What are stablecoins?

A stablecoin is a cryptocurrency designed to maintain a stable value, typically pegged to a fiat currency like the U.S. dollar. It aims to combine the benefits of cryptocurrency—high-speed, low-cost, decentralized transactions—with the stability of traditional assets. However, stablecoins have remained on the periphery of the mainstream financial system due to a lack of comprehensive regulation.

What are the key developments in stablecoin regulation?

• In the U.S., the GENIUS Act was signed into law on July 18, 2025. This legislation mandates 1:1 reserves in high-quality liquid assets (e.g. Treasury bills and Federal Reserve deposits), requires anti-money laundering programs, bans interest payments, and requires regular audits.
• Europe's MiCA regulation was also enforced in late 2024, outlining similar rules, but limits stablecoin issuers to credit or electronic money institutions.
• The Hong Kong Monetary Authority recently established a licensing regime for the issuance of fiat-referenced stablecoins, as well as reserve requirements (e.g. USD reserves are permitted for HKD-referenced stablecoins) and redemption rules.   
• The Monetary Authority of Singapore finalized its stablecoin regulation in 2023, laying out the scope (single currency stablecoins pegged to SGD or any G10 currency), reserve requirements, and capital requirements.
• Japan implemented stablecoin rules in 2023 under its Payment Services Act, with the Financial Services Agency set to approve the issuance of the first Japanese yen-based stablecoin this autumn. 

With regulatory frameworks emerging, stablecoins have newfound legitimacy, warranting an exploration of their impact on investments. It is noted that governments and regulators from different economies have opted for different strategies. In the U.S. and Hong Kong, the Stablecoin development model is mainly led by the private sector, with regulators setting the rules. China and Australia have been working on their versions of central bank digital currencies. The euro area and the UK have warned about the risks of private sector issuers issuing stablecoins. This reflects the experimental phase of this technology’s development. 

What are the use cases for stablecoins?

Currently, stablecoins are mainly used in the cryptocurrency ecosystem for payments and collateral. Potential use cases include:

• Bank-alternative store of value: Stablecoins reduce reliance on traditional bank deposits or equivalents. However, without interest payments, their attractiveness relative to deposits, certificates of deposit, or money market funds is limited. This makes them more suited to being payment vehicles instead of investment assets.
• Payments, including cross-border transactions: Stablecoins enable quick, inexpensive payments, even during non-business hours. Moreover, their “programmable” nature can streamline processes like vendor payments. All of this occurs with an immutable, digitized paper trail, reducing the potential for error.
• Improving access to blockchain-based marketplaces: Stablecoins provide a digital on/off ramp to cryptocurrencies and digital assets.

What is the impact on investments? 

• Firstly, stablecoins may further diminish the usefulness of other cryptocurrencies. Cryptocurrencies were once seen as the future of currency, but prospects are limited due to price volatility. People hesitate to spend them if their value rises and are reluctant to receive them if it drops. Stablecoins address this issue, offering stability and increasing regulatory safeguards.
• Secondly, stablecoin issuers—required to hold reserves in high-quality liquid assets like short-term Treasuries—may become a growing source of demand for U.S. government debt. The market capitalization of stablecoins has risen to just under 5% of the outstanding short-term Treasury market, and that share could rise further, especially if foreign adoption scales (Exhibit 1). One future question would be whether this creates excess demand for ultra-short Treasury bills, competing with traditional money market funds, or whether the Treasury Department would adjust its issuing plan to accommodate the extra demand to back stablecoins issued. This would need to take into consideration the potential for volatility in the volume of stablecoin issuance to prevent ‘the tail wagging the dog’ that might  lead to excess swings in the U.S. Treasury market. 

What are the key risks?

Depegging risks: The 1:1 peg to the underlying asset (e.g. USD) could be challenged if the issuer faces a liquidity crisis or loss of confidence, triggering mass redemption. For example, in March 2023, U.S. Dollar Coin’s (USDC) peg fell to USD 0.88 due to large deposits with Silicon Valley Bank. This should be addressed by requiring issuers to fully back stablecoin issuance with high-quality, high-liquidity assets.

Fraud and security risks: If used for consumer payments, stablecoin transactions are irrevocable, leaving users without fraud guarantees, which could limit adoption. Current legislation and issuers do not provide the same level of protection as existing policies (e.g. Federal Deposit Insurance Corporation protection). Regulators must ensure proper gatekeeping against anti-money laundering (AML) and other illicit transactions, such as circumventing capital control rules, breaching sanctions, and financing terrorism.

Monetary policy complexities: There is concern that widespread stablecoin use, replacing traditional bank deposits, could weaken central banks’ monetary policy transmission because traditional interest rate and credit creation mechanisms are disrupted.

In conclusion, stablecoins are a payment channel facilitated by private or public blockchain technology, instead of an investment asset. While stablecoins have the potential to redefine global finance infrastructure, their growth depends on building user confidence and balancing positive attributes like speed and low cost with regulatory compliance. Instead of explosive growth, stablecoins will likely see gradual adoption as infrastructure, regulation, and user confidence evolve. 

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