By: Udaibir Das
This article originally appeared in Econofact on June 18, 2025.
The Issue:
As originally envisaged, cryptocurrencies such as Bitcoin were intended to provide an alternative to government-backed money in all its uses. Bitcoin's market cap has risen dramatically in recent years, but it remains a volatile speculative asset rather than a widely used exchange and payment method. Instead, stablecoins have emerged as a practical alternative to the traditional banking system for payments and remittances. These digital coins seek to maintain stable value by pegging to currencies like the U.S. dollar, combining blockchain technology with reserve backing. Stablecoins are bringing opportunities for more accessible and efficient financial intermediation, but also raise concerns about monetary control, illicit transactions, user protection, and financial stability. However, a fundamental divide has emerged between the U.S. approach to the regulation of stablecoins, which encourages private sector innovation, and the European approach, which prioritizes sovereign monetary and regulatory control. This divergence in approach could profoundly reshape the global financial structure.
Stablecoins have a current market capitalization of approximately $250 billion. While modest relative to Bitcoin, they are growing channel for financial intermediation.
The Facts:
The digital finance ecosystem took shape with the launch of Bitcoin in 2009, following the global financial crisis of 2008. Conceived as a decentralized alternative to government-issued currency, Bitcoin uses blockchain technology — a transparent, tamper-resistant ledger that all users can view and verify — to facilitate peer-to-peer transactions without relying on banks or payment intermediaries. Its supply is capped through a resource-intensive mining process, and its price is entirely market-determined. As of June 2025, Bitcoin’s market capitalization has reached approximately $2.1 trillion. Yet despite its scale, Bitcoin remains a highly volatile asset that is slow and costly to exchange. It is still used primarily for speculative investment rather than as a medium for financial transactions.
Subsequently, stablecoins emerged to address Bitcoin’s usability problems by offering price stability and lower transaction costs. Stablecoins vary widely in design, risk, and currency backing. They combine blockchain technology with reserve backing — typically in the form of low-risk, liquid assets — to maintain a stable value against a peg. They come in multiple forms, each with distinct risk profiles. The most widely used are U.S. dollar-pegged, tokenized e-money stablecoins such as Tether (USDT, launched in 2014) and USD Coin (USDC, launched in 2018). These are backed 1:1 by cash and short-term U.S. Treasury securities. Other fiat-backed variants track currencies like the euro (EURT, EURS), the Japanese yen (JPYC), and several emerging market currencies. More complex types include asset-backed stablecoins (collateralized by commodities such as gold), crypto-collateralized tokens (typically over-collateralized with digital assets by 150% or more), and algorithmic models, which attempt to maintain price stability through programmed supply adjustments rather than reserve backing. These design differences have direct implications for both price stability and regulatory risk.
Stablecoins can generate returns, but they also involve risks. While stablecoins themselves do not pay interest, they can be deployed on crypto lending platforms that offer returns through pooled lending mechanisms. However, these returns do carry risk as highlighted starkly by the 2022 collapse of FTX, a major centralized exchange and lending platform. The stablecoin ecosystem is becoming increasingly competitive, with new crypto-focused issuers continuing to dominate market share. Established financial institutions, such as JPMorgan (with JPM Coin) and PayPal (with PYUSD), are also entering the space, signaling a convergence between traditional finance and blockchain-based payments. Central banks have also sought to compete in the digital space by issuing central bank digital currencies (CBDCs), which are digital versions of national currencies based on electronic balances in a central ledger managed by the central bank. However, these presently remain small compared to global holdings of crypto assets and stablecoin usage.
As of early 2025, stablecoins have a market capitalization of approximately $250-260 billion, modest relative to Bitcoin, but they are providing an expanding channel for financial intermediation. Stablecoins now process over $15 billion in daily transactions, compared to approximately $2–4 billion for Bitcoin. According to estimates by blockchain analytics firms, around two-thirds of stablecoin transactions are associated with "DeFi trading" — the trading of digital tokens, such as Bitcoin and stablecoins, among holders of these coins, providing a stable medium of exchange for trading and lending outside the banking system, as shown in the figure. But stablecoins are increasingly being used for “real-world” purposes, particularly in emerging markets and underbanked regions. One growing use is international remittances since stablecoins can significantly lower transfer costs, from an average of 6.6% to under 3%. In high-inflation economies such as Argentina and Turkey, households are turning to dollar-denominated stablecoins as a store of value to hedge against rapidly depreciating local currencies. In Sub-Saharan Africa, stablecoins are helping to expand financial access, particularly as mobile wallets and digital infrastructure improve. These developments suggest that stablecoins are now functioning as practical financial tools in places where conventional financial services are costly or unreliable.
The illicit use of stablecoins is rising, although it is still a relatively small share of overall usage. Stablecoins now account for approximately 63% of all crypto illicit transaction volume, according to the Chainalysis 2025 Crypto Crime Report. This marks a shift away from Bitcoin, which had previously been the dominant medium for crypto-based illicit activity. However, all crypto use for illicit activity accounts for less than 1% of all illicit financial activity, while only 0.14% of all crypto transactions were illicit, according to the 2025 Crypto Crime Report.
The growing use of stablecoins is raising a complex set of policy concerns. Such concerns include the risk of undermining official currencies as more transactions migrate to stablecoin platforms, their potential use in illicit financial flows, gaps in safeguards for retail users, and unresolved questions surrounding the taxation of returns on crypto assets. Regulatory concerns center on financial stability risks arising from the increasing role of stablecoins in financial intermediation. Central banks and regulators now consider large stablecoin issuers as systemically important institutions. For example, the US Financial Stability Oversight Council (FSOC) 2024 Annual Report noted that stablecoins "continue to represent a potential risk to financial stability because they are acutely vulnerable to runs absent appropriate risk management standards." Concerns were highlighted by the May 2022 collapse of TerraUSD (which lost its dollar peg entirely) and the November 2022 failure of the FTX exchange, as well as brief de-pegging events affecting even major stablecoins like USDC under banking sector stress in March 2023. Such events can have systemic implications given that stablecoins' integration with securities markets, custody chains, and payment processors creates links to the core financial infrastructure. A related concern is that weak reserve management by stablecoin issuers or trading platforms could trigger collateral fire sales during mass redemptions, driving down the cost of assets and potentially destabilizing other parts of the financial markets. To date, however, progress in addressing these risks has been uneven, slowed by the absence of clear regulatory mandates over stablecoin activities and by diverging views among policymakers and agencies on the dangers and potential benefits of this rapidly evolving ecosystem.
A transatlantic divergence in the regulation of stablecoins has widened in early 2025. The United States, under the Trump administration, views stablecoins primarily as vehicles for innovation — tools to expand consumer choice and provide more efficient forms of financial intermediation, with the additional benefit that the rapidly rising use of dollar stablecoins helps to bolster dollar dominance globally. An executive order issued in January 2025 promotes stablecoins while explicitly prohibiting central bank digital currencies (CBDCs) in the United States. Meanwhile, the Generating Revenue and Enhancing National Investment by Using Stablecoins (GENIUS) Act, which has just been passed by the Senate, proposes a light-touch but structured framework for stablecoins. The Act mandates that stablecoins be backed 1:1 with safe, liquid assets and that issuers undergo regular audits and adhere to disclosure requirements. However, it carves out a separate regime for smaller issuers — with less than $10 billion in outstanding stablecoins — allowing them to operate under state-level oversight. This has raised concerns about regulatory arbitrage and the potential for inconsistent standards across jurisdictions, and the potential for systemic risk from a growing multitude of alternative forms of digital money.
Europe is taking the opposite approach, prioritizing tighter control. This is not just a technical difference from the United States—rather, it reflects competing visions about who should control the future of finance: private companies or government institutions. The European Central Bank's (ECB’s) concerns focus on monetary sovereignty and the ability to implement effective monetary policy in a digital world. The ECB is accelerating the development of a digital euro to counter the growth of U.S. stablecoins, with pilot testing of a coordinated digital payment platform expected by the end of 2025. At the same time, EU regulations treat stablecoin issuers much like banks, with equivalent capital and operational rules. The European Union’s Markets in Crypto-Assets (MiCA) regulation, adopted in 2024, imposes stricter rules than the U.S. GENIUS Act. It treats large stablecoin issuers like banks, requiring them to maintain strong capital buffers, establish clear liability frameworks, and implement tight operational controls. MiCA also seeks to limit the spread of non-euro stablecoins, particularly dollar-denominated ones, by increasing compliance costs and making authorization more challenging for foreign issuers.
What This Means:
Stablecoins are no longer a niche innovation; they are testing the foundations of modern monetary and payment systems. Their rapid expansion is reshaping financial stability risks, straining regulatory boundaries, and challenging the roles of central banks and supervisory authorities. As private digital tokens gain ground, existing oversight and payment monitoring frameworks are struggling to keep pace. While regulators debate their response, the market — driven mainly by U.S.-based technology and market actors — is moving ahead. Diverging approaches to regulating stablecoins risk fragmenting the global digital finance landscape: a dollar-based stablecoin system in the U.S., a state-backed European digital euro regime, and a mix of regional approaches elsewhere. These competing models risk disrupting the transmission of monetary policy, cross-border capital flows, and regulatory coherence. Stablecoins must now be considered an integral part of the core financial architecture. A coordinated international response is needed before their scale outpaces the capacity of any single jurisdiction to manage the risks they pose to monetary and financial stability.
Udaibir Das is a Visiting Professor at the National Council of Applied Economic Research, a Senior Non-Resident Adviser at the Bank of England, a Senior Adviser of the International Forum for Sovereign Wealth Funds, and a Distinguished Fellow at the Observer Research Foundation America.