A stablecoin is a type of cryptocurrency that aims to maintain a stable value relative to a specified asset, a pool or basket of assets. The specified asset might refer to fiat currency, commodity, or other cryptocurrencies.[1][2] Despite the name, stablecoins are not necessarily stable. Stablecoins rely on stabilization tools such as reserve assets or algorithms that match supply and demand to try to maintain a stable value.[3]
Historically, multiple stablecoins have failed to maintain their value relative to the underlying assets. With the growing market transactions, stablecoins issuance and usage are increasingly regulated by governments around the world.
Background
Stablecoins emerged in 2014 as a method for investors in cryptocurrencies to park their money when they invest in other highly volatile cryptocurrencies.[4][5] Stablecoins are now mainly used for buying or selling cryptoassets, and for making cross-border payments.[1] According to the Bank for International Settlements, the size of the global stablecoin market is approximately $255 billion as of June 2025, with near 99% of stablecoins pegged to the US dollars.[6]
Types of stablecoin
Stablecoins can be distinguished based on their methods of maintaining their relative value with the specified asset. Some major types of stablecoins are as follows:[7][8]
Fiat-backed stablecoins
Fiat-backed stablecoins are stablecoins that claim to be backed by assets denominated in a fiat currency.
The value of a fiat-backed stablecoin is based on the value of the backing currency, which is supposedly held by a third party custodian. The issuer defends the peg of the stablecoin by holding mostly fiat-denominated short-term assets, such as treasury bonds, high-quality commercial paper, repurchase agreements and bank deposits. Therefore, the structure of fiat-backed stablecoins closely resembles that of moneymarket funds (MMFs), and are exposed to similar risk of large-scale redemption requests causing negative fire-sale contagion effects on the financial system.[9][10]
As of August 2025, nearly 99% of fiat-backed stablecoins are pegged to the US dollars.[6] Major examples of US dollar pegged stablecoins are Tether's USDT, Circle's USDC, and Binance's BUSD.[5][11] For Euro pegged stablecoins, major examples would include Circle's EURC, EUR Tether and Stasis EUR.[12][13]
Cryptocurrency-backed
Cryptocurrency-backed stablecoins are stablecoins using other cryptocurrencies as collateral. The reason such stablecoins are created is that by utilizing smart contracts, they allow a decentralized network to track the price of US dollar as closely as possible. Another use case of cryptocurrency-backed stablecoins is to convert a cryptocurrency into ERC20 compatible standard to enable trading on another blockchain.[14]
Major examples of cryptocurrency-backed stablecoins are DAI and Wrapped Bitcoin (WBTC).
Commodity-backed stablecoins
Commodity-backed stablecoins are stablecoins that claim to be backed by commodities. Examples are PAX Gold and Tether Gold.[8]
Algorithmic stablecoin
Algorithmic stablecoins, sometimes called seigniorage-style stablecoin, are stablecoins with no reserve assets or only partial reserve assets. They utilize algorithms that match supply and demand to maintain a stable value. The European Central Bank suggests that algorithmic stablecoins should be treated as unbacked crypto-assets.[3]
Some major examples of algorithmic stablecoins are Celo Dollar, Tron's USDD and Kava's USDX.[7]
Do Kwon, founder of Terraform Labs, creator of TerraUSD
"Death spiral" of algorithmic stablecoin
Algorithmic stablecoins are vulnerable to a de-pegging process known as "death spiral" [15][16], in which an external event, such as the tightening of global liquidity, led to heavy redemption of the stablecoin. This triggered the minting of the linked token to burn the stablecoin, causing the supply of the linked token to increase exponentially, further causing a decrease in price.[17][18]
A famous case of death spiral is the TerraUSD (UST), which was created by Terraform Labs founded by Do Kwon. TerraUSD was meant to maintain a 1:1 peg with the United States dollar.[19] Instead of being backed by dollars, UST was designed to keep its peg by linking it with another Terra network token, LUNA. The mechanism worked by providing an economic incentive for arbitrage. If UST lost its peg and traded below $1, an arbitrager could purchase it on the secondary market and redeem it for $1 worth of LUNA. Correspondingly, if UST traded higher than $1, market actors could mint new UST by locking in $1 of LUNA and then sell the new UST on the market for a profit. However, this mechanism assumes there is sufficient market demand for UST and LUNA, making the stablecoin inherently fragile.[20]
In May 2022, UST broke its peg with its price plunging to 10 cents,[21] while LUNA fell to "virtually zero", down from an all-time high of $119.51.[22] The collapse wiped out almost $45 billion of market capitalization over the course of a week.[23][24]
In the case of TerraUSD, another contributing factor to its failure was its proof-of-stake mechanism. The fall in the price of LUNA caused validators to sell their stakes, allowing malign actors to became dominant validators.[25]
Use cases and potential advantages of stablecoin
Convenience for crypto investors
The main advantage of stablecoins is they provide convenience for investors in cryptocurrencies, allowing investors to park their money while buying and selling other more volatile cryptocurrencies.[3][4]
Cross-border payments
Stablecoins are used for cross-border payments, especially for cross-border remittance to less developed countries. Cross-border payments are traditionally associated with high transaction costs, prolonged processing times, and limited access for unbanked populations. Since stablecoins can be sent using a smartphone, it can facilitate faster cross-border transactions for individuals with limited access to financial institutions.[26][27][28]
Stablecoins are being used in countries with hyperinflation, such as Argentina, Turkey, and Venezuela. Due to monetary policies of these countries, average citizens are often unable to obtain foreign currencies through formal financial services. Since some stablecoins could maintain a relatively steady value against specific assets such as the US dollar, they are used as a hedge against hyperinflation.[29][30][31][32][33]
Trading and humanitarian effort in financially repressed countries
Stablecoins became tools for trading and distributing humanitarian aid in financially repressed countries in Africa. Humanitarian NGOs told media that stablecoins help them get around regulatory holdups and wastage of donor funds on exorbitant banking fees. Local communities also started accepting stablecoins as payment method.[34]
Financial and regulatory risks of stablecoin
Anti-Money Laundering / Counter-Financing of Terrorism compliance concern
Stablecoins enable person-to-person transfers without the need for a regulated intermediary, which raised concern from international financial institutions on Anti-Money Laundering (AML) and Counter-Financing of Terrorism (CFT) compliance.[35][36] Blockchain maintains pseudonymity for individual users, which can preserve privacy but also facilitates illegal use in the absence of Know Your Customer (KYC) requirments.[37]
In 2020, the intergovernmental anti-money laundering Financial Action Task Force (FATF) issued a report on stablecoin, calling out the risk of money laundering using stablecoins. In particular, the anonymity, global reach, and layering using "chain-hopping" technique are cited as risk factors.[38]
Erosion of monetary sovereignty
After the passing of the GENIUS Act by the Trump administration in the United States, Jürgen Schaaf, adviser to the European Central Bank (ECB) wrote that widespread adoption of US dollar stablecoins could erode European monetary sovereignty and financial stability.[39] Scholars in China and Singapore have both described the GENIUS Act as a strategic move to increase demand for US Treasuries and therefore an attempt to consolidate the hegemony of the US dollar.[40][41]
Volatility risk
Research have shown that the price of fiat-backed stablecoins can dip below the value of the pegged currency due to limited participation in the primary market and sell pressure in the secondary market.[42]
Contagion risk on financial market
Since fiat-backed stablecoins are structurally similar to money market funds, they pose similar contagion risk, in which a large amount of redemption caused the selling of underlying assets, further pushing down the price of the underlying assets and creating more demand for redemption.[9][10]
Counterparty risk
Reserved-backed stablecoins require a third party custodian to hold the reserve assets to maintain price stability. The concentration of reserve deposit create a counterpart risk in which the custodian may fail in the case of a bank run. In March 2023, the price of Circle's USDC de-pegged temporarily during the banking crisis in the United States in which Signature Bank, Silvergate Bank, and Silicon Valley Bank collapsed.[43]
Lack of reserve transparency
Tether's USDT is currently the world's largest market capitalization stablecoin. Tether initially claimed their stablecoin is fully backed by fiat currency. However, in October 2021, it failed to produce audits for reserves used to collateralize the quantity of minted USDT stablecoin.[44] Tether were fined $41 million by the Commodity Futures Trading Commission for deceiving consumers.[45] The CFTC found that Tether only had enough fiat reserves to guarantee their stablecoin for 27.6% of the time during 2016 to 2018. Since then, Tether began issuing assurance reports on USDT backing, although some speculation persists regarding the use of Chinese commercial paper for reserves.[46] As at March 2025, Tether had never completed an audit by an accounting firm.[47]
A stablecoin should not be confused with a central bank digital currency (CBDC). While both are electronic digital payment utilizing the blockchain. CBDC is issued by central banks, meaning that they are a direct claim on the central bank, while stablecoin is issued by private entity.[1][48]
Another difference is that CBDC, being issued by central banks, would belong to the monetary base (M0),[49] while stablecoins issued by commercial financial institutions would belong to the monetary aggregate (M2).[50]
The digital renminbi is a CBDC that has been in limited operation in China since 2022.[51] The European Central Bank's digital euro project has been under consideration since 2021 but has not been legislated by the European Parliament as of August 2025. Christine Lagarde, president of European Central Bank, called it a "strategic priority" for Europe in response to US legislation of stablecoins.[52]
Stablecoin and interest return
While most stablecoins are non-interest bearing and therefore do not provide interest returns to the holder, some issuers and service providers began offering yield-bearing stablecoins in an attempt to gain market share.[53][54][55][56]
The reason most stablecoins with centralized issuers do not provide interest return is because that would potentially make them financial securities, thus falling under regulatory regime. Both the US's GENIUS Act and Hong Kong's Stablecoin Bill explicitly prohibit the provision of yield-bearing stablecoins by regulated issuers.[57][58]
Research suggests that by providing interest return on stablecoin, holders of stablecoins would be less likely to sell, thus reducing the risk of a run on stablecoins.[42]
Yield farming in decentralized platform
While issuers may not directly provide interest return, decentralized financial platforms are another possible avenue for earning interests. By providing stablecoins for liquidity on decentralized platforms, holders of stablecoins can get a share of the fees paid by liquidity takers. This process is known as "yield farming".[59]
Contrary to popular belief, yield farming is not risk free, because the holders are engaged in lending activity. In the case of the TerraUSD, initially to drive adoption, the Anchor protocol was created to offer a yield of 19.5% to depositors of the stablecoin, a rate much higher than the return on US Treasuries. Thus, a large amount of the stablecoin is locked in the Anchor protocol. Subsequently when the price of TerraUSD began to crash. The holders are unable to cash out of their position and are left holding the bag.[60][18]
Since 2020, online scams originating from Southeast Asia, mostly in Cambodia, Myanmar, and Laos, began to proliferate. These scams are known as "pig butchering" and are often run by criminal gangs based in large compounds in the region. By tricking victims into investing in cryptocurrency, the scammers are then able to transfer the money and attempt to hide their trail using stablecoins.[61][62][63]
According to media reports, official announcements, and academic research, Tether's USDT is the preferred stablecoin of these criminals.[64][65][66][67] In January 2024, the United Nations Office on Drugs and Crime (UNODC) published a report, directly linking USDT to cyberfraud and money laundering.[68] In June 2025, the US Department of Justice announced the seizure of $225 million USDT linked to pig butchering scams.[69]
Legislation and regulation
United States
In July 2025, the United States passed the GENIUS Act, a bill which allows banks and other financial institutions to issue stablecoins backed by fiat currency or other high-quality collateral, such as US Treasuries. The bill is expected to generate greater demand for US Treasuries by stablecoin issuers.[70][71][72]
European Union
The European Union introduced the Markets in Crypto-Assets Regulation (MiCAR) in June 2023. The regulation became applicable to asset-referenced tokens and e-money tokens on 30 June 2024.[73] MiCAR has no clear regulation on global firms issuing the same stablecoin both from an EU-regulated entity and from a third-country entity, causing concern that in that event of large scale redemption of a multi-country stablecoin, the reserves located in the EU might be quickly depleted.[74]
In November 2023, the Monetary Authority of Singapore finalized its Stablecoin Regulatory Framework after conducting public consultation since October 2022.[79] Issuers of stablecoins are required to maintain a portfolio of reserve assets denominated in the currency of the stablecoin peg.[80] On 16 November 2023, the regulator approved Paxos Digital and StraitsX as stablecoin issuers.[81]
UAE
In June 2024, the Central Bank of the UAE established the Payment Token Services Regulations to regulate the use of stablecoins in the UAE. The regulations prohibit persons within the UAE from accepting stablecoins for the sale of goods and services except licensed payment token.[82][83]In April 2025, the sovereign wealth fund of Abu Dhabi, ADQ, and the First Abu Dhabi Bank, are set to launch a stablecoin backed by dirhams.[84]
Bahrain
In July 2025, the Central Bank of Bahrain introduced the Stablecoin Issuance and Offering (SIO) Module. Under the regulation, stablecoin issuers can issue single currency fiat-backed stablecoins pegged to the Bahraini Dinar, US dollar, or any other fiat currency upon obtaining approval of the central bank. Algorithmic stablecoins are prohibited.[85][86]
Japan
In June 2022, Japan’s Financial Services Agency launched the Regulatory Framework for Crypto-assets and Stablecoins.[87] The regulation requires stablecoin issuer of fiat-backed stablecoin (known as digital-money type stablecoins in Japan) to register with the agency. The agency views algorithmic stablecoin as crypto assets and does not require issuer to register. However, intermediaries such as crypto exchanges are subject to regulations.[88] In August 2025, fintech company JPYC received approval by the agency to launch the first stablecoin pegged to the Japanese Yen.[89]
Defunct stablecoin projects
There is a history of de-pegged stablecoins and stablecoin projects that have been abandoned by the issuer.[90]
De-pegged stablecoins
In June 2021, IRON stablecoin, which is an algorithmic stable coin partially collateralized by USDC, de-pegged after large selling orders to its linked TITAN token.[91]
In May 2022, Terra's stablecoin UST lost its peg with the US dollar. The subsequent failure of Terraform Labs resulted in the loss of nearly $40 billion invested in UST and LUNA tokens.[92][90] Terraform Labs filed for bankruptcy in January 2024. In December 2024, Do Kwon was extradited to the United States and subsequently charged with fraud. Do Kwon pleaded guilty in August 2025.[93][94]
Abandoned stablecoin projects
In December 2018, Basis, an algorithmic stablecoin which previously raised $133 million from venture capital, has to shut down due to concerns about US regulation.[95][96][97]
In February 2022, stablecoin project Diem was abandoned by Meta and later purchased by Silvergate Capital, which filed for bankruptcy in September 2024.[98][99]
↑ Schaaf, Jürgen (28 July 2025). "From hype to hazard: what stablecoins mean for Europe". ECB blog. ECB. Retrieved 30 July 2025. The ECB believes that the wide adoption of US dollar stablecoins would provide the United States with strategic and economic advantages, allowing it to finance its debt more cheaply while exerting global influence. Europeans would experience higher borrowing costs, reduced monetary policy autonomy, and geopolitical dependency.
↑ Schoar, Antoinette; Makarov, Igor; Liu, Jiageng (22 May 2023). "Anatomy of a Run: The Terra Luna Crash". The Harvard Law School Forum on Corporate Governance. Retrieved 7 August 2025.
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