Stablecoin
A stablecoin is a digital token issued on a blockchain and designed to hold a steady value against a reference — almost always the US dollar, increasingly the euro — by the issuer holding reserves of cash and short-term government securities against every token and redeeming at par on demand; algorithmic designs have failed. By 2025 stablecoins exceeded $200 billion in circulation and were regulated as a distinct category under MiCA and the US GENIUS Act.
- Also known as
- Stablecoins, Payment stablecoin, Fiat-backed stablecoin, USDC, USDT
- Used at
- crypto-asset trading (the dollar leg of most trades), cross-border payments and remittances (minutes and cents against days and percentage points), treasury and settlement between businesses in markets with capital controls or weak banking, on-chain cash for tokenised assets, and, from 2024–2025, the payment products of Stripe, PayPal, Visa, Mastercard and the banks that began issuing their own
- Binding
- MiCA (in force for stablecoins from June 2024) requires issuers to be authorised as e-money or credit institutions, hold reserves in segregated, low-risk assets, redeem at par, and meet caps on non-euro tokens' use as a means of payment; the US GENIUS Act (July 2025) creates federal and state licensing for payment stablecoin issuers with 1:1 reserves in cash and Treasuries, monthly disclosure, and no interest to holders; the UK's regime is in progress; AML and the travel rule apply to transfers through regulated intermediaries
- Typical reserves
- Tether (USDT, the largest at over $140 billion) and Circle (USDC, over $60 billion) hold Treasury bills, repo and cash, disclosed monthly with attestations; the issuer earns the yield on the reserves — Tether reported profits of over $13 billion in 2024 — which is the business model and the reason banks and payment companies want in
- Typical risks
- reserve quality and redemption capacity (the run on USDC in March 2023 when Silicon Valley Bank, holding part of its reserves, failed — the token traded at 88 cents for a weekend); issuer failure; algorithmic designs (Terra's UST collapsed to zero in May 2022 taking $40 billion with it); blockchain and smart-contract risk; and illicit use, which regulated issuers address by freezing addresses on request
- Parties
- issuers, reserve custodians and auditors, the exchanges and wallets that distribute, the payment companies integrating them, the regulators (ECB and EBA, the US Treasury and banking agencies), and the users — traders, businesses in emerging markets, and increasingly ordinary payment flows
How a stablecoin works in practice
A business in Argentina buys a dollar stablecoin from a local exchange with pesos; the exchange holds a wallet of tokens it bought from the issuer against dollars. The business transfers the tokens to its supplier in Vietnam in five minutes, on a public chain, for a fee of cents; the supplier sells the tokens for dong on a local exchange or holds them as dollar savings. No correspondent bank, no two-day settlement, no 3% in FX spreads and fees — and no bank account required at either end, only a wallet and an exchange that performed KYC. The issuer, meanwhile, holds a dollar of Treasury bills for every token, earns 4–5% on them, and redeems tokens at par to authorised participants who return them. The exchanges and wallets are the regulated intermediaries that screen the transfers, apply the travel rule and freeze what the authorities require; the issuer can freeze addresses at the contract level.
The regulated stablecoin of 2025 is a payment instrument with a legal definition, and the payments industry is building on it: Visa and Mastercard settle in stablecoins with some acquirers; Stripe bought a stablecoin infrastructure company (Bridge) for $1.1 billion in 2024 and launched stablecoin accounts; PayPal issues its own; banks in the US and Europe announced issuance under the new rules. For a fintech, a stablecoin is a settlement rail — cheaper and faster than correspondent banking for cross-border flows, with the compliance obligations of a crypto-asset and the counterparty risk of the issuer's reserves. For a buyer, a stablecoin-based business is priced on its licences (MiCA CASP or e-money, US money-transmitter and the new federal regime), its reserve arrangements if it issues, and its ability to demonstrate the screening of every transfer. The economics that drew the banks — yield on reserves, float — are the economics of e-money with a global, programmable rail.
For a payments founder, the stablecoin is the cross-border rail that finally works and a regulated product with an issuer's balance sheet behind it; for an investor, it is the crypto-asset that became infrastructure, and the licence file is the asset.
Example
A cross-border payments company processing $3 billion a year between Latin America and Asia replaces its correspondent-banking settlement with a regulated dollar stablecoin in 2024. Before: pre-funded accounts in nine countries totalling $60 million, average settlement two days, cost 1.4% all-in. After: pre-funding reduced to $12 million, settlement in minutes, cost 0.5%; on-ramps and off-ramps through licensed exchanges in each corridor; wallet screening and travel-rule compliance on every transfer through a blockchain-analytics vendor; issuer risk managed by holding two issuers' tokens and a daily limit on the balance held. The company's margin rises by 0.7 points on $3 billion — $21 million a year — and its working capital falls by $48 million. When Stripe's acquisition of Bridge sets a public benchmark, the company's own sale in 2025 closes at 8× revenue, with a two-week diligence workstream on its crypto-asset licences and screening records.
Common mistakes
- Treating all stablecoins alike; reserve quality, issuer regulation and redemption terms differ. - Holding customer funds in a stablecoin without the issuer risk on the balance sheet. - Skipping wallet screening and the travel rule because the rail is "just settlement". - Algorithmic or under-collateralised designs; they have failed every time. - Reading a stablecoin business as a crypto business when it is an e-money business with a new rail.