Stable Coins

## What Are Crypto Stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging their price to another asset, most commonly the US dollar, but sometimes to other fiat currencies or commodities like gold[1][2][5]. This stability distinguishes them from traditional cryptocurrencies like Bitcoin or Ether, whose prices can fluctuate wildly[2][3].

## Types of Stablecoins

- **Fiat-backed stablecoins:** These are backed by reserves of traditional currencies or cash equivalents. Examples include Tether (USDT) and USD Coin (USDC)[2][5][6].

- **Crypto-backed stablecoins:** Backed by other cryptocurrencies, these require overcollateralization to offset the volatility of the underlying assets. Dai (DAI) is a leading example[2][6].

- **Algorithmic stablecoins:** These use algorithms to control supply and demand, maintaining their peg without direct asset backing. Their market share is small due to higher risk and past failures[2][6].

- **Bank-issued stablecoins (tokenized deposits):** Issued by regulated banks and function as blockchain-based representations of bank deposits[6].

## Market Size and Usage

Stablecoins have grown rapidly, with over $250 billion in circulation as of mid-2025[2][5]. Tether (USDT) dominates the market with a capitalization over $143 billion, followed by USD Coin (USDC) and Dai (DAI)[2][5]. Stablecoins are widely used as a bridge between traditional finance and crypto markets, facilitating trading, remittances, and payments[3][5].

## Benefits and Risks

**Benefits:**

- Provide a stable store of value and medium of exchange in the volatile crypto ecosystem[1][2][3].

- Enable fast, low-cost, and programmable transactions globally[4][7].

- Expand access to dollars and financial services, especially in countries with restricted access to traditional banking[4][8].

**Risks:**

- Not all stablecoins are fully backed by high-quality liquid assets, raising concerns about liquidity and solvency[3][5].

- Regulatory clarity is still evolving, with authorities worldwide considering new rules to manage risks and support innovation[3][2].

- Algorithmic and under-collateralized stablecoins have experienced failures, leading to loss of value for holders[6].

## The Future of Stablecoins

Stablecoins are increasingly viewed as a transformative force in global finance, with the potential to reshape payment systems, challenge traditional banks, and drive further adoption of digital assets[4][8]. However, their continued growth will depend on robust regulation, transparency, and market confidence.

Citations:

[1] 10 years of stablecoins: Their impact, what we know, and future ... https://www.sciencedirect.com/science/article/pii/S0165176524004233

[2] What are stablecoins, and how are they regulated? https://www.brookings.edu/articles/what-are-stablecoins-and-how-are-they-regulated/

[3] [PDF] Stablecoins: Market Developments, Risks and Regulation https://www.rba.gov.au/publications/bulletin/2022/dec/pdf/stablecoins-market-developments-risks-and-regulation.pdf

[4] The Race to Dominate Stablecoins - Harvard Business Review https://hbr.org/2024/08/the-race-to-dominate-stablecoins

[5] Stablecoin surge: Reserve-backed cryptocurrencies are on the rise https://www.weforum.org/stories/2025/03/stablecoins-cryptocurrency-on-rise-financial-systems/

[6] An Introduction to Stablecoins | Advisories - Arnold & Porter https://www.arnoldporter.com/en/perspectives/advisories/2025/05/an-introduction-to-stablecoins

[7] A guide to stablecoins: What, why, and how - a16z crypto https://a16zcrypto.com/posts/article/stablecoin-guide-what-why-how/

[8] A stable of stablecoins and a challenge to banking https://www.franklintempleton.lu/articles/2025/digital-assets/a-stable-of-stablecoins-and-a-challenge-to-banking

Importance of stable coin

The importance of stablecoins in the cryptocurrency ecosystem stems mainly from their ability to provide stability and mitigate the extreme price volatility typical of other cryptocurrencies like Bitcoin and Ethereum. This stability enables several key benefits and uses that are critical for the broader adoption and functionality of crypto assets:

- **Price Stability:** Stablecoins maintain a consistent value by being pegged to a stable asset like the US dollar or other fiat currencies. This makes them a reliable medium of exchange and store of value within the crypto space, suitable for everyday transactions and savings without exposure to wild price swings.

- **Safe Haven in Volatile Markets:** Investors and traders can convert volatile cryptocurrencies into stablecoins to protect their assets during market downturns, effectively serving as a safe harbor amid crypto price fluctuations.

- **Liquidity and Trading Efficiency:** Stablecoins enhance liquidity on cryptocurrency exchanges and decentralized finance (DeFi) platforms. They serve as a bridge enabling swift conversion between cryptocurrencies and stable assets, facilitating faster and more cost-efficient trading.

- **Facilitate Payments and Cross-Border Transfers:** With fast transaction speeds and low costs, stablecoins simplify payments and remittances across borders, reducing the reliance on traditional banking systems and associated fees and delays.

- **Access to Financial Services:** They provide financial inclusion opportunities for unbanked populations by enabling digital transactions and savings without traditional bank accounts.

- **Reference Currency for Pricing:** Stablecoins act as a benchmark or reference point for pricing other crypto assets, helping to stabilize valuations within the market.

- **Enable DeFi and Programmable Finance:** Stablecoins are integral to decentralized finance applications, supporting lending, borrowing, yield farming, and other financial activities with reduced risk due to their stable value.

Examples of widely used stablecoins include USDT (Tether), USDC (USD Coin), and DAI, which have collectively become foundational in crypto trading and DeFi activities. Their rapid growth and integration into various sectors indicate stablecoins are a cornerstone of the evolving digital financial ecosystem.

In summary, stablecoins bridge the gap between the volatility of cryptocurrencies and the need for dependable transactional currency, fostering broader adoption and utility of blockchain technology in real-world financial contexts[1][2][4][5][6].

Citations:

[1] What Are Stablecoins and Why Are They Important in Crypto? - OSL https://www.osl.com/hk-en/academy/article/what-are-stablecoins-and-why-are-they-important-in-crypto

[2] Stablecoins' role in crypto and beyond: functions, risks and policy https://www.ecb.europa.eu/press/financial-stability-publications/macroprudential-bulletin/html/ecb.mpbu202207_2~836f682ed7.en.html

[3] Stablecoins payments infrastructure for modern finance - McKinsey https://www.mckinsey.com/industries/financial-services/our-insights/the-stable-door-opens-how-tokenized-cash-enables-next-gen-payments

[4] Pros and Cons of Stablecoins: Benefits & Purpose - Gemini https://www.gemini.com/cryptopedia/pros-and-cons-of-stablecoins-benefits-and-purpose

[5] Stablecoins: Definition, How They Work, and Types - Investopedia https://www.investopedia.com/terms/s/stablecoin.asp

[6] What is a stablecoin? - Coinbase https://www.coinbase.com/learn/crypto-basics/what-is-a-stablecoin

[7] 10 years of stablecoins: Their impact, what we know, and future ... https://www.sciencedirect.com/science/article/pii/S0165176524004233

[8] III. The next-generation monetary and financial system https://www.bis.org/publ/arpdf/ar2025e3.htm

[9] Ecosystem, architecture, mechanism and applicability as payment ... https://www.sciencedirect.com/science/article/abs/pii/S0920548923000284

Stablecoins role in cross-border payments

Stablecoins play a transformative role in cross-border payments by addressing many limitations of traditional international money transfers through the use of blockchain technology. Key aspects of their role include:

- **Speed and Instant Settlement:** Stablecoins enable near-instantaneous cross-border transfers 24/7, overcoming delays common in traditional wire transfers that can take several days. This instant settlement improves efficiency in global payments.

- **Lower Costs:** By removing intermediaries like correspondent banks and streamlining the payment process, stablecoins significantly reduce transaction fees which are typically high for international transfers.

- **Transparency and Security:** Blockchain technology provides transparent tracking of transactions, reducing risks of fraud and errors. The decentralized ledger system enhances security compared to conventional payment rails.

- **Accessibility:** Stablecoins facilitate payments in regions with limited traditional banking infrastructure or restricted access to international banking networks, helping underserved populations and businesses participate more easily in global commerce.

- **Flexibility through the "Stablecoin Sandwich":** The payment process often involves converting the sender's fiat currency into a stablecoin, moving the stablecoin across borders on blockchain rails, and then converting it back to the recipient's local currency. This method optimizes speed and cost while integrating with local banking systems for “last mile” delivery.

- **Growing Adoption in Emerging Markets:** Many emerging regions in Africa, Latin America, and Asia are increasingly using stablecoins for business-to-business payments and remittances due to their advantages in speed, cost, and reliability.

- **Complement to Traditional Financial Systems:** Stablecoins are not replacing traditional banking but working alongside it, providing an additional rail for international payments.

Notable stablecoins used in cross-border payments include USDT (Tether), USDC (USD Coin), and newer entrants tailored for payment networks by companies like PayPal and Ripple. However, challenges remain in scaling, regulatory compliance, cost optimization, and liquidity management.

In summary, stablecoins are revolutionizing cross-border payments by making them faster, cheaper, and more accessible while maintaining security and transparency, especially benefitting emerging markets and transforming traditional remittance processes[1][2][3][4][5].

Citations:

[1] Real-Time Payments and Stablecoins are Reshaping International ... https://www.crossriver.com/insights/real-time-payments-stablecoins-reshaping-international-payments

[2] The state of stablecoins in cross-border payments: 2025 primer https://www.fxcintel.com/research/reports/ct-state-of-stablecoins-cross-border-payments-2025

[3] III. The next-generation monetary and financial system https://www.bis.org/publ/arpdf/ar2025e3.htm

[4] Stablecoins payments infrastructure for modern finance - McKinsey https://www.mckinsey.com/industries/financial-services/our-insights/the-stable-door-opens-how-tokenized-cash-enables-next-gen-payments

[5] How stablecoins are revolutionising cross-border payments https://zodiamarkets.com/insights/blogs/how-stablecoins-are-revolutionising-cross-border-payments-for-institutions/

[6] Are Stablecoins the Future of Cross-Border Payments? https://www.edgardunn.com/articles/are-stablecoins-the-game-changer-for-cross-border-payments

[7] Stablecoins & Cross-Border Payments: What Banks Must Do https://paymentscmi.com/insights/stablecoins-cross-border-payments-banks-strategy/

[8] From adoption to continuance: Stablecoins in cross-border ... https://www.sciencedirect.com/science/article/pii/S0736585324001345

[9] How Blockchain Revolutionises Cross-Border Payments - Thunes https://www.thunes.com/insights/blockchain-cross-border-payments/

[10] The quest for cheaper and faster cross-border payments: regional ... https://www.ecb.europa.eu/press/key/date/2025/html/ecb.sp250627~de084f5b69.en.html