What is a stablecoin — types, examples, regulation, risks

🪙 What is a stablecoin and why is it needed

📌 Definition and essence

Stablecoin is a cryptocurrency whose rate is pegged to some stable asset, for example to the U.S. dollar, euro or gold. Thanks to this peg, the price remains relatively stable and is not subject to sharp fluctuations, unlike classic cryptocurrencies such as bitcoin.

• Maintains price stability
• Combines fiat reliability with crypto technologies
• Allows value to be transferred on the blockchain

🔁 How stablecoins work

In practice, stablecoins act as a digital equivalent of currencies: one unit of such a token usually corresponds to one dollar, one euro, etc.

Users can exchange a stablecoin at any time for an equivalent amount of fiat if the issuer has secured it with reserves. When exchanged back, tokens are often burned (removed from circulation), maintaining a balance of supply and demand.

🎯 Why stablecoins are needed

The key function is to be a stable unit of account in the crypto economy. They are used for:

• Storing capital between trades
• Settlements in smart contracts
• Protecting against market drawdowns

For example, an investor may convert funds into a stablecoin and ride out turbulence, preserving the dollar equivalent of their value.

🌍 Where they are particularly useful

Stablecoins are especially in demand where access to a stable fiat currency is difficult.

• Residents of countries with high inflation use them as a means of savings
• In Russia in 2022, many used stablecoins for transfers abroad
• This helped bypass banking and SWIFT restrictions

Thus, stable coins have become a global financial tool — from traders to ordinary people making transfers.

🧩 Types of stablecoins

There are several types of stablecoins that differ in their mechanism for maintaining the peg. Some are fully backed by reserves (fiat currencies, commodities or crypto assets), others use algorithmic stabilization methods.

💵 Fiat-backed stablecoins

This is the most common type. These stablecoins are backed by fiat currency — the issuer holds reserves in bank accounts in dollars, euros, etc.

• Examples: USDT (Tether), USDC (USD Coin)
• Each token corresponds to 1 dollar (1:1)
• Reserves are held in cash and liquid papers
• Some, like JPM Coin, are used for internal settlements

Advantages: simplicity, liquidity, high market capitalization

Disadvantages: centralization, dependence on the issuer, lack of reserve transparency

🪙 Commodity-backed (gold and more)

These stablecoins are tied to the value of a physical commodity. Usually gold, less often oil or real estate.

• PAX Gold (PAXG) — 1 token = 1 troy ounce of gold
• Tether Gold (XAUT) — similarly, stored in vaults
• Digix Gold (DGX) — backed by gold from Singapore

Advantages: real asset backing

Disadvantages: volatility of the commodity itself, low liquidity, niche nature

🔐 Crypto-backed

These are decentralized stablecoins that are backed by crypto collateral (most often ETH).

• Example: DAI from MakerDAO
• Issuance and backing are governed by smart contracts
• To get $100 DAI you need to deposit $150 collateral (overcollateralization)
• If the collateral price falls, automatic liquidation occurs

Although DAI is considered reliable, much of its backing is centralized USDC, which reduces its pure decentralization.

⚙️ Algorithmic stablecoins (without backing)

These projects have no reserves. Stability is achieved through algorithmic issuance and manipulation of supply:

• When the price is < $1 — the supply is reduced (tokens are burned)
• When the price is > $1 — more tokens are issued
• Auxiliary tokens (“shares”, “bonds”) are used

Example of failure: in 2022 the algorithmic stablecoin TerraUSD (UST) collapsed from $1 to just a few cents after the LUNA token crashed.

📊 Major stablecoins: comparison

Today there are hundreds of stablecoins, but the market is concentrated in a few major projects. Below is a table with key coins and their characteristics — type of backing, market share, issuer and other parameters.

*Market share is indicated approximately as of mid-2025. USDT and USDC together control about 85–90 % of the sector. Other projects are significantly smaller in scale.

💼 Examples of stablecoin use

Over a few years, stablecoins have grown from a niche tool for traders into a multifunctional financial product. According to Chainalysis analysis, they already account for more than a third (!) of the total volume of operations on the blockchain.

📈 On cryptocurrency exchanges

Trading on exchanges is the original and still key case for stablecoins. On centralized crypto exchanges, pairs with USDT/USDC have effectively replaced fiat: most trading pairs are quoted not to USD but to USDT or USDC.

• Fast conversion between assets without exiting into fiat
• The mass appearance of stablecoin pairs facilitates liquidity
• Stablecoins have become the "second dollar" in the crypto market

Stablecoins are also actively used in P2P deals and deposits/withdrawals. Thanks to liquidity and global demand, they allow one to bypass fiat restrictions and serve as a bridge to traditional finance.

🌐 In decentralized finance (DeFi)

DeFi applications are the base ecosystem for using stablecoins. They are applied in:

• Loans and lending (for example, collateral ETH —> issuance of DAI)
• Yield farming and staking
• Decentralized settlements and liquidity

Stablecoins in DeFi also provide global financial accessibility. People from countries with unstable economies can use them without banks, directly through wallets and protocols.

💳 In transfers and payments

One of the most revolutionary applications is cross-border transfers. A stablecoin transfer from wallet to wallet over the Tron or BSC network takes a few minutes and requires minimal fees.

• Reduced costs compared to SWIFT and Western Union
• Widespread use by migrants, freelancers and businesses
• Relevant for countries under sanctions and without banking access

Stablecoins are also used in retail payments: Visa/Mastercard cards issued by crypto exchanges allow purchases in shops to be paid with USDT like ordinary currency.

According to Andreessen Horowitz, stablecoins will become the main entry point into crypto for most users in the coming years.

⚖️ Advantages and risks of stablecoins

✅ Advantages

• Price stability. Absence of volatility. The purchasing power of 1:1 to the dollar or another asset makes a stablecoin convenient for settlements and planning.
• Speed and low cost of transfers. Transactions 24/7, fees are minimal. No need for SWIFT and banks.
• Global accessibility. Only the internet is needed. Billions of users without banks gain access to payments and capital storage through crypto wallets.
• Integration with the crypto market. Participation in ICOs, GameFi, NFTs almost always requires stablecoins as an "entry currency".
• Yield. Participation in DeFi: farming, staking, deposits. Yields higher than classic deposits (but risks are higher too).
• Transparency. Public reports, blockchain transactions. The level of transparency is higher than that of banks.

⚠️ Risks and disadvantages

• Credit risk of the issuer. If the issuer cannot redeem the coins, the tokens will depreciate. Examples: questions about Tether’s backing.
• Absence of insurance. Unlike bank deposits, stablecoin deposits are not insured. If something happens to the reserve, the losses are not compensated.
• Risk of depeg (loss of peg). In crisis situations, the rate may deviate from $1. Example — USDC in March 2023 ($0.87).
• Regulatory risks. Authorities may impose strict reserve requirements or prohibit the circulation of coins without a license. Example: the ban on issuing BUSD in the USA (2023).
• Centralization and censorship. Issuers may freeze funds (at the request of the authorities). This reduces decentralization.
• Technical risks. Vulnerability to bugs, theft of keys, network outages or mistakes when sending a token. Like any crypto, it requires caution.

⚖️ Legal regulation of stablecoins

As the stablecoin market grows, regulators around the world are strengthening oversight. The main topics are investor protection, anti-money laundering and financial stability. Let’s look at key approaches in different countries.

🇺🇸 USA

• There is no separate law, but the SEC, CFTC and a presidential working group are actively working
• After the collapse of Terra (2022), discussions began about licensing and mandatory reserves
• Circle (USDC) publishes reports and seeks to become a bank
• Tether is offshore, fined by the CFTC for reserve opacity

In 2023 PayPal USD (PYUSD) appeared — the first stablecoin from a major fintech company. The issuer is the licensed bank Paxos. This accelerated legislative initiatives.

In 2025, the US Senate approved the GENIUS Stablecoin Act:

• Requirement of 1:1 fiat backing
• Monthly reports and audits
• Guaranteed reserve insurance

🇪🇺 Europe

The European Union adopted strict regulation MiCA (2023), which came into force in July 2024.

• The issuer is obliged to have a license in the EU
• Full fiat reserve
• Audit, guarantee of redemption, restrictions on non-euro stablecoins

Some exchanges began delisting USDT, DAI and other unlicensed coins. The regulator is promoting local analogues:

• EUROe (France)
• Digital EUR (Santander Bank)

🌏 Asia

Japan: licenses only for banks and trusts. Private stablecoins are equated to electronic money.

Singapore: there is no law yet, but MAS issued a directive with requirements:

• Full reserves
• Transparency
• Guaranteed exchange into fiat

China: complete ban. Instead, they are developing the digital yuan (DCEP).

Hong Kong: is following its own path — since 2024 it has been licensing any stablecoins. Coins tied to different currencies are allowed, provided the issuer is locally registered.

Others: South Korea, India, Thailand, UAE (Dubai) are introducing licensing regimes. The region is moving towards unification.

🇷🇺 Russia

• Domestic settlements in stablecoins are prohibited (Central Bank of Russia)
• A regime for cross-border settlements has been introduced (since 2024)
• The legalization of certain tokens for foreign economic activity is being discussed

The Central Bank proposes using the digital ruble (CBDC) instead of private coins for domestic operations. Own ruble stablecoins have not yet been developed.

📊 Current trends and the future of stablecoins

The stablecoin market continues to develop rapidly. Below are the key trends of recent years that determine the trajectory of the industry:

📈 1. Market dynamics

After the crypto winter of 2022–2023, the market recovered and continued to grow:

• Capitalization reached $250 billion by mid‑2025
• The share of USDT increased to ~70%
• USDC strengthened its position due to trust and compliance
• DAI and other decentralized stablecoins are losing share

🛑 2. Rejection of algorithmic schemes

After the collapse of TerraUSD (UST) in 2022, trust in algorithmic models plummeted:

• There are essentially no new launches
• FRAX abandoned partial algorithmicity and switched to 100% backing
• The market is betting on real reserves

🏦 3. Growing interest from traditional finance

Large banks and fintech companies are getting involved in stablecoin issuance:

• PayPal launched PYUSD
• Standard Chartered is working on an HKD stablecoin
• Japanese banks are testing yen stablecoins
• Bank of America and other fintechs in the USA are preparing to launch

This is a signal: stablecoins are becoming part of the global financial mainstream.

📜 4. Regulatory clarity

• MiCA comes into force in the EU in 2025
• The USA adopted the GENIUS Stablecoin Act
• Requirements: license, 1:1 fiat reserves, audit and insurance
• USDT is under pressure — delisting in the EU and other restrictions

Regulatory frameworks will open the way for institutional clients and increase confidence in the sector.

🪙 5. Interaction with CBDCs

Government digital currencies could change the landscape:

• The Chinese yuan (DCEP) replaces private stablecoins within the country
• In the USA and Japan, coexistence of CBDCs and stablecoins is being discussed
• The market is moving towards a mixed model: CBDCs for state settlements, stablecoins for private transactions

Fed Chair Jerome Powell: «CBDCs could eliminate the need for private stablecoins.» But for now, stablecoins support the dollar’s dominance in the world. With the growth of digital currencies (euro, yuan, ruble) they must adapt — or make way.

❓ Frequently asked questions (FAQ)