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A study by Lambis Dionysopoulos and Andrew Urquhart highlights the history, growth, and importance of stablecoins since their launch 10 years ago as both a medium of exchange and a store of value, particularly in regions with monetary instability and limited access to the US dollar. The study details the use of stablecoins by businesses, financial institutions, and individuals for international cross-border payments, liquidity management, and protection against currency fluctuations in a swifter, more cost-effective way compared to traditional financial systems. According to this study, the accelerated adoption of stablecoins across the world is impacting the digital asset ecosystem as well as the financial system as a whole.

Types of Stablecoins

There are hundreds of different types of stablecoins in circulation, with the majority issued by Tether (USDT), followed by Circle USDC (USDC). These stablecoins derive their value through various mechanisms. Four categories of stablecoins/tokens are backed by real-world assets such as fiat, commodity, treasury bill, or digital assets, which are pegged to the value of traditional/fiat currencies, commodities, T-Bills, or repos, or digital assets with varying degrees of collateral requirements. Algorithmic stablecoins, on the other hand, are backed by programmed trading mechanisms without relying on direct collateral. These models face challenges in maintaining long-term stability, as seen with the collapse of TerraUSD in 2022, according to a recent report titled “Stablecoins 101: Behind crypto’s most popular asset,” published on December 11, 2024, by Chainalysis.

Source: Chainalysis

William Quigley, a cryptocurrency and blockchain investor and co-founder of WAX.io and stablecoin Tether, states:

> “Stablecoins will remain one of the fastest-growing areas in digital assets. Backing them with real-world assets, particularly U.S. Treasuries, has already proven successful, and I expect continued innovation in stablecoins unless banned by world regulators. Stablecoins are here to stay and will likely drive the next phase of crypto adoption.”

President Donald Trump and his administration seem to agree with this sentiment, as stablecoin issuance and use is rising globally. The market is projected to reach $3 trillion within the next five years, capturing a larger share of the digital asset market, surpassing traditionally dominant assets like Bitcoin (BTC) and Ethereum (ETH). This growth is particularly notable in the Middle East and North Africa, with Türkiye leading the world in stablecoin trading volume as a percentage of GDP, according to the Chainalysis report.

With the US lagging behind in the adoption of stablecoins compared to other countries, President Trump’s World Liberty Financial platform aims to “make crypto and America great” by enabling users to engage with digital assets without relying on traditional banking systems, positioning US-pegged stablecoins as the foundation for global financial settlements. As Federal Reserve Bank Governor Christopher Waller said, stablecoins “will broaden the reach of the dollar across the globe and make it even more of a reserve currency than it is now.”

Vivek Ramsar, CEO of etherealize.io, explains:

> “Stablecoins were the first instance of real product-market fit and also ended up being of strategic importance to the US, as stablecoins allow for the USD to be digitally exported to the rest of the world. Moving dollars via stablecoins is much more efficient: faster, cheaper, automatic settlement than existing methods.”

Source: Etherealize

Due to their rapid adoption and growing role in the global financial system, stablecoins emerged as the most dynamic asset class of the year, according to a 2024 report by a16z, garnering attention and becoming a priority for world regulators.

The US Stablecoin Legislation Proposals

The US has introduced two stablecoin bills at the federal level—the Stablecoin Transparency and Accountability for a Better Ledger Economy (STABLE) Act in the House and the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act in the Senate. These proposals seek to regulate stablecoin issuers with licensing requirements, risk management rules, and 1:1 reserve/collateral backing. It should be noted that state-specific regulation varies across the U.S., with most states lacking regulatory frameworks separate from the federal level.

In a press release on the draft STABLE Act, Representatives Hill and Steil expressed willingness to collaborate with their Senate colleagues to pass stablecoin legislation.

The GENIUS Act Introduced in the Senate:

• Prohibits the issuance of a payment stablecoin in the United States by any person that is not a “permitted payment stablecoin issuer.”
• Defines “payment stablecoin” as a digital asset that maintains a fixed value through backing by fiat currency or other secure reserves.
• Imposes federal standards on permitted payment stablecoin issuers, including requirements for fully backed reserves, segregation of reserves, monthly certification, and capital and liquidity requirements.
• Allows state-regulated payment stablecoin issuers to issue stablecoins, but only if their regulatory regime is similar to the federal regime.
• Gives federal banking agencies enforcement authority over permitted payment stablecoin issuers akin to the Federal Deposit Insurance Act over insured depository institutions.
• Imposes customer protection standards on custody services for permitted payment stablecoins, segregating funds and requiring monthly audited reports on fiat reserves.
• Prohibits federal banking agencies from requiring an asset held in custody to be treated as a liability, clarifying that payment stablecoins are not securities under federal laws.

Current Stablecoin Regulation by Region

In countries with a regulatory framework, favorable government initiatives, and web3-friendly policies, continued innovation in stablecoins collateralized by a broader range of financial instruments is expected. While this expansion is promising, issuers must consider liquidity constraints, with those failing to do so facing challenges.

For example, in the EU, Kraken announced it would delist Tether’s USDT and four other stablecoins for compliance with Markets in Crypto-Assets Regulations. In Brazil, the new Central Bank president linked rapid stablecoin growth to tax evasion and money laundering. In the US, JPMorgan analysts estimate that only 66%–83% of Tether’s reserves comply with proposed US regulations. In China, individuals were imprisoned for using Tether’s USDT to bypass exchange controls.

Elliptic predicts that 2025 will see a proliferation of regulatory initiatives around the world to support the responsible development of stablecoins and tokenization.

Read more: The inevitable future of the global financial system is tokenization | Opinion