing development will play a central role in defining the future of cryptocurrencies and TradFi.
