Stablecoin

Definition and origins

A stablecoin is a type of cryptocurrency that seeks to hold a stable value against a specific asset or basket of assets, such as a fiat currency, a commodity, or another crypto asset. Korean-language references define it as a crypto asset designed to target price stability by pegging to the value of an asset such as a fiat currency or gold, or by adjusting supply through an algorithm. Despite the name, stablecoins are not necessarily stable: they depend on stabilization tools such as reserve assets or supply-adjusting algorithms, and historically many have failed to hold their value against their reference asset.

Stablecoins emerged in 2014 as a way for cryptocurrency investors to park funds while buying and selling volatile crypto assets. They have been used mainly for trading crypto assets and are now also used for cross-border payments. Tether, launched by Tether Limited in 2014 and described as a stablecoin aiming to hold its value against the US dollar, is a leading example: its first tokens (as Realcoin) were issued on 6 October 2014 on the bitcoin blockchain, and the project was renamed Tether on 20 November 2014.

Mechanisms and types

In the simplest reserve-backed model, the issuer holds one dollar of reserves per token issued. Reserves are short-term fiat-denominated assets such as government bonds, high-quality commercial paper, repurchase agreements, and bank deposits, so the structure closely resembles a money market fund (MMF) and shares its contagion risk, in which large redemptions force asset sales, push prices down, and create further redemption demand.

The main types are fiat-backed (backed by fiat-denominated assets supposedly held by a third-party custodian; examples Tether's USDT and Circle's USDC), crypto-backed (other cryptocurrencies as collateral, using smart contracts to track the dollar value), commodity-backed (examples PAX Gold and Tether Gold), and algorithmic (no or only partial reserve assets, relying on supply-and-demand algorithms). The European Central Bank holds that algorithmic stablecoins should be treated as unbacked crypto assets.

Scale and examples

After the 2021 "DeFi summer," the value of stablecoins in circulation grew more than tenfold, from 25 billion dollars to nearly 300 billion dollars, and trading volumes reached levels comparable to major payment processors such as Visa and Mastercard.

According to the Bank for International Settlements (BIS) in July 2025, 90 percent of stablecoin market capitalization was concentrated in Tether (USDT) or USD Coin (USDC). By FATF figures, in October 2025 market capitalization was 316 billion dollars and daily trading volume 156 billion dollars, with 95 percent of stablecoins fiat-backed and 97 percent of those denominated in dollars. Euro-pegged examples include Circle's EURC, EUR Tether, and Stasis EUR; algorithmic examples include Celo Dollar, Tron's USDD, and Kava's USDX.

Stablecoin cross-border flows surpassed those of unbacked crypto assets in early 2022 (IMF, 2025 report), and cross-border flows in 2024 were estimated at 1.4 trillion dollars. According to University of Cambridge research, the most cited reason for using stablecoins in cross-border settlement is their 24/7 settlement capability outside banking hours.

Use in the real economy, by contrast, remains limited. According to the Philadelphia Fed (Joseph Abadi, June 2026), almost 88 percent of stablecoin transactions in 2024 occurred on decentralized finance (DeFi) platforms; of the remainder only 5 percent were linked to payments including business-to-business payments, and retail payments were just 0.3 percent of non-automated transaction volume. In high-inflation countries the real-economy role is larger. The same source reports that about half of Turkey's adult population has invested in cryptocurrencies after years of high double-digit inflation, and in 2024 Turkish investors' stablecoin purchases exceeded 4 percent of GDP, higher than any other country. Naira depreciation spurred stablecoin adoption in Nigeria as a store of value and means of payment, and some Venezuelans use dollar-denominated stablecoins because of the bolivar's volatility. Since 2019 Oxfam has distributed humanitarian aid to Vanuatu residents in US dollar stablecoins, and a January 2026 UNDP report describes stablecoin pilots in Colombia, Syria, Gambia, Papua New Guinea, Kazakhstan, and Morocco.

Institutionalization

In 2023 the Financial Stability Board (FSB) finalized global recommendations on crypto-asset and stablecoin activities, and the EU began phasing in MiCA from 2024, regulating asset-referenced tokens (ARTs) and e-money tokens (EMTs). In July 2025 the United States enacted the GENIUS Act, requiring payment stablecoins to hold 100 percent highly liquid reserves and to comply with monthly disclosure, supervision and registration, and Bank Secrecy Act (BSA) obligations; it restricts issuance to permitted issuers and prohibits stablecoins from paying interest. A "yield loophole" nonetheless remains, allowing crypto exchanges to pay indirect interest: as of March 2026 Coinbase advertised a 3.50 percent reward on USDC holdings, close to the Treasury bill rate at the time. By late 2025 Visa had begun allowing USDC settlement on its network and Mastercard expanded USDC settlement outside the United States, and in June 2025 Circle, the issuer of USDC, listed on the New York Stock Exchange.

Several early projects were discontinued. In December 2018 the algorithmic project Basis shut down over US regulatory concerns; Meta's Diem wound down with an asset sale; and in January 2024 National Australia Bank ended its Australian-dollar-backed stablecoin project, launched in January 2023. In October 2025 the first yen-pegged stablecoin (JPYC) launched, and in November 2025 Kyrgyzstan launched USDKG, a national stablecoin issued by a state-owned issuer, backed by gold, and pegged to the US dollar.

Distinctions

Stablecoins must not be confused with central bank digital currencies (CBDCs). A CBDC is issued by a central bank and is a direct claim on that central bank, belonging to the monetary base (M0), whereas stablecoins are issued by private entities and, when issued by commercial financial institutions, belong to broader monetary aggregates (M2). Stablecoins also differ from fiat currency on the issuer axis: they can be issued by private companies with relatively low barriers to entry.

Fiat-backed stablecoins resemble MMFs in structure, but unlike MMFs they are designed as means of payment, so conversion can be faster and banks' exposure to liquidity risk is greater. Most stablecoins pay no interest to holders, but some issuers and service providers have begun offering yield-bearing stablecoins to expand market share. Centralized issuers avoid interest because a yield-bearing token could be classified as a security and become subject to regulation; the US GENIUS Act, Europe's MiCA, and Hong Kong's stablecoin bill explicitly prohibit regulated issuers from offering yield-bearing stablecoins. In February 2026 legislation on interest payments stalled in the United States amid opposition from the banking sector.

Risks and failures

Tether's USDT is the world's largest stablecoin by market capitalization. Tether initially claimed full fiat backing but failed to submit a reserve audit in October 2021, and the US Commodity Futures Trading Commission (CFTC) fined it 41 million dollars for misleading consumers. The CFTC stated that between 2016 and 2018 Tether held reserves covering all issued tokens on only 27.6 percent of days. As of February 2026 Tether had never completed an audit by an accounting firm.

Algorithmic stablecoins are vulnerable to de-pegging that turns into a "death spiral," and the leading case is Terraform Labs' TerraUSD (UST). UST was designed to hold its peg not against the dollar but against another Terra network token, LUNA, a mechanism that presupposes sufficient market demand for both UST and LUNA. Terraform Labs offered a yield on UST deposits through its Anchor app, given as 20 percent by the Philadelphia Fed and 19.5 percent by English Wikipedia, so the figure is disputed. When a surge of deposits in early 2022 drained the yield reserve, Terraform Labs announced a rate cut and a crisis of confidence followed. In May 2022 UST broke its peg and fell to 10 cents (Reuters, 12 May), LUNA dropped from an all-time high of 119.51 dollars to effectively zero, and roughly 45 billion dollars of market capitalization vanished within a week. Terraform Labs filed for bankruptcy in January 2024, and Kwon Do-hyung pleaded guilty in August 2025. In June 2021 IRON de-pegged after large sell orders hit its linked TITAN token.

After the Terra episode the market shifted almost entirely to reserve-backed models, with two reserve-backed stablecoins, Tether and USDC, accounting for more than 90 percent of the market. Even transparently reserve-backed stablecoins are fragile, however. The March 2023 collapse of Silicon Valley Bank (SVB) triggered a run on USDC. USDC held about 20 percent of its reserves as uninsured deposits at SVB, and when Circle could not meet redemption demand and suspended redemptions, USDC de-pegged to 89 cents. The stress spread to other stablecoins through Dai's Peg Stability Module (PSM), and only after the US Treasury, the Federal Reserve, and the FDIC jointly announced that all SVB depositors would be made whole did the run end and USDC recover to one dollar, showing that even a transparent stablecoin holding high-quality reserves relied on a government guarantee for its survival.

De-pegging can occur through liquidity stress, demand shifts, reserve mismanagement, crypto price swings, or design flaws. Fiat-backed stablecoins share the MMF-like contagion risk of large redemptions leading to asset sales, price declines, and further redemptions. Counterparty risk arises when reserve deposits concentrate at a custodian that may fail, and solvency risk arises because reserve assets such as Treasuries are affected by interest rates. Technology risks include smart-contract and cross-chain bridge flaws and liquidity fragmentation from non-interoperable blockchains.

The BIS assessed in its 2025 annual report that "stablecoins fall short of the requirements of sound money" and pointed to the possibility of fire sales of safe assets and knock-on effects in payment and repo markets if stablecoin growth continues.

Relations with the dollar system

Dollar-pegged stablecoins hold US Treasury securities as reserves and thus contribute structurally to demand for US Treasury bills. In November 2025 Federal Reserve Governor Stephen Miran confirmed that stablecoins are already increasing demand for US Treasuries and "contributing to the dollar's dominance," which lowers the neutral rate and reduces US government borrowing costs. Using 2021-2025 data, the BIS estimated that stablecoin demand lowered the three-month Treasury bill rate by about 2 to 2.5 basis points, an effect comparable to small-scale quantitative easing.

US Treasury Secretary Scott Bessent said stablecoins would "buttress the dollar's status as the global reserve currency, expand access to the dollar economy for billions across the globe, and lead to a surge in demand for U.S. [Treasury bills]." Conversely, the European Central Bank's Jürgen Schaaf wrote that widespread adoption of dollar stablecoins could erode Europe's monetary sovereignty and financial stability, and scholars in China and Singapore assessed the GENIUS Act as a strategic move to consolidate dollar hegemony by increasing demand for US Treasuries. South African Reserve Bank Governor Lesetja Kganyago worried that dollar stablecoins are being used to weaken African currencies. A March 2026 ECB study analyzed how adoption of dollar-denominated stablecoins imports foreign monetary policy into Europe, weakening central banks' influence over short-term rates, complicating liquidity management in the banking system, and widening exchange-rate volatility in capital flows, in the extreme case neutralizing Europe's monetary policy tools. A Standard Chartered report warned that the spread of dollar-denominated stablecoins could draw up to 1 trillion dollars from developing countries into stablecoins and cause losses of bank deposits.

The Center for Global Development (CGD), an independent policy institution, states that stablecoin proliferation poses substantial risks including banking sector instability, regulatory arbitrage, weaker transmission of monetary policy, and the spread of illicit finance, and calls on the IMF and World Bank to adopt clear criteria for country engagement and strengthened surveillance. The Philadelphia Fed lays out future scenarios - a medium of exchange for everyday transactions and cross-border remittances, a store of value giving dollar access without a US bank account, or remaining a blockchain-native asset for crypto trading - and concludes that the success of the reserve-backed model suggests stablecoin demand will boost demand for existing dollar assets, likely strengthening the dollar. Even without interest, international demand may persist because the dollar's stability and liquidity are attractive on their own, and stablecoins also allow investors to circumvent de facto or de jure capital controls.

Monetary debate

The Philadelphia Fed characterizes stablecoins as "a new wave of privately issued money" and likens them to unregulated banknote issuance during the Free Banking era of the 1830s to 1860s, when there was no central bank or federal currency. In that era regional currencies proliferated, notes often traded below face value, and bank failures were widespread. Gary Gorton of Yale holds that "stablecoin issuers are unregulated banks" and that private money is a subpar medium of exchange whose issuers are subject to destabilizing bank runs.

Sanctions, money laundering, and the regulatory landscape

In response to sanctions on Russia, Promsvyazbank and the Moldovan oligarch Ilan Shor launched the ruble-pegged stablecoin A7A5, used for Russian firms' cross-border payments and for a Russian state influence campaign. In September 2025 the Central Bank of Russia approved A7A5 as a digital financial asset usable by Russian importers and exporters for cross-border settlements. In October 2025 the UN's Multilateral Sanctions Monitoring Team found the Democratic People's Republic of Korea avoided sanctions using stablecoins for the sale and transfer of military equipment and raw materials, alleging buyers in Laos and Sudan paid in USDT. In January 2026 there were reports that Iran's central bank was accumulating stablecoins under sanctions, and in November 2025 the Australian government published an advisory note saying ISIL prefers USDT for fundraising and to circumvent sanctions.

The FATF has reported that stablecoins are increasingly used for money laundering, terrorist financing, sanctions evasion, and proliferation financing, and in January 2024 the UN Office on Drugs and Crime (UNODC) reported that organized crime groups in East and Southeast Asia prefer USDT for cyber fraud and money laundering.

Stablecoins are considered illegal in mainland China. In October 2025 the People's Bank of China required Chinese companies including Ant Group and JD.com to halt plans to issue stablecoins in the Hong Kong Special Administrative Region, and in February 2026 the China Securities Regulatory Commission (CSRC) issued a notice prohibiting the issuance of yuan-denominated stablecoins inside and outside China on the grounds that currency issuance is a matter of sovereignty. In September 2025 a consortium of nine European banks announced plans to issue MiCA-compliant stablecoins in response to the market dominance of dollar-denominated stablecoins.

South Korea

South Korea established a basic framework for user asset protection and unfair-trading regulation with the enforcement of the Act on the Protection of Virtual Asset Users on 19 July 2024. In 2025, discussions on separate legislation premised on introducing a won-pegged stablecoin gained momentum, covering issuer licensing and supervision, a 100 percent highly liquid reserve requirement and redemption obligations, disclosure and auditing, and an anti-money laundering (AML) system; the Bank of Korea has maintained a principle of gradual, bank-centered introduction in view of monetary policy and financial stability risks. Multiple bills with differing designs have been introduced in the National Assembly in parallel, differing on the scope of underlying assets, licensing and capital requirements for issuance businesses, and whether interest payments should be allowed. In February 2026 the Bank of Korea proposed that only licensed commercial banks should be able to issue won-denominated stablecoins, citing money laundering and financial stability concerns, while the Financial Services Commission presented a more open approach permitting participation by technology firms and warned of hampering innovation. From 2025, "digital ATMs" (DTMs) offering USDT-to-won cash-out for foreigners were piloted at tourist and commercial sites, and banks and fintechs ran parallel technical verification of stablecoin-based overseas remittance and settlement.

Stablecoins continue to expand across cross-border payment, store-of-value, and crypto-trading uses, and both their regulatory landscape and market size kept growing through mid-2026.