Stablecoin 101: A Clear Guide to Digital Currency Stability

Stablecoin is rapidly becoming a core component of modern financial systems, offering speed, stability, and accessibility across global transactions. Terence Tse and Dražen Kapusta explain how these blockchain-based assets differ from speculative cryptocurrencies and highlight their potential to reshape cross-border payments while raising urgent regulatory, operational, and systemic considerations for future integration.

Stablecoins have evolved from a niche cryptocurrency tool into a mainstream financial instrument. Once used mainly by crypto traders, they now play a role in the operations of many global corporations. Unlike speculative coins driven by profit motives, stablecoins aim for real-world utility.

Why Stablecoins Matter

Stablecoins represent a different and potentially transformative technology. They are often backed by liquid assets such as short-term treasuries or bank deposits. This makes them genuinely useful and less volatile. Their popularity is growing in countries like Turkey and Nigeria, where trust in local currencies is low.

Bringing stablecoins under a proper regulatory framework, such as the proposed Genius Act in the US, could unlock their full potential. This law would require issuer registration and clear reserve rules, paving the way for broader adoption.

Standard Chartered projects stablecoin issuance could rise from $260 billion to $2 trillion by 2028. Large financial players like Stripe and Visa are investing heavily, while Uber considers them for cheaper cross-border payments. Circle’s IPO success further signals growing institutional trust. Stablecoins are no longer a sideshow—they are entering the financial mainstream.

What are Stablecoins?

A stablecoin is essentially a form of cryptocurrency designed to maintain a stable value, typically by pegging its worth one-for-one to a sovereign currency like the US dollar. Unlike more volatile cryptocurrencies such as Bitcoin, stablecoins aim to function like traditional cash, offering predictability in often fluctuating crypto markets. Consider them as digital vouchers for a conventional currency, such as the US dollar or the euro.

Imagine you have a €1 note in your pocket. A stablecoin is like a digital version of that same €1 note, but instead of existing physically, it exists on the internet and can be transferred digitally. When you hold a stablecoin pegged to the euro, the issuer behind it promises that they have a real euro, or an equivalent value in other highly liquid assets, in reserve for every digital voucher you own. This promise means you should always be able to exchange your stablecoin back for a physical euro at face value.

This digital voucher can subsequently be transferred over the internet outside of the traditional banking system, making transactions potentially faster and cheaper than conventional methods. Therefore, the key characteristic is that stablecoins provide the stability of fiat currency combined with the efficiency and programmability of blockchain technology. Stablecoins also encompass the significant attributes of currency: they serve as a unit of account, a store of value, and a medium of exchange.

How Stablecoins are Backed

The fundamental principle behind stablecoins is that they are backed one-for-one with reserves of equal value to the currency they are pegged to. Issuers create a digital token for every unit of traditional currency they receive and commit to holding corresponding assets in reserve. These reserves are crucial for maintaining the stablecoin’s fixed value and enabling holders to redeem their tokens at any time. To ensure this, typically, these backing assets are chosen for their high liquidity and low risk.

Fiat-Backed Stablecoins

These are supported by reserves of real-world assets. For every dollar or euro received, issuers hold a matching asset. Circle’s USDC, for example, holds US securities and cash reserves. According to the Bank for International Settlements, stablecoin issuers bought $40 billion in US Treasury bills last year—on par with major money market funds.

Crypto-Backed Stablecoins

These use other cryptocurrencies as collateral. To issue one stablecoin, users deposit more crypto than they borrow—often 150% or more. Smart contracts monitor the collateral and automatically sell assets if values drop too low. MakerDAO’s DAI token is the best-known example of this decentralised model.

Commodity-Backed Stablecoins

These tokens link to physical assets like gold or silver. Each coin represents a share of stored commodities. Projects such as Pax Gold and CACHE allow investors to trade fractional gold ownership digitally while maintaining physical claims. This approach bridges traditional assets and blockchain innovation.

Algorithmic Stablecoins

Algorithmic models use smart contracts to control supply and demand instead of holding reserves. Prices remain stable through automated incentives. However, these systems can fail under pressure—as seen with TerraUSD’s 2022 collapse. Without tangible reserves, they remain experimental and risky.

Pros of Stablecoins

Stablecoins offer a compelling set of advantages when compared to traditional money in the existing banking system setup. They include:

• Enhanced Speed and Efficiency: Stablecoins can significantly accelerate payment settlements. Cross-border transactions, which can take days through traditional correspondent banking networks and often involve high charges and occasional errors, can be settled in mere seconds or minutes with stablecoins. This drastically improves cash conversion cycles for businesses.
• Cost Reduction: By bypassing traditional intermediaries like correspondent banks and payment processors, stablecoins significantly lower transaction fees, currency conversion costs, and foreign exchange spreads. Traditional cross-border payments often incur fees ranging from £25 to £50 per transaction. They can take one to three business days to settle, due to the involvement of multiple intermediaries and currency conversions. In contrast, stablecoin transfers—such as sending USDC over the Solana blockchain—typically cost less than £0.01 in network fees and settle in seconds.^[9]
• Access to Stable Currencies: For individuals and businesses in countries afflicted by high inflation, weak or volatile currencies, unstable banks, or capital controls, stablecoins offer ready access to a proxy for US dollars. This allows them to hedge risk and protect against economic downturns. After all, to many citizens around the world, the dollar remains the most sought-after currency globally.
• Financial Inclusion and Accessibility: Stablecoins facilitate financial transactions outside the traditional banking system, which is particularly beneficial for underserved populations or in regions with limited banking infrastructure or corrupt financial systems.
• Programmable Money: Their blockchain foundation enables “programmable money” capabilities, allowing for automated compliance, instant settlement, and complex conditional payments through smart contracts. This can automate treasury operations and reduce manual errors.

Cons of Stablecoins: Key Risks and Challenges

However, they also present significant risks and regulatory challenges that need to be carefully managed. Some of the risks involved are:

• Regulatory Uncertainty and Grey Area: Stablecoins currently exist in a “grey area,” somewhere between a payment network, a bank deposit, and a security. The market remains little-regulated, and the emerging regulatory frameworks have been criticized as too “light-touch,” with omissions in consumer protections and proper compliance checks.
• Risk of De-peg and Collapse: Although designed to maintain a fixed value, stablecoins can and sometimes do deviate from their peg by more than a couple of per cent. Historically, some stablecoin models have proven vulnerable to market stress and extreme fraud, resulting in failures.
• Lack of Transparency and Audits: Despite attestations of reserves, many issuers have failed to provide complete audits, raising concerns about the proper backing of tokens. This opacity complicates efforts to model their potential impacts on financial stability.
• Illicit Activity Concerns: Stablecoins remain the primary cryptocurrency for illicit transactions. A report reveals that stablecoins accounted for 63% of the $51 billion in criminal activity associated with cryptocurrencies in 2024.^[10]
• Systemic Risk to Traditional Banking: The US Treasury has warned that around $6.6 trillion in deposits in US commercial banks could be “at risk” of migrating to stablecoins.^[11] This could potentially force banks to raise interest rates to retain deposits or increase their wholesale funding, and large outflows could “meaningfully influence” the transmission of monetary policy.
• Credit and Operational Risk of Issuers: Stablecoins are not cash; they reflect the credit risk of the issuing company and its ability to manage operational risks. Centralized issuers commingling assets together in a single account can also create significant operational risk for banks if mistakes occur.

The Road Ahead

Stablecoins are transforming global finance from niche crypto tools into essential infrastructure for international payments and corporate treasury management. They offer superior speed, cost efficiency, and accessibility for cross-border transactions, particularly in volatile economies. However, their widespread adoption necessitates navigating complex regulatory frameworks, security challenges, and systemic risks. The future will likely witness traditional banking and digital assets converging, with stablecoins driving a more efficient yet regulated global financial system.

Authors: Terence Tse, PhD & Dražen Kapusta

References

^[1] https://www.coindesk.com/markets/2025/04/15/stablecoin-market-could-grow-to-usd2t-by-end-2028-standard-chartered

^[2] https://castleisland.vc/wp-content/uploads/2025/06/artemis-stablecoin-payments-from-the-ground-up-2025.pdf

^[3] https://stripe.com/gb/newsroom/news/sessions-2025

^[4] https://www.paymentsdive.com/news/visa-pursues-stablecoins-for-cross-border-payments/747250/

^[5] https://www.pymnts.com/cryptocurrency/2025/uber-considers-using-stablecoins-for-cross-border-money-transfers/

^[6] https://www.cnbc.com/2025/06/05/stablecoin-issuer-circle-soars-in-nyse-debut-after-pricing-ipo-above-expected-range.html

^[7] https://www.bis.org/publ/work1270.htm

^[8] https://blockapps.net/blog/exploring-the-risks-and-failures-of-algorithmic-stablecoins-in-the-crypto-market/

^[9] https://www.helius.dev/blog/stablecoin-payments

^[10] https://www.chainalysis.com/blog/2025-crypto-crime-report-introduction/

^[11] https://www.ft.com/content/b69f304c-798e-4dc3-9f17-6f7a7c8d3ac0