With the increasing momentum around cryptocurrency regulation, stablecoins are becoming a focal point in discussions about technologies shaping the future of finance.
Source: Chainalysis
Article compiled by: Bai Shui, 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 recorded cryptocurrency transactions over recent months.
Unlike most cryptocurrencies, which often experience extreme price volatility, stablecoins are pegged to less volatile assets (such as fiat currencies or commodities) at a 1:1 ratio to maintain consistent and predictable value.
Globally, stablecoins are experiencing strong momentum as mediums of exchange and means of value storage, filling the gaps left by traditional currencies, especially in regions with currency instability and limited access to the U.S. dollar (USD). Businesses, financial institutions (FIs), and individuals are leveraging stablecoins for a variety of use cases, from international payments to liquidity management and hedging against currency fluctuations. Compared to traditional financial systems, stablecoins enable faster, more cost-effective transactions, accelerating the global adoption of stablecoins.
With the increasing momentum around cryptocurrency regulation, stablecoins are becoming a focal point in discussions about technologies shaping the future of finance.
What are stablecoins?
Stablecoins are programmable digital currencies, typically pegged 1:1 to fiat currencies like the U.S. dollar. Stablecoins are primarily issued on networks like Ethereum and Tron, combining the powerful capabilities of blockchain technology with the financial stability required for practical cryptocurrency use cases.
In 2009, the launch of Bitcoin revolutionized the world’s financial infrastructure by introducing a decentralized peer-to-peer trading system that eliminated the need for intermediaries. However, its limited supply and speculative trading dynamics led to extreme price volatility, making its native token, Bitcoin (BTC), difficult to use as a medium of exchange. Similarly, when Ethereum emerged a few 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 significant price volatility.
Stablecoins first emerged in 2014, combining the technological advantages of blockchain (such as transparency, efficiency, and programmability) with the financial stability required 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 both retail and institutional participants.
Types of Stablecoins
Stablecoins maintain their value through various mechanisms designed to ensure price stability.
Fiat-Pegged Stablecoins
Fiat-backed stablecoins are the most popular type of stablecoin to date, pegged to traditional currencies at a 1:1 ratio, with the U.S. dollar and euro (EUR) being the most common benchmarks. The stability of these stablecoins comes from reserves held in fiat currency or equivalent assets that serve as collateral. Examples include Tether (USDT) and USD Coin (USDC) pegged to the U.S. dollar, as well as Stasis Euro (EURS) pegged to the euro.
Commodity-Backed Stablecoins
Commodity-backed stablecoins are tied to the value of physical assets such as gold, silver, or other tangible commodities. 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, where each token represents one troy ounce of gold stored in secure vaults. Another example is Tether Gold (XAUT), which similarly offers stability backed by gold.
Crypto-backed Stablecoins
Crypto-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 despite the volatility of the collateralized cryptocurrency.
U.S. Treasury-Backed Stablecoins
Stablecoins backed by the U.S. Treasury, such as USDY from Ondo and USYC from Hashnote, differ from traditional fiat-backed stablecoins that rely on cash reserves or liquid assets. Supported by U.S. Treasuries and repos, they provide yield directly to holders, effectively serving as tokenized money market funds and 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 its price, and Frax (FRAX), a partially algorithmic stablecoin that combines collateral with algorithmic adjustments. Ethena's USDe is a synthetic stablecoin pegged to the dollar that uses 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 evidenced by the collapse of TerraUSD (UST) in 2022, highlighting the risks associated with purely algorithmic stabilization mechanisms.
Stablecoins in the Cryptocurrency Market
Beyond speculation, stablecoins play a vital role in the cryptocurrency market, providing a reliable medium of exchange, value storage, and a bridge between TradFi and cryptocurrencies. As significant 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 adopting stablecoins as a means to hedge against local currency instability, providing more reliable transaction and value preservation methods. In these regions, retail adoption of stablecoins is primarily driven by their use for low-cost remittances, secure savings in currency-volatile areas, and access to DeFi services such as lending and staking.
While stablecoins are increasingly popular among institutions, much of their growth is driven by transfers below $1 million—this is our benchmark for non-institutional activity, which we studied in our annual cryptocurrency geographical report. Below, we examine 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 transfers, 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, regions like North America and Western Europe have seen significant growth in retail stablecoin activity, albeit at a slower rate, possibly due to strong local financial infrastructure. However, institutional investors in these areas are increasingly adopting stablecoins for liquidity management, settlement, and entry into cryptocurrencies. Notably, Western Europe hosts 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 holding 60-80% market share each quarter, as illustrated in the following chart.
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 trading in Turkey is also far ahead of the world, relative to its GDP.
In East Asia, interest in stablecoins has surged following Hong Kong's launch of a stablecoin sandbox. Upcoming stablecoin regulations will pave the way for stablecoins to be listed in retail trading, potentially boosting Hong Kong's web3 ambitions.
In Central Asia and South Asia, as well as Oceania, stablecoins are widely used for cross-border trade and remittances, circumventing the challenges of traditional banking. Countries like Singapore have bolstered confidence in stablecoins through regulatory frameworks, making them 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 within the global financial system and play an increasingly important role in 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 European Union (EU) has launched the Markets in Crypto-Assets Regulation (MiCA), aimed at creating a unified crypto-asset framework for issuers and service providers within the EU, including stablecoins. MiCA represents a significant shift from AML-focused regulation (introduced by the 5th Anti-Money Laundering Directive) to a comprehensive regulatory framework establishing prudential and conduct obligations. MiCA focuses on enhancing consumer protection and ensuring market integrity and financial stability. The stablecoin framework under MiCA will come into effect on June 30, 2024, while regulations governing crypto-asset service providers (CASPs) will take effect on December 20, 2024. Although MiCA is a piece of European legislation applicable to all 27 EU member countries, the responsibility for licensing and overseeing issuers and CASPs lies with their respective national authorities.
MiCA establishes two different types of stablecoins: (i) Asset Referenced Tokens (ART), designed to maintain stable value by referencing another value or right, or a combination of both, including one or more official currencies, commodities, or crypto assets; (ii) Electronic Money Tokens (EMT), intended to maintain stable value by referencing the value of an official currency, such as the euro or the U.S. dollar. Issuers of ART and EMT within the EU must obtain the corresponding MiCA authorization, including publishing detailed white papers and adhering to strict rules regarding governance, reserve asset management, and redemption rights.
EMT (viewed as both crypto assets and funds) serves as a means of payment, while ART is considered a trading instrument, requiring issuers to report transaction activities in greater detail. Furthermore, ART may be subject to issuance restrictions. Major stablecoins, so-called 'significant' stablecoins, face stricter regulations, including higher capital requirements and reserve asset obligations, directly overseen by the European Banking Authority (EBA) rather than national regulatory bodies. While MiCA has the potential to become a global standard, challenges like unclear national implementations 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 regulatory framework for stablecoins in the country, focusing on single-currency stablecoins (SCS) pegged to the Singapore dollar or any G10 currency circulating in Singapore. The framework emphasizes value stability, capital adequacy, redemption, and disclosure to ensure prudent robustness and consumer protection. Stablecoin issuers meeting 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 legal and regulatory framework different 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 stablecoin opportunities, but the market is still in its infancy, with no stablecoins listed on local exchanges or registered with electronic payment service providers (EPISPs). Recently, the Financial Services Agency of Japan has been reviewing stablecoin rules and considering international experience.
United States
Stablecoin regulation in the United States 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, which aims to establish 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, while having a smaller market share, are actively reshaping the stablecoin landscape.
Tether (UDST)
Tether (USDT) is the largest stablecoin by market capitalization, accounting for the vast majority of stablecoin supply and providing liquidity for numerous blockchains. Tether's reserves and financial transparency have been scrutinized, but the company asserts that audits and market stress tests confirm its solid standing. Tether holds nearly $100 billion in U.S. Treasury bills, with most of its assets managed by Cantor Fitzgerald, placing its reserve assets on par with 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 attestations of its reserves. Reserves are held in cash and short-term U.S. government debt, 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, supported 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 have now become versatile tools for everyday use cases, offering broad utility for both the cryptocurrency native ecosystem and TradFi.
Gateway to DeFi
Stablecoins are a cornerstone of many DeFi protocols, facilitating lending and yield farming. They exhibit no price volatility and are 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 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 charging minimal fees, making them an attractive option for users. In P2P transactions, stablecoins offer individuals a simple, secure way to exchange value without intermediaries. This is especially valuable in regions where reliable banking systems are unavailable.
Cross-Border Transactions and Remittances
Cross-border payments and remittances are one of the most transformative use cases for stablecoins. They provide 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 offer a solution to bypass the inefficiencies of the traditional financial system, enhancing financial inclusion and reducing 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.
Foreign Exchange (FX) and Trade Finance
For forex and trade finance, stablecoins enable businesses to transact in globally accepted digital currencies, reducing reliance on intermediaries and minimizing 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 value storage in regions facing economic instability or high inflation. By pegging their value to assets like the U.S. dollar, stablecoins provide individuals and businesses with a means 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 high demand for direct access to dollars.
Stablecoins often trade at a premium in high-inflation areas, reflecting users' willingness to pay for stability and faster access to funds. Currency instability in emerging markets can lead to significant GDP losses over time, further driving demand for stablecoins.
Illicit Activities in the Stablecoin Ecosystem
While stablecoins have garnered significant attention for their legitimate use cases, they have also been exploited by high-risk and illicit actors for various illegal activities. Their stability and global accessibility make them attractive tools for bad actors trying to circumvent financial controls and avoid detection—though the inherent transparency and traceability of blockchains often make this a poor choice.
While we estimate that less than 1% of on-chain transactions are illicit, stablecoins have been used for activities such as money laundering, fraud, and evasion of sanctions. Due to their relatively high liquidity and acceptance on 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 circumvent Western financial restrictions, the practice of evading sanctions through stablecoins and other cryptocurrencies has become 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 fund transfers by sanctioned entities and political figures) pose safety and compliance risks.
How Stablecoin Issuers Collaborate with Law Enforcement
Stablecoin issuers are ramping up efforts to combat financial crime, supporting global law enforcement and regulatory investigations. Issuers like Tether work closely with global law enforcement agencies, financial crime units, and regulators like the Financial Crimes Enforcement Network (FinCEN) to use Chainalysis for real-time transaction monitoring and identifying suspicious activities. Most centralized stablecoin issuers also hold the power to freeze or permanently delete or 'destroy' tokens in wallets associated with confirmed criminal activities, thereby stopping 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. Striking a balance between compliance and user autonomy is a significant consideration for 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 are steadily increasing across regions and industries. As frameworks like Europe's MiCA and guidelines in markets such as Singapore and Japan continue to take shape, stablecoins are set to 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 related to reserve transparency persist, and if not effectively addressed, these issues could undermine market confidence and stifle broader adoption. On the other hand, stablecoins present significant opportunities for financial inclusion, especially in underserved areas, and are actively innovating payments, remittances, and trade finance by lowering costs and increasing speed. Their role in creating new financial products and simplifying cross-border trade further illustrates their transformative potential.
With ongoing advancements in regulation and technology, stablecoins have the potential to unleash new opportunities, bridging gaps between economies and achieving greater global financial connectivity. Their continued development will play a core role in defining the future of cryptocurrencies and TradFi.
