Stablecoins: How they work, and Can They be Trusted
Blockchain + Digital Money!
Stablecoins aim to bring the best of both worlds to crypto: the speed and transparency of blockchain with the price stability of traditional money. But behind that simple promise are very different designs, from fiat-backed reserves to algorithmic mechanisms, each with its own trade-offs, risks, and real-world use cases. Stablecoins are rapidly becoming the crypto market’s most popular asset class with an asset base of ~ $300 billion today. In this article we dive deep into the rapidly evolving world of Stablecoins!
Let’s Get Started! **
Unlike most cryptocurrencies, which can often be subject to dramatic price swings (aka Bitcoin), Stablecoins are pegged 1:1 to less volatile assets such as fiat currencies (US Dollar, Euro etc.), crypto assets, or commodities (Gold). Stablecoins, which first appeared in 2014 attempt to combine the technological benefits of blockchain — transparency, efficiency, and programmability — with the financial stability needed to establish trust and to foster widespread adoption.
A primary goal of Stablecoins is to address the issue of crypto price volatility, and in doing so Stablecoins have unlocked new use cases beyond trading and speculation, appealing to a broad range of crypto users, both retail and institutional.
BitUSD, was the world’s first Stablecoin, released in July 2014, and was operated on the Bitshares blockchain. BitUSD was crypto-backed and not backed by the US Dollar.
In Sept of the same year, the NuBits Stablecoin was launched and was also pegged to the dollar, using the BitShaes cryptocurrency for collateral. NuBits relied on a flawed algorithm that couldn’t handle the extreme market volatility of the cryptocurrency market and the stablecoin lost its $1 peg in 2018 and never recovered.
In Nov 2014, Tether USDT was released and it has progressed to become the world’s most valuable and most traded Stablecoin with ~ $190B in Reserve Asset Base. Because fiat backed Stablecoins are pegged 1:1 to the US Dollar (USD), Reserve Asset Base (the total reserves backing the Stablecoin) is the best way to characterize a Stablecoin’s size and adoption.
Industry sources currently estimate there are ~ 380 Stablecoins in existence today – this includes dormant or low-volume coins. Conservative estimates have the number of active Stablecoins worldwide at ~180–200, with more than 99% of the Stablecoin supply being US Dollar denominated. The largest 2 Stablecoins (USDT + USDC) together represent ~86% of total market capitalization. Many algorithmic Stablecoins collapsed after TerraUSD failed in 2022, reducing the active count to ~ 20 worldwide. See below for more details on the TerraUSD collapse.
** Disclaimer
This article is provided solely for informational purposes only and does not constitute investment advice, financial advice, or any recommendation to buy, sell, or hold any asset. Readers should not rely on this content as a substitute for professional guidance, and they should consult a qualified financial advisor before making any financial decisions.
Stablecoin Designs – How They Work – Why that Matters!
Stablecoins are a special type of cryptocurrency designed to maintain a fixed value over time. Unlike volatile cryptocurrencies like Bitcoin and Ethereum, Stablecoins are “pegged” 1:1 to a traditional currency, most commonly the U.S. dollar, and they are backed “stable” asset(s) (Fiat Currency, Cryptocurrency, Gold), or a collection of stable assets.
The mechanism behind a Stablecoin type determines far more than how it holds its peg. It shapes how regulators classify it, what compliance obligations apply, where risk is concentrated and who bears responsibility when something goes wrong. The most common Stablecoin types are:
Fiat currency backed: are backed by real-world fiat currency assets and currently dominate the market. Tether’s USDT and Circle’s USDC, the two largest Stablecoins, collectively account for more than $220 billion in market cap – fully 86% of today’s Stablecoin universe.
Algorithmic: these coins rely on technical mechanisms to maintain the 1:1 peg. When the coin trades above its target, the protocol mints more supply; when it trades below mtarget, it reduces supply using redemption incentives to keep the price stable. These Stablecoins are not backed by collateral assets. This approach is riskier because it’s more susceptible to market fluctuations and technical failures.
Crypto backed: Crypto-backed models not surprisingly are tied to cryptocurrencies, notably BitCoin and Ethereum which makes them more decentralized but also more complex and riskier. Smart contracts and overcollateralization are used to maintain their dollar peg.
Commodity-backed: here the Stablecoin is pegged to tangible physical commodities such as precious Metals, Oil and Gas and/or Treasury Bills. The issuer typically holds reserves of the underlying physical commodity (like Gold). Commodity backed coins need to manage the variables of the market value of the underlying asset (aka the price of Gold fluctuates) and the physical infrastructure needed to store the assets.
Regulatory treatment follows these structural differences. Fiat-backed Stablecoins increasingly fall under dedicated payment stablecoin frameworks. Crypto-backed and algorithmic models are less clear-cut, with classification varying by jurisdiction and are still evolving. Commodity-backed tokens may face dual regulatory oversight.
Note on terminology used in this article. For simplicity, the words stablecoin, coin, and token are sometimes used interchangeably in this article. For true clarity, the three words describe a hierarchy in crypto assets: coin is the broadest term for a native cryptocurrency on a blockchain, token is a unit of value built on top of an existing blockchain, and stablecoin is a specific type of token.
Deep Dive into Stablecoin Types
Fiat Currency Backed Stablecoins
These are by far the most popular type of stablecoin — as noted above, they are tied 1:1 to the value of traditional currencies, with the USD and Euro being the most common benchmarks – surprise – surprise! These Stablecoins derive their stability from reserves held in the fiat currency or equivalent assets. Examples include the US Dollar pegged Tether USDT, Circle’s USDC, and the EUR–pegged Stasis Euro EURS.
Important Consideration
With fiat backed Stablecoins, risk of the asset is on the issuer – the organization or company who holds the reserves, what those reserves consist of and whether redemptions could be restricted during stress events. Relative to other types of Stablecoins, Fiat backed Stablecoins provide users with the most protection from market fluctuations - but they are not completely safe.
Issuers of fiat-backed Stablecoins typically establish a reserve fund holding real-world assets, the volume of which mirror the total value of invested funds. So, for example, if a Stablecoin is backed by the U.S. dollar, the issuer will hold $100 million in US dollar assets to support 100 million Stablecoins issued to users. When a user wants to redeem their Stablecoin, the issuer can draw from this reserve to provide the equivalent amount of fiat currency to the user. Reversely, when a user invests in Stablecoin, the issuer acquires more of the collateral assets and deposits them into the reserve fund.
Example: Tether USDT
Tether launched its USDT Stablecoin in 2014, and in doing so essentially eliminated a lot of the hassle that comes with moving your money in and out of the crypto space, providing crypto investors with an exchange mechanism that is simpler to execute, and less volatile in price than buying crypto currencies directly. Prior to Tether, there really wasn’t any way for crypto traders to easily move their money in and out of the blockchain ecosystem without taking their fiat money out of the crypto space entirely.
This means if you wanted to sell your Bitcoin, for example, but didn’t want to cash out entirely and instead wanted to buy another cryptocurrency, you’d have to sell the crypto, take the gains in the form of actual cash, then re-transfer that cash into your crypto account, and purchase the new cryptocurrency. With Tether USDT, investors can sell their Bitcoin and then park their funds in a Stablecoin rather than cashing out of the blockchain.
Tether USDT coins are backed 1:1 by U.S. cash and other assets held in Tether’s reserves. Tether’s parent company, Tether Holdings Limited, manages the reserve supply. The company audits and reports on its reserves quarterly.
Tether says USDT is backed by reserves that include a large share of highly liquid assets, especially U.S. Treasury bills and other cash-like instruments. The collateral backing USDT is not just cash in a bank account; rather it is a mix of liquid assets and other holdings that together are intended to support the circulating supply.
Recent reporting cited by third parties suggests U.S. Treasuries and related short-duration instruments make up the bulk of USDT reserves, while more volatile assets, such as money market funds, secured loans, Bitcoin, precious metals, and corporate bonds may also be included in the reserves – al be it these are a small portion of the total reserves.
Here’s a closer look at how Tether stores its reserves in the order of ~ $160B in assets.
Tether’s liquid asset allocation (~ 84 percent) *
U.S. Treasury bills: $94 billion
Overnight USD reserve repurchase agreements: $17 billion
Term reverse repurchase agreements: $8.5 billion
Money market funds: $15 billion
Cash and bank deposits: $400 million
Non-U.S. Treasury bills: 100 million
Tether’s alternative asset allocation (~ 16 percent) *
Secured loans: $8 billion
Bitcoin: $7.5 billion
Precious metals: $6 billion
Other investments: $4 billion
Corporate bonds: $10 million
* Tether’s asset mix changes dynamically both in terms of the types of assets and the relative investment quantities. The data presented above is just that, an example of the various collateral assets USDT leverages to collateralize the USDT Stablecoin at a given point in time. For more details visit this site: https://tether.to/en/transparency/?tab=usdt
Algorithmic/Synthetic Designs
Algorithmic Stablecoins are digital currencies that maintain their value through programmed mechanisms that adjust supply based on market demand, without relying on direct collateral > aka typically there are no hard assets (fiat currency or crypto) backing these types of Stablecoins.
These coins also target a $1 USD peg, and they deploy onchain rules and incentive systems to constantly adjust how many tokens exist. When the price drifts above a dollar, the system mints more tokens. When the price slips below a dollar, it removes tokens from circulation. These are self-correcting systems that keep the coin close to its peg value with adjustments happening automatically through smart contracts operating on blockchains. The typical adjustment mechanisms include:
Rebasing systems – where an adjustment protocol changes the total number of tokens in circulation on a set schedule. If the price rises above $1, everyone’s balance increases; if it falls below $1, balances shrink. A user continues to hold the same percentage of the network, but the number of tokens they have shifts. This design makes each token more or less scarce until the market price returns to the target.
Dual-token models – here the Stablecoin is paired with a second token that absorbs volatility. When the stablecoin is above $1, the protocol mints more of the secondary asset– sometimes distributing new tokens to holders of the secondary asset – to push the price down. When the price drifts below $1, users are incentivized to buy discounted stablecoins or swap the secondary token for stablecoins that get removed from circulation, tightening supply until the peg recovers.
Hybrid or fractional models – these models blend collateral asset backing with algorithmic corrections. A portion of the Stablecoin’s value is backed by real assets, and the algorithm handles the rest. This mix can be more resilient because the collateral provides a stable buffer, and the algorithm keeps the coin responsive to demand. In theory, fractional models can maintain a tighter peg than fully unbacked systems, especially during volatile periods.
Algorithmic Stablecoins operationalize several tools and techniques including Smart Contracts which are automated software programs that execute the stablecoin’s monetary rules on the block chain(s) by creating, called minting, and removing, called burning, coins to manage supply changes, and coordinating swaps between paired assets.
Price Oracles are services that deliver real-time market prices to smart contracts on the blockchain, so the algorithm knows when the coin is trading above or below its target. There are number of price oracle types including Push-based price feeds that update a schedule or when price moves by a pre-set threshold, Pull-based price feeds that enable protocol to fetch high-frequency data when needed, Decentalized Exchange (DEX) based that derive prices from on-chain trading activity, often using time-weighted averages to reduce manipulation risk. Some Stablecoin designs use multi-source aggregated feeds that combine data from many exchanges or venues to avoid depending on a single market source.
Blockchain Networks are an obvious major critical component, as the chain’s speed, fees, and reliability shape how well the stabilization mechanism performs. Congestion or blockchain outages can delay transactions, limit arbitrage, and weaken the Stablecoin price by negatively impacting the peg.
Example: Ethena USDe
Ethena’s USDe, a synthetic US dollar pegged stablecoin, that uses crypto assets and automated hedging to maintain its dollar value, and it also operates the globally accessible dollar savings asset, sUSDe. USDe was founded by Guy Young in July of 2024 and released USDe in Feb of 2024.
It has a Reserve Asset Base of ~ $5.5B and operates on the Ethereum blockchain. The Stablecoin delta-hedges Bitcoin, Ethereum and other governance-approved spot crypto assets using perpetual and deliverable futures contracts, as well as holding liquid positions in the USDC (Circle) and USDT (Tether) Stablecoins.
USDe is decentralized and uses what’s called “cash-and-carry trade,” a kind of arbitrage that takes advantage of the price differences between long exposure and short derivatives exposure to Ethereum and some of its financial derivatives. USDe takes money client’s remit to buy USDe and uses that money to buy Ethereum (going long) while simultaneously betting against its price (going short) using financial derivatives.
This strategy attempts to neutralize the price risk of USDe, and it offers buyers a yield (aka interest) by staking the Ethereum and collecting payments from the short derivatives positions. In other words, USDe generates returns (yield) from its hedging activities and Ethereum staking activities and these returns are distrusted to the holders of USDe creating a passive income stream.
Governance and decision making for Ethena leverages the ENA governance token. Holders of the ENA Token can vote bi-annually to elect members to a Risk Committee, and in the future additional committees performing critical roles within the Ethena ecosystem.
TerraUSD Stablecoin Collapse
TerraUSD, once the third-largest stablecoin by reserve assets, is a stark example of the pitfalls of algorithmic Stablecoins. TerraUSD relied on a complex system of arbitrage and other cryptocurrencies to maintain its 1:1 peg to the U.S. dollar.
In 2022, a sudden crash eroded confidence in the system, leading to a catastrophic collapse with investors panicking and selling their TerraUSD tokens which broke the peg and it never recovered. The TerraUSD cost its investors $40 billion in losses and severely damaged the reputation of Algorithmic Stablecoins in the market.
Crypto Backed Stablecoins
As you might gather, crypto backed Stablecoins establish their peg by holding other cryptocurrencies as collateral rather than cash, money market funds, or government bonds. Given that the underlying collateral assets are volatile, these systems rely on a decentralized model with overcollateralization and smart contract rules to maintain their peg.
For example, if a Stablecoin has $10B of their Ethereum-backed stablecoin in circulation, they will hold more than $10B of Ethereum cryptocurrency in reserve to establish its overcollateralization which attempts to address the potential for volatility in the reserves.
Some of the common characteristics of these types of coins include:
Overcollateralized vaults – users lock crypto into a smart contract and mint stablecoins against it, usually with collateral worth more than the coins issued.
Decentralized governance – many crypto-backed systems are managed by protocols or Decentralized Autonomous Organization (DAOs) instead of a single company, with rules encoded in smart contracts and tokens used to manage membership in the DAO.
Liquidation mechanisms – If the crypto collateral value falls too far, the system can automatically liquidate part of the position to protect the peg.
Stability incentives – fees, interest-like charges, and arbitrage opportunities encourage users to keep the peg close to the target value.
Redemption and mint/burn logic – tokens are created when collateral is deposited and removed from circulation when users repay or redeem them.
How Does a Decentralized Autonomous Organization (DAO) Operate? DAOs implement Stablecoin management via tokens and smart contracts to decide how Stablecoins are held, moved, invested, or used for payments. In practice, members vote on treasury policy, risk limits, yield strategies, and spending rules, instead of a single company or manager doing it alone
Example: DAI Stablecoin
DAI is a Stablecoin that uses cryptocurrency collateral locked in Maker Protocol smart contracts to maintain its 1:1 peg to the US dollar. DAI is a popular Stablecoin typically ranked in the top 5 globally based on its Reserve Asset Base of ~ $4.5-$5B.
Each DAI coin is backed by cryptocurrency and is overcollateralized by crypto deposits through Maker Protocol’s smart contracts, called Maker Vaults. This means that every coin requires a coin holder to lock cryptocurrencies worth more than the amount they mint in a Vault to ensure the stability of its $1 peg, even with fluctuations in the crypto market.
The Maker Protocol is open-source software built on Ethereum, and its Stablecoin can use a variety of ERC-20 tokens as collateral, including Ether (ETH), Basic Attention Token (BAT), wrapped Bitcoin (wBTC), Compound (COMP), and more.
The Maker Foundation, the company who coordinates the original development of the Maker Protocol, was co-founded in 2014 by Rune Christensen and Wouter Kampmann. Its first collateral token backed only by Ethereum was released in 2017, with multi-collateral functionality introduced in 2019. In July 2021, the Maker Foundation gave up control of the Maker software to MakerDAO, a Decentralized Autonomous Organization providing the protocol with a fully decentralized governance model.
How it works:
To create new coins, a user deposits their cryptocurrency (like Ethereum, ETH) into a Maker Vault. Their tokens are locked in the Vault’s smart contract as collateral against which they can withdraw, or more accurately, borrow DAI. The user’s deposits are referred to as a Collateralized Debt Position (CDP), and they must pay a small stability fee for using the service.
Maker uses pricing oracles to determine the dollar – based value of the deposited cryptocurrency, and users generate a specified amount of coins based on that value. This collateralization is never 1:1 because of the volatility of the cryptocurrency market. Therefore, Maker requires overcollateralization of each CDP in which users must deposit more value than they are taking out. If the dollar value of a user’s cryptocurrency decreases, then they must return the tokens they have borrowed, deposit more value into the Vault, or risk being liquidated.
Maker’s smart contracts employ several automated auctioning mechanisms to stabilize the cryptocurrency’s value around its peg to the US dollar. The auctions are implemented through smart contracts in the Maker Protocol that are executed autonomously without human intervention.
Maker also leverages something called Keepers, which are third-party participants (usually automated) that buy DAI when it is below its $1 target and sell it when it is above its $1 target. This process of arbitrage keeps a constant pressure on the price of the stablecoin to remain in a tight band around the Peg.
Commodity Backed Stablecoins
Commodity-backed Stablecoins are dominated by coins that are tied to the value of precious metals – Gold and Silver. The OIL1 Stablecoin was announced in January of 2026, with an expected release in the first half of the year. It will be collateralized by verified reserves of Gulf crude oil and pegged to both the U.S. dollar and the price of Gulf crude.
Commodity backed Stablecoins offer users the ability to gain exposure to commodities without directly owning them. Examples include:
Tether Gold (XAUT) with ~$2.5–3.3B in gold reserves ~16.2 metric tons; 644 gold bars (7,667 kg) stored in Swiss bank vaults.
PAX Gold (PAXG) with ~$1.6–2.3B in gold reserves, with each coin backed by one ounce of a 400-ounce gold bar stored in London based bank vaults.
Kinesis Silver (KAG) – the largest silver backed coin, with ~$285–414M in Silver reserves, with 1 ounce of investment-grade silver bullion per coin stored in fully insured, audited vaults
Stablecoins - General Benefits
Stablecoins have become an essential tool in the cryptocurrency ecosystem, offering several key benefits.
Reduced Transaction Fees: Many cryptocurrency exchanges skip the fees for users converting to or from Stablecoins. Instead of cashing out into U.S. dollars and racking up fees each time. International Transfers cost less than $1 vs. $10–$25 for traditional international wire transfers.
Speed: Transactions settle almost instantly vs. days for traditional wire transfers and are available 24/7/365 (worldwide), aka transactions are unrestricted by traditional banking hours
Hedging Against Volatility: By holding Stablecoins, traders can protect their investments from the price swings inherent in the crypto market and provide stability essential for corporate treasury and payments.
Passive Income Opportunities: Some Stablecoins allow users to earn interest through staking or lending. For example, Coinbase offered a 4.1 percent reward to users who held USDC on the platform in July 2025.
Programmability: Smart contracts and blockchain enable automated payments, yield lending, and collateral use.
General Risks
Anything in the crypto world has inherent risks.
Depegging: If the value of the stablecoin deviates from underlying fiat currency (trades significantly below or above its $1 target), due to market conditions or liquidity issues, the issuer is forced to take corrective action quickly to restore confidence and the Peg. See pegging/depegging section below for additional details
Reserve Risk: The Coin issuer may not hold the claimed collateral or reserves may be inaccessible. Recent regulation in the U.S. requiring audited reserves should help mitigate this risk.
Counterparty Risk: Users need to trust that the Coin’s issuer is solvency and stable
Regulatory Uncertainty: Accounting/treatment rules still evolving (FASB, IRS), and asset classification debates (SEC, CFTC, Treasury OCC)
Technology Risk: Smart contract vulnerabilities, price oracle failures, network congestion can cause serious problems
Liquidity Concentration: Most liquidity is concentrated in USD – backed stablecoins; other currencies are less supported
Mass Redemption Risk: Unforeseen market forces may trigger large scale redemption requests which can overwhelm the issuer
Transparency: Some Stablecoin issuers have been guilty of being less than transparent, given the ever shifting regulatory environment historically
Unique and Specific Risks:
Fiat-Backed Stablecoins: While generally recognized as the most risk-adverse type of Stablecoin, fiat-backed coins have risks related to centralization and single institution solvency, reserves may be frozen or inaccessible, and unclear/evolving regulatory overhang.
Algorithmic Stablecoins: These Stablecoins do not rely on backup collateral/assets, rather deploy automated supply adjustments via programmatic smart contracts to maintain the Peg. Algorithmic stablecoins depend on a coordinated set of technologies that let them run without a central operator. A loss of confidence can create a rapid downward spiral, and the lack of back up collateral means there is no hard asset floor – there is nothing to absorb losses if the peg breaks. Pure algorithmic models do not have a good historic track maintaining their peg.
Crypto-Backed Stablecoins: These Stablecoins are purposely over collateralized to help absorb volatility, yet, cryptocurrencies are notoriously volatile, so when used as backing collateral for Stablecoins, a crypto crash can trigger mass redemption events for the coin that can contribute to the possibility of a depegging situation.
Commodity-Backed Stablecoins: Typically backed by physical commodities – precious metals (Gold) and/or government issued Treasury Notes, these Stablecoins also have unique risks. Commodity prices do fluctuate which necessitate buying/selling assets by the issuer, and physical assets require securing storage and custody and therefore have lower liquidity – it takes time to buy/sell these assets.
Pegging and … Oh No … Depegging!
In a generic sense, a “peg” is a specified price for the rate of exchange between two assets. In the context of Stablecoins, the peg refers to the specific price that a token is aiming to stay at – aka the target value a Stablecoin seeks to maintain over a long period of time – this is the “Stable” in Stablecoin! 😊 . The vast majority of Stablecoins are pegged to one US Dollar – aka each coin is worth $1.
Collateralized Stablecoins maintain their peg through contraction (removing or “burning” existing coins) or dilution (adding or “minting” new coins) to affect the total supply. The changes in the coin supply will change the relative price of each coin, until it reaches the desired peg. Algorithmic Stablecoins maintain their peg through a combination of collateralization and utilizing complex block chain based smart contract algorithms that contract and expand the supply based on various market factors.
Depegging
A depegging event occurs when a stablecoin loses its intended 1:1 parity with its underlying asset –and drops in price well below $1. Depegging events are hugely important to avoid first and foremost because it serves to destabilize the coin which negatively affects trust and market confidence in the crypto ecosystem and brings financial risk directly to the buyers/users of Stablecoins.
Holders of a depegged coin face the possible immediate loss of capital as they may not be able to redeem coins for the fiat currency backing the coin because buyers flee the market – aka a bank run scenario builds rapidly as users rush to redeem coins simultaneously.
Stablecoin protocols may be forced to register their collateral asset positions as undercollateralized, triggering automated liquidations that force asset sales which further accelerate worsening price declines.
Contagion effects can develop where one stablecoin’s depegging can destabilize other stablecoins and even negatively impact cryptocurrencies like bitcoin. Lastly, the Stablecoin’s issuers reputation can be severely damaged – potentially forever – possibly leading to regulatory crackdowns.
Uses Cases – What are Stablecoins good for?
Once used primarily for crypto trading, particularly smoothing the on and off ramp for purchases of Bitcoin and /or Ethereum for example, Stablecoins have now become a versatile tool for multiple uses.
Stablecoins are becoming the backbone for facilitating lending, borrowing, and yield farming. Their lack of price fluctuation makes them ideal for liquidity pools, where they reduce impermanent loss and maintain the efficiency of decentralized exchanges (DEXs). Stablecoins also enable global access to financial services, empowering users in economically unstable regions to participate in foreign financial markets without exposure to local currency volatility.
Their ability to process transactions quickly and cost-effectively, 24x7x365, often with minimal fees compared to traditional banking systems, makes them an attractive option for peer-to-per (P2P) transactions by providing a simple and secure way for individuals to exchange value without intermediaries – particularly for cross-border payments and remittances. Stablecoins simplify transactions for importers and exporters, providing a stable and transparent medium for international trade, particularly in regions with limited access to foreign currency.
U.S. Regulation – SEC and the GENIUS Act
SEC’s position on Stablecoins
The role(s) of the U.S. Security and Exchange Commission (SEC) with respect to Stablecoins has been under debate (rather boisterous at times) for the past 4-5 years (2021-2025). The core question is whether the SEC should regulate Stablecoins as securities or whether they should fall under banking/payment regulations instead.
On April 4, 2025, the SEC’s Division of Corporation Finance published a “Statement on Stablecoins” in which it states that certain Stablecoins – aka “Covered Stablecoins”, are not securities under federal law, so their issuers don’t need to register them with the SEC.
In the statement “Covered Stable” coins are defined as:
Pegged 1:1 to USD value - designed to maintain stable value equal to one U.S. dollar per stablecoin
Redeemable 1:1 – users can exchange any stablecoin back for exactly $1 USD at any time, with no limits
Having a Fully Backed Reserve – Stablecoins are backed with a reserve of low-risk, highly liquid assets (like cash or U.S. Treasuries) worth at least as much as all Stablecoins in circulation
The SEC’s rationale for this position goes something like this …
Users acquire Stablecoins to use them for a number or purposes such as making payments, transmitting money, or storing value—like a “digital dollar.” As such, users are not viewing Stablecoins as investments, and are not expecting profits, interest, or ownership rights – but users do want stability.
Users are not expecting share or profit from the issuer’s financial performance. Because Stablecoins are fully backed with safe, secure, liquid assets leveraging securities laws is not necessary. Net-Net, the SEC currently views that Banking Regulators (Treasury OCC, State Bank Regulators) are better suited addressing “near-money” assets like Stablecoins.
In July 2025, the GENIUS Act passed, assigning payment stablecoin regulation to Treasury OCC (federal) and state banking regulators, not the SEC.
Important Note:
Algorithmic/Synthetic coins, commodity backed coins, yield/interest-bearing tokens, or coins redeemable for non-USD assets are NOT covered by regulations from the SEC or by the GENIUS Act.
Illicit Activity with Stablecoins – The Dark Side Exists
High-risk and illicit actors are attempting to leverage Stablecoins for a variety of illegal activities. Their stability and global accessibility make them attractive tools for bad actors seeking to bypass financial controls and avoid detection — although the inherent transparency and traceability of blockchain often makes this a poor choice.
Stablecoins have been used in money laundering, fraud, and sanctions evasion. Due to their relatively high liquidity and acceptance across cryptocurrency exchanges, Stablecoins can be used to transfer value quickly across borders without relying on traditional financial institutions.
Sanctions evasion through Stablecoins and other cryptocurrencies has gained prominence as countries like Russia and Iran explore alternatives to bypass Western financial restrictions often through complex networks of wallets and exchanges.
Stablecoin issuers have stepped up their efforts to fight financial crime, supporting global law enforcement and regulatory investigations. Most centralized stablecoin issuers have the power to freeze or permanently delete or “burn” tokens in wallets linked to confirmed criminal activities, to comply with regulations, and help to stop illegal transactions and helping recover stolen funds.
Issuers like Tether work closely with global law enforcement agencies, financial crime units, and regulators like the Financial Crimes Enforcement Network (FinCEN) using Chainalysis to monitor transactions in real-time and identify suspicious activity.
Chainalysis plays a critical role in proactively assisting in the detection and prevention of illicit activities involving Stablecoins. With real-time monitoring, Chainalysis can identify frozen or burned assets, trace the flow of funds, and map networks of wallets associated with high-risk actors across various blockchains, reinforcing trust in the ecosystem and allowing innovators to confidently build onchain.
Adoption – Where are Stablecoins Used
Latin America and Sub-Saharan Africa are the fastest growing regions for retail and professional-sized Stablecoin transfers, with year-over-year (YoY) growth exceeding 40%. Eastern Asia and Eastern Europe follow closely, with 32% and 29% YoY growth respectively.
Across the Middle East and North Africa, Stablecoins and altcoins are capturing a larger share of the market, particularly in Turkey, Saudi Arabia, and the UAE.
In Eastern Asia, Hong Kong is seeing a flurry of interest from potential issuers. In Central and Southern Asia and Oceania, Stablecoins are widely used for cross-border trade and remittances, bypassing traditional banking challenges. Countries like Singapore have bolstered Stablecoin confidence through regulatory frameworks, making Stablecoins a key tool for both retail and institutional users.
Meanwhile, markets like North America and Western Europe have seen meaningful, but slower growth rates of retail Stablecoin activity, likely due to robust native financial infrastructure, and the existing relatively high levels of Stablecoin usage. In Western markets the next wave of Stablecoin adoption will be institutional investors (Banks, Investment organizations) increasingly adopting Stablecoins for liquidity management, settlements, and entry into cryptocurrency.
Are Stablecoins Safe?
If it has not dawned on you yet, Stablecoins might seem like a low-risk investment compared to volatile cryptocurrencies – and that is partially true. No Stablecoin is risk-free and trust depends entirely on the issuer’s credibility and reserve asset quality
Further, Stablecoin safety depends heavily on their design, backing and the regulatory environment they operate in. Regulations across the globe vary wildly. Stablecoin issuers may refuse or fail to redeem tokens at face value, which can be the single biggest risk to holders.
Some Stablecoins are safer than others. Fiat-backed Stablecoins such as USDT and USDC are considered safer than some other Stablecoins because they’re backed by reserves of cash or government bonds. Crypto-backed Stablecoins, such as DAI, maintain their dollar peg by using over-collateralized cryptocurrencies locked in smart contracts, making them vulnerable to the volatility of the underlying crypto assets and the potential for technical flaws in their supporting smart contracts that could expose the Stablecoin to hacking.
Among the riskiest types of Stablecoins are Algorithmic Stablecoins which rely on market incentives and algorithms to maintain their value. With Algorithmic coins you are placing your trust in the robustness, stability, security, and ability of the algorithmic protocols to deal with rapidly accelerating price declines, or other unforeseen market forces, and the potential for depegging events.
Net-net, the current consensus is that Stablecoins are comparatively safe within the crypto world but do carry real financial risks. Users are encouraged to treat Stablecoins as high-risk financial instruments, and to NOT view Stablecoins as FDIC-insured bank deposits – which they are absolutely not. For maximum safety, pundits will suggest using only USDT, USDC, or other top-rated, fully audited, regulated fiat-backed stablecoins—and never hold more in Stablecoin(s) than you can afford to lose if the issuer fails.
Wrapping up
Stablecoins like all crypto powered products have inherent risks .That said, there is growing consensus that Stablecoins are rapidly becoming a core component of the global financial system, and yes, it is safe to say that this area of the financial industry will continue to evolve rapidly and adapt to address new use cases, applications, and opportunities. Digital Dollars are here to stay!
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