On January 23, 2025, the White House issued the Strengthening American Leadership In Digital Financial Technology Executive Order (EO). This EO sets in motion a policy mandate to promote the development of dollar-backed stablecoins worldwide. It also establishes the Working Group on Digital Asset Markets to propose a federal regulatory framework for digital assets, with a focus on stablecoins. This signals stablecoins as a priority for the administration.
Since then, lawmakers have introduced legislation to regulate stablecoins, including the STABLE Act in the House and the GENIUS Act in the Senate. Both aim to establish licensing and supervision frameworks for USD-denominated stablecoins. With bipartisan support, stablecoins could become the first digital asset class with comprehensive regulatory clarity.
This article provides an introduction to stablecoins, their use cases, structures, and associated risks. A follow-up will discuss legislative approaches and opportunities for financial institutions.
What Is a Stablecoin?
Stablecoins are digital assets designed to maintain a stable value through backing by another asset or stabilizing mechanisms. They serve as programmable, blockchain-based currencies with instant settlement capabilities.
Types of Stablecoins:
- Fiat-backed: Pegged 1:1 to fiat currencies (e.g., USD) or cash equivalents.
- Crypto-backed: Collateralized by cryptocurrencies, often overcollateralized to mitigate volatility.
- Algorithmic: Non-collateralized; rely on mathematical algorithms to adjust supply based on demand.
- Bank-issued (tokenized deposits): Deposit-like obligations issued by banks, tracked via blockchain.
Stablecoins emerged to address cryptocurrency volatility, enabling reliable payments and attracting traditional financial institutions.
Uses of Stablecoins
Stablecoins offer diverse applications:
- Medium of exchange: Facilitate value transfer within and outside crypto ecosystems.
- Store of value: Serve as a stable investment alternative.
- Merchant transactions: Enable low-fee, fast digital payments.
- Cross-border payments: Reduce costs and settlement times for remittances.
- Foreign exchange: Mitigate settlement risks in forex markets.
As adoption grows, use cases are expected to expand further.
Current Market Size
The stablecoin market has grown from $4 billion in 2020 to over $220 billion in 2025. Tether (USDT) dominates with a $146 billion market cap. Analysts project further growth as regulatory clarity improves.
Stablecoin Structures
Fiat-Backed Stablecoins
- Collateralized by fiat reserves held with custodians.
- Issuance involves minting tokens tied to deposited funds.
- Redemption burns tokens and releases collateral.
Crypto-Backed Stablecoins
- Overcollateralized to account for crypto volatility.
- Smart contracts adjust collateral ratios dynamically.
Algorithmic Stablecoins
- Use seigniorage or rebasing models to stabilize value.
- Hybrid models combine algorithmic and collateralized features.
Bank-Issued Stablecoins
- Tokenized bank deposits redeemable for fiat.
- Potentially eligible for FDIC insurance.
Regulatory Landscape
Stablecoin issuers and intermediaries are regulated under state money-transmitter laws, requiring compliance with anti-money laundering (AML) and collateralization rules. Some states, like New York and California, regulate stablecoins under digital asset frameworks.
Risks of Stablecoins
- Value Stability Risk: Dependence on collateral quality and liquidity.
- Transparency Risk: Lack of reserve reporting standards.
- Cybersecurity Risk: Vulnerabilities to hacking or smart contract exploits.
- Illicit Activity Risk: Potential misuse for money laundering or fraud.
- Liquidity Risk: Insufficient reserves to meet redemptions.
- Legal Uncertainty: Ambiguities in regulatory treatment.
- Bankruptcy Risk: Collateral disputes in issuer insolvency.
Future Outlook
With impending federal legislation, stablecoins are poised for growth. Financial institutions can explore roles as issuers, custodians, or intermediaries. Regulatory clarity will boost market confidence and innovation.
👉 Learn more about stablecoin regulations
FAQs
1. How do stablecoins maintain their peg?
Stablecoins use collateral (fiat, crypto) or algorithms to stabilize value. Fiat-backed stablecoins hold reserves equal to circulating supply.
2. Are stablecoins insured?
Bank-issued stablecoins may qualify for FDIC insurance. Others rely on collateral reserves without insurance.
3. What is the largest stablecoin?
Tether (USDT) is the largest, with a $146 billion market cap.
4. Can stablecoins lose their peg?
Yes, due to collateral mismanagement, algorithmic failures, or market shocks (e.g., TerraUSD collapse).
5. How are stablecoins regulated?
Most states regulate them under money-transmitter laws; federal legislation is pending.
6. What are tokenized deposits?
Bank-issued stablecoins representing deposit obligations on a blockchain.