The tech sector has a great talent for using words whose superficial meaning is reinforced through intense though misleading marketing but whose actual meaning turns out to be quite different. Consider the name “stablecoin,” a simple term given to a crypto asset that might not be as stable as it looks like.
What Is a Stablecoin?
Stablecoins are part of the family of crypto assets that use blockchain as their underlying technology. The difference from other cryptos is that it is mostly expressed in a fiat currency like the U.S. dollar. Its value is identical or close to one dollar, and to achieve that value its issuer must maintain an equivalent value in U.S. Treasuries.
The market capitalization of all stablecoins is currently around $ 300 billion, a fraction of the value of Bitcoin, which has a market capitalization of over $ 2 trillion. Only five of them (out of hundreds in circulation) have a market capitalization exceeding $1 billion. They represent half the market capitalization of the stablecoins in circulation. A year ago, those five stablecoins amounted to less than $ 20 billion. None of them are issued by banks.
Stablecoins have been circulating since 2014. JP Morgan launched JPM Coin: It is a dollar-backed cryptocurrency (stablecoin) announced in February 2019 as an institution-to-institution service. Their recent emergence coincides with an attempt to make cryptoassets a means of payment.
The GENIUS Act Might Not Be Genial
The United States is trying to regulate stablecoins through the GENIUS Act, signed by President Trump in July 2025.
The point of the GENIUS Act, which will not be implemented until January 2017, and a major objective of the White House, is to make the United States the leader in digital assets. Yet digital assets are global and cannot be “located” in a particular place. As it currently stands, the stablecoin market is composed 90 percent of US dollars and therefore is strongly connected to the role and value of the U.S. dollar.
The GENIUS Act does, however, impose certain rules designed to protect against consumer risks:
- Stablecoins must be 100 percent backed by liquid assets like U.S. dollars or short-term Treasuries, and issuers must make monthly, public disclosures of the composition of reserves.
- Stablecoin issuers must comply with strict marketing rules to protect consumers from deceptive practices. Issuers are forbidden from claiming that their stablecoins are backed by the U.S. government, federally insured, or legal tender.
- State and federal stablecoin frameworks are aligned, ensuring fair and consistent regulation throughout the country.
- In the event of insolvency of a stablecoin issuer, stablecoin holders’ claims are given priority over all other creditors, ensuring a final backstop of consumer protection.[1]
Reserve Backing Makes Stablecoins Less Useful Than Bank Deposits
While banks transform approximately 10 times the amount of their deposits into assets or loans, stablecoin issuers are obliged to have their stablecoins in circulation covered 100 percent by U.S. dollars or U.S. Treasuries.
There are real risks that issuers will not comply with these rules. The LUNA stablecoin by Terra, for example, did not apply this ratio. When Luna holders tried to convert their coins into dollars, it collapsed. “Do Kwon, co-founder of the company behind the collapsed Terra blockchain and its algorithmic stablecoin Terra USD, has pleaded guilty to conspiracy to commit fraud and one count of fraud[2].
The Risks of Stablecoins
In its last annual report, the OECD looked at the impact of stablecoins on monetary policy and found:
- Asset-backed stablecoins are akin to digital bearer instruments. They behave like financial assets and typically fail the test of singleness – there is no settlement on the central bank balance sheet. Therefore, singleness cannot be guaranteed.
- Stablecoins also fail the elasticity test. This is because the issuer’s balance sheet cannot be expanded at will. This differs fundamentally from banks, which can elastically expand and contract their balance sheets within regulatory limits.
- Stablecoins have significant shortcomings when it comes to promoting the integrity of the monetary system. As digital bearer instruments, they can circulate freely across borders onto different exchanges and into self-hosted wallets.
- There is an inherent tension between stablecoin issuers’ ability to uphold their promise of stability and their pursuit of a profitable business model. When issuers invest in assets with some credit or liquidity risk, they cannot fully guarantee stability under all possible contingencies, since holders can redeem their stablecoins on short notice.[4]
The name “stablecoin” should be questioned: Pegging to a currency does not make it stable since the currency itself fluctuates on foreign exchange markets. It is like the definition of “safe assets” given to government bonds, especially U.S. Treasuries, which also constantly fluctuate.
Regulating Stablecoins: The International Challenge
The current landscape of digital assets regulations varies widely.
- In the United States, the GENIUS act provides a specific stablecoin regulation for the entire country. Will it harmonize the regulation across the country, given that state regulators already have created their own rules? It needs to be viewed in conjunction with the CLARITY Act, which aims to establish a clearer federal regulatory framework for digital assets by defining jurisdiction between the SEC and CFTC.
- The European Markets in Crypto Assets Regulation (MiCA) was enacted in June 2023. It includes a substantial number of Level 2 and Level 3 measures that must be developed before the application of the new regime (within a 12-to-18-month deadline depending on the mandate). During the implementation phase of MiCA–The European securities regulator, ESMA (in close cooperation with EBA, EIOPA, and the ECB)] is consulting with the public on a range of technical standards that will be published sequentially in three packages. [5]
- Under the UK proposals, any UK-issued stablecoin must be 100 percent –Real World Assets (RWA) backed with high quality liquid assets. [6]
- In Japan, in May 2024, a major, domestic, cryptoassets exchange business, the DMM Bitcoin exchange, experienced a large-scale hacking incident, resulting in the outflow of Bitcoin valued at about $305 million, underscoring the continued importance of robust customer asset protection measures. This led Japanese authorities to revisit their crypto assets regulation.
- Chinese regulators have asked big local brokers to halt publication of research endorsing stablecoins in a bid to curb a surge in interest in the digital currency among domestic investors. While crypto trading is banned in mainland China, brokerages have received a wave of requests for information on stablecoin and digital assets from Chinese investors since Hong Kong passed a stablecoin bill in May.
The biggest challenge of stablecoins is their interoperability – ability to work with each other – and cannot be overestimated. As the OECD puts it, “Interoperability between stablecoins is important to avoid further fragmentation and inefficiencies in cross-border payments. Different blockchains currently are not always compatible, and even tokens of the same stablecoin issued on multiple blockchains are not always fully interoperable. While cross-chain solutions for interoperability between stablecoins are available, they are vulnerable to hacks. Therefore, standardization and interoperability between stablecoins will be crucial at an early stage to avoid new and unintended barriers later.” [7]
Stablecoins and Central Bank Digital Currencies
The Trump administration banned the issuance of central bank digital currencies, or CBDCs. President Trump’s Executive Order issued on January 23, 2025, signaled a shift in government policy towards favoring the digital asset industry and seeking promotion of United States leadership in digital assets and financial technology. The order prohibits the establishment, issuance, or use of CBDCs, citing risks to financial stability, individual privacy, and national sovereignty.
Favoring stablecoins over CBDCs has a serious consequence: It is in fact a privatization of the issuance of U.S. dollars. As expressed in a blog of the Atlantic Council, “The relationship between central bank digital currencies (CBDCs) and stablecoins will take center stage this year. New United States policies support dollar-backed stablecoins and oppose CBDCs. European policies take the opposite stance, arguing that CBDCs—including the digital euro and digital pound—provide financial stability, while cryptocurrencies and stablecoins create financial stability risks. All policymakers agree on one point: both CBDCs and stablecoins will significantly impact the global role of the US dollar.” [9]
Europe authorities warn that stablecoins might threaten the role of the European Central Bank in the issuance of Euros, with the decrease of banknotes in circulation. The European Central Bank (ECB) is moving ahead with a retail CBDC (the digital euro project) and new ways to settle blockchain-based transactions in central bank money. [10]
In a previous post on this site, I expressed my concerns about CBDC and the risks it poses to financial stability and the nation’s system of payment. I asked who u the regulator of the CBDC would be. [11]
The regulatory approach treats stablecoins as privately issued digital money, distinct from sovereign currencies. Importantly, unlike CBDCs, stablecoin holders remain exposed to issuer bankruptcy risk. Though regulations aim to mitigate such risks, their broader intent is to foster innovation and growth while managing systemic risks.[12]
Bank Tokens and Stablecoins
JPMorgan research describes the differences between bank tokens and stable coins as follows: “In a nutshell, a deposit token (or tokenized deposit) is a digital representation of a bank deposit that operates on blockchain-based payment rails. Unlike stablecoins, which are typically backed one-to-one by fiat currency or equivalents, deposit tokens are underpinned by the same liquidity frameworks as traditional bank deposits. While both stablecoins and deposit tokens offer 24/7, near-instant settlement, they have different applications. Today, stablecoins primarily have retail use cases, including crypto trading, remittances and merchant payments. “[13]
This makes bank coins more useful to the economy and sources of investments and loans. Stablecoins will, in turn, increase the demand for Treasury bills, the short end of U.S. government bonds, on a one-to-one ratio.
Domestically, non-interest-bearing stablecoins limit disruptive substitution from bank deposits, preserving core banking functions. However, mandated reserve backing in short-term U.S. Treasuries reallocates liquidity across balance sheets, heightening sensitivity to interest rate fluctuations and subtly reshaping monetary policy transmission. The extent of yield curve impact hinges on the scale of net new demand beyond asset substitution, which remains modest under most scenarios.[14]
While the GENIUS Act was intended to protect consumers and prevent stablecoins from becoming unregulated substitutes for bank deposits, banks argue it is not enough. They claim that non-bank stablecoin issuers can easily bypass the law by offering yields through affiliates, exchanges, or other partners. Banks cannot do the same because of strict capital and liquidity requirements, and the affiliates they could use would likely fall under banks’ strict regulatory requirements as well. [15]
Stablecoins are diverse in nature, in issuer, and in yield. There are 247 different stablecoins issued by a variety of issuers, most of which are unknown. Five of them exceed $ 1 billion market capitalization. [16]
Provisional Conclusion
Despite a marketing narrative that wants us to believe that they are the best thing since sliced bread, stablecoins are mostly a trading instrument rather than a payment mechanism. It is another way to utilize blockchain technology.
The United States aims to use stablecoin to extend the supremacy of the U.S. dollar as a world currency. However, there is nothing to stop from being issued in other currencies. There are some small attempts to create stablecoins in yen and euros that have not been successful.
The key issue is the added value of stablecoins. Do they compensate for weaknesses of other payment systems? If anonymity is an improvement, one should not forget the risks of using stablecoins for criminal or fraudulent purposes.
The regulatory landscape is not moving toward interoperability, with most countries attempting to go their own way. It is always helpful to create a structure to protect consumers.
More fundamentally, the need to cover stablecoins in circulation with 100 percent of equivalent assets makes stablecoins infinitely less economically helpful or meaningful than bank tokens or deposits.
Its stability is limited to the currency to which it is attached.
Though some denizens of the technosphere would like us to believe that stablecoins will revolutionize payment systems, the OECD gets closer to the truth: They are “not-so-stable coins: a double-edged sword for decentralized finance. [18]
ENDNOTES
[1] https://www.whitehouse.gov/fact-sheets/2025/07/fact-sheet-president-donald-j-trump-signs-genius-act-into-law/
[2] https://www.axios.com/2025/08/12/terra-do-kwon-pleads-guilty
[3] https://crypto.news/what-happened-to-terra-luna-journey-from-crypto-kings-to-fallen-stars/
[4] https://www.bis.org/publ/arpdf/ar2025e.pdf pp77 and following.
[5] https://www.esma.europa.eu/esmas-activities/digital-finance-and-innovation/markets-crypto-assets-regulation-mica
[6] https://www.ashurst.com/en/insights/uk-stablecoin-regulation-go-further-and-faster/
[7] https://www.oecd.org/content/dam/oecd/en/publications/reports/2025/01/tokenisation-of-assets-and-distributed-ledger-technologies-in-financial-markets_be149012/40e7f217-en.pdf
[8] https://www.linkedin.com/posts/institute-of-international-finance_stablecoins-activity-7371896265586020354-nbs0?utm_medium=ios_app&rcm=ACoAAABK8BYBV88mukT9WtiQAZPOr4F0-2kdTj4&utm_source=social_share_video_v2&utm_campaign=mail
[9] https://www.atlanticcouncil.org/blogs/econographics/central-bank-digital-currencies-versus-stablecoins-divergent-eu-and-us-perspectives/
[10] https://flow.db.com/cash-management/cbdcs-where-do-we-stand-in-europe#!
[11] https://clsbluesky.law.columbia.edu/2021/05/12/who-will-regulate-central-bank-digital-currencies/
[12] https://www.statestreet.com/us/en/insights/stablecoin-moment
[13] https://www.jpmorgan.com/insights/global-research/currencies/stablecoins#section-header#3
[14] https://www.statestreet.com/us/en/insights/stablecoin-moment
[15] https://www.emarketer.com/content/banks-fighting-stablecoin-loophole-competitors-unfair-advantage
[16] https://coinmarketcap.com/view/stablecoin/
[17] https://cointelegraph.com/learn/articles/yield-bearing-vs-traditional-stablecoins
[18] https://www.oecd.org/en/blogs/2022/05/not-so-stable-coins-a-double-edged-sword-for-decentralised-finance-and-the-key-bridge-linking-defi-to-tradfi.html
This post comes to us from Georges Ugeux, chairman and CEO of Galileo Global Advisors and an adjunct professor of international finance at Columbia Law School.