Stablecoins are marketed as a “killer app” that can perform three roles simultaneously.[1] They aspire to operate as a money-market instrument with a state-of-the-art holding system.[2] They not only bridge real-world accounts and blockchain wallets but aim to facilitate fiat-denominated activity in decentralized finance (DeFi). And they are a convenient mechanism for cross-border settlements and an alternative instrument for point-of-sale payments in global e-commerce. Yet, developing a regulatory framework that covers all three roles presents obvious challenges.

Policymakers have made good progress on thinking about how to regulate stablecoins, and none too soon. By some estimates, the world’s two leading stablecoins reached a total market value of approximately $187 billion (USDT, issued by Tether) and $75 billion (USDC, issued by Circle) respectively, in 2025. Stablecoin transaction volume by some calculations hit $33 trillion in 2025,[3] with USDC leading at approximately $18 trillion and USDT at $13 trillion. As “centralized” dollar-denominated stablecoins backed by real-world collateral, USDC and USDT are collectively among the world’s top 20 holders of U.S. government securities.[4]

The most recent round of global stablecoin laws and regulations anticipates a broad range of prudential, consumer protection, and systemic concerns. Several jurisdictions have enacted legislation for stablecoins as a class of digital asset, including the GENIUS Act in the United States and MiCAR in the European Union, with comparable instruments in Singapore, Japan, Hong Kong, and other jurisdictions. Stablecoins may nevertheless be distinctive in their ability to frustrate harmonization. As I argue in a recent paper, the multiplicity of roles they play reveals tensions in the global financial order that may be irreconcilable.

First, efforts to assert jurisdiction over stablecoins may pit prudential regulation against monetary policy. Prudential regulation favors both harmonization of rules to limit regulatory arbitrage and segregation of collateral to facilitate redemption of fiat-denominated coins into official currencies. Monetary authorities may concurrently pursue aggressive expansion of stablecoins denominated in their official currencies, while resisting displacement of their domestic currencies by foreign-denominated stablecoins. These mixed incentives may call into question whether regulators can respond in a coordinated fashion to cross-border crises.

For example, in a hypothetical global run involving USDC, would non-U.S. authorities have an incentive to relax prudential rules governing foreign-currency stablecoins? Or would regulators enforce or tighten domestic rules regarding collateralization and redemption to limit the risks posed to their residents? Conversely, would U.S. regulators intervene to support a dollar-denominated stablecoin issued and predominantly held outside the United States (such as USDT) with a view to promoting dollarization and avoiding a run on Treasury securities?

Regulators also seem fixated on ensuring the “centralization” of regulated stablecoins while deferring engagement with the problem of decentralization. Stablecoin legislation gives institutional and retail users an incentive to use fiat-collateralized coins for transacting through decentralized protocols and pricing digital assets. Exchanges and other intermediaries similarly use highly regulated stablecoins such as USDC to price exchange-traded funds and cryptocurrency products. At the same time, the continuing legal uncertainty surrounding decentralized stablecoins fundamentally undercuts efforts to engage directly with DeFi protocols. Some regulators, moreover, require regulated issuers to exhibit the capacity and willingness to comply with “lawful orders” to “seize, freeze, burn, or prevent the transfer” of stablecoins.[5] This may compromise the composability of regulated stablecoins within DeFi transactions.

Such an approach, while wholly consistent with traditional financial regulation, may shape relationships with decentralized markets in a manner that increases the opacity of DeFi activity while limiting the benefits of DeFi innovation. For example, is the goal of global stablecoin policy to create more USDCs, with the understanding that a central bank digital currency could eventually displace them? Or does stablecoin policy aim to build a regulatory perimeter that users of USDT can live in—let alone DAI, USDe, or other stablecoins that may not be tied to any official currency?

More generally, stablecoin legislation lays bare a fundamental disagreement among global regulators over how payment systems should be regulated. Stablecoins have come to play a substantial role as a form of payment, such as in the Global South, where their relative stability and pseudonymity are “particularly attractive.”^[6] Stablecoins and permissionless ledgers may nevertheless lack the infrastructure necessary to assure finality of transactions and adequate protection for consumers.

Policymakers must thus consider whether the goal of stablecoin policy is to promote competition among payment systems or to regulate stablecoins as a bespoke financial instrument comparable to traditional banking arrangements. Technology-neutral rules for tokenized money may result in the proliferation of “wildcat” products that are not exchangeable at par with official currencies.[7] Conversely, privileged coordination of payment services around specific coins—whether issued by a central bank or through bespoke technologies—may unnecessarily constrain innovation and induce moral hazard.

If these tensions are in fact irreconcilable, stablecoins—as a regulated product—may not be so stable after all. In the face of such ambivalence, stablecoins may more closely resemble the progenitor of a range of new financial instruments rather than a product that can credibly satisfy rival use cases. If so, policymakers should design stablecoin law, rules, and policies with a view to preserving their flexibility rather than hardwiring them into real-world and decentralized markets. I believe this can be approached in three ways.

First, regulators should facilitate greater differentiation of stablecoins, such as classifying them by risk, so that relevant constituencies can better assess their fitness for some purposes and not others.

Second, policymakers should reduce undue reliance on stablecoins to perform essential market functions (such as shuttling funds between traditional and digital wallets or pricing digital asset derivatives) to foster a more robust toolkit for pricing and consummating DeFi transactions.

Third, regulators should accelerate the development of alternative intermediaries and infrastructures to contain the fallout of a major stablecoin failure without signaling they are too big to fail.

These strategies may provide a surer foundation for stablecoins than enabling them to be all things to all markets.

ENDNOTES

[1] See, e.g., Andreessen Horowitz, State of Crypto 2025, https://www.a16z.news/p/state-of-crypto-2025.

[2] The Wharton Blockchain and Digital Asset Project, “The Stablecoin Toolkit,” 32-38 (Jan. 2026) (discussing use cases) [hereinafter, “Stablecoin Toolkit”].

[3] See, e.g., Suvashree Ghosh, Stablecoin Transactions Rose to Record $33 Trillion in 2025, Bloomberg (Jan. 8, 2026) (summarizing data collected by Artemis Analytics Inc.).

[4] See State of Crypto 2025, supra (noting that stablecoins collectively held over $150 billion in U.S. Treasury securities, making them the “#17 holder of U.S. Treasuries” in the world).

[5] 12 U.S.C. § 5901(16); see also id. § 5903(a)(5)(A), (a)(6)(B).

[6] Marco Reuter, Decrypting Crypto: How to Estimate International Stablecoin Flows at 23, IMF Working Paper 25/141 (July 2025).

[7] Gary B. Gorton & Jeffery Y. Zhang, Taming Wildcat Stablecoins, 90 U. Chi. L. Rev. 909 (2023).

Onnig H. Dombalagian is the John B. Breaux Chair in Law & Business and George Denègre Professor of Law at Tulane University Law School. This post is based on his recent article, “The Paradoxes of Stablecoin Regulation,” available here.