For Nkiru Uwaje, co-founder and chief operating officer of trade payments group Mansa, stablecoins are an integral part of her daily corporate life.
The tokens, a form of cryptocurrency that acts like cash, account for 90 per cent of business activities at the group, which helps small businesses in Africa, south-east Asia and South America. Payments to customers and her young team are made using tether, the world’s largest stablecoin, and Mansa received its fundraising the same way.
Uwaje, a former executive at bank messaging group Swift, says stablecoins are far superior to the network of correspondent banks that handle most of the world’s cross-border transactions — which take longer, charge more and occasionally make mistakes.
But for Mansa and its customers they represent one thing above all: ready access to a proxy for US dollars. Stablecoins track the value of the currency one-for-one but the money is transferred across the internet, outside the banking system. That makes them highly attractive in countries afflicted by high inflation, weak or volatile currencies, unstable banks or capital controls.
“People are trying to hedge risk . . . you know, you’re trying to just not go down with the economy,” says Uwaje. “The dollar is still the dollar, whether we like it or not. And it is still the most desired currency to hold because of how much trade is done in the US dollar.”
Until recently, stablecoins’ ease of use and anonymity made them a de facto currency reserve for crypto traders and a conduit for crime including drug trafficking and money laundering.
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But, helped by the return of President Donald Trump to the White House, stablecoins are becoming increasingly mainstream, a development that could have profound implications for the global financial system.
JD Vance, the vice-president, last month predicted digital money would be “a force multiplier of our economic might” that would benefit the dollar. Lawmakers in Washington are working across the aisle on proposals to oversee what is currently a little-regulated market.
Investment bank Standard Chartered has forecast there could be some $2tn of stablecoins in circulation by the end of 2028, from around $250bn now. Others are even more bullish.
Payments giants Stripe and Visa are deepening their investments in the industry, Japan’s Sony Bank is testing its own token for payments, and there is speculation that banks and big Silicon Valley technology companies will also join the fray. Uber, the ride-hailing app, is considering using them to make cross-border payments and reduce currency costs.
Capturing the mood among investors, the market valuation of Circle, which runs the world’s second largest stablecoin, nearly quadrupled in value in its first three days as a listed company in New York, to $25bn.
But stablecoins exist in a grey area, somewhere between a payments network, a bank deposit and a security. Issuers have liabilities like a bank, but don’t make commercial loans. They are tradeable and invest in assets like money market funds, but US regulators have ruled that they are not securities if the coins can be fully redeemed on demand and do not pass the investment income to holders. A stablecoin is supposed to keep a fixed value against the asset to which it is pegged, but often deviates from it by more than a couple of per cent.
As their usage grows, this has raised fears that without considered regulation stablecoins could trigger a crisis in the future.
“It feels like quite a moment in the development and history of stablecoins and banking,” says William Emmons, a former economist at the St Louis Federal Reserve.
“I think it’s guaranteeing a crisis at some point, just as money market funds have collapsed twice since 2008.”
Stablecoins were created to boost trading in cryptocurrency markets, enabling buying and selling without the use of a bank. Some 80 per cent of all crypto transactions now involve them.
The market is dominated by Tether’s eponymous coin and Circle’s USDC token. However, their fiat currency pegs make them an anomaly in the crypto world, which puts its trust in decentralised computing power.
Private companies issue a token for every dollar received and promise to back them with assets held in reserve. Usually, these are short-term liquid assets like Treasury bills, money market funds or loans in overnight money markets.
The Bank for International Settlements (BIS) estimated stablecoin issuers purchased $40bn of US Treasury bills last year to back their tokens, a level similar to the largest US government money market funds and larger than most foreign purchases.
As they keep the interest from their investments, they have become highly profitable businesses. According to its unaudited results, Tether had yearly net profits of $13bn last year — with just 100 employees. That has led to a proliferation of new offerings, with president Trump and his sons backing a crypto company that also has its own stablecoin.
Issuers such as Tether provide attestations of their reserves to verify the assets are fully backed but few provide full audits, and they have faced accusations that they mint more tokens than the money they receive.
In 2021 Tether agreed to pay a $41mn penalty to New York state regulators to resolve claims it had falsely represented the asset backing of its coins to cover up losses at its sister exchange Bitfinex. Tether neither admitted nor denied the regulator’s findings.
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Stablecoin issuers have been likened to the US “wildcat banks” of the 19th century, which took advantage of weak national banking regulation and the lack of a nationwide currency to issue promissory notes backed by very little collateral. Many collapsed, leaving customers holding worthless paper.
Despite such concerns and a US regulatory clampdown on the industry after the 2022 market crash, they have continued to grow rapidly.
Stripping out automated trading on crypto markets, transaction volumes in stablecoins climbed to $752bn last month compared with $409bn in the same period a year ago, according to data from Visa. The number of wallets that regularly send and receive payments hit a record average of 46mn last month, up from 27mn in May last year.
Few see an immediate need for stablecoins in countries with relatively advanced banking and payments systems where credit and debit cards can be used to help pay for daily expenses.
“Most of the traction is focused on cross-border payments where the system is most broken,” says Michael Shaulov, chief executive of Fireblocks, an infrastructure provider for digital assets. “You’re shortening settlement from three days to 10 seconds. It’s going to go into every payment system.”
But large-scale use may take some time. Even though issuers are subject to anti-money laundering laws, stablecoins remain the principal crypto asset for illicit transactions. A 2024 UN report named the tether coin as the “preferred choice” for Asian crime syndicates.
Blockchain analysis company Chainalysis estimated that criminal activity associated with cryptocurrencies hit $51bn last year, with stablecoins accounting for 63 per cent of that.
As payments are recorded on a publicly accessible digital ledger, they are to some extent traceable and law enforcement authorities have used blockchains to disrupt nefarious activities. Tether says it regularly freezes wallets linked with suspicious activity on behalf of authorities.
Fireblocks’ Shaulov says know-your-customer (KYC) and transaction checks are done by both banking customers and stablecoin operators, using third parties that hold the assets in their digital wallets. That makes it faster to check than with the existing banking system, which has also suffered high-profile incidents that exposed poor controls and criminal activity.
Nevertheless, some question how forcefully stablecoin platforms will scrutinise anomalies. “The federal enforcement agencies that once led the charge in curbing crypto-related fraud and abuse are now being restructured or defunded,” says Tonantzin Carmona, a fellow at Brookings Metro, a think-tank.
Yuval Rooz, chief executive of Digital Asset, a US blockchain technology group, says his company has seen “massive” interest from banking customers in a stablecoin that has better privacy protections that also hide commercially-sensitive information.
Most stablecoin issuers commingle assets together in a single account to obfuscate activity, but that creates a potential huge operational risk for banks if the issuer makes a mistake. “If you were to talk to some of these payments companies they would tell you they really don’t like that. Because at the end of the day the larger the mess, the more scary. So I think that is restricting activity,” he said.
Loopholes still exist. There are no criminal activity checks in decentralised finance, the loose network that does away with centralised intermediaries like banks or exchanges. If a party is paid in tether but wants to convert it to USDC, it is possible to swap assets on a decentralised exchange that carries out no screenings on the sender or receiver.
The crypto industry accepts it needs regulation to expand further. A stablecoin “has all the benefits of not having to move cash, coins or interact with the banking system for payments”, says Ben Santos-Stephens, chief executive of ClearToken, a UK start-up developing a digital asset clearing house.
“Without regulation, it also has all the costs of no oversight, regulation or money laundering controls. The open question is whether tokenised money will still be more efficient, safer and quicker once regulated.”
Despite stablecoins’ risks and limitations, banks and regulators can feel them encroaching on their turf.
The US Treasury warned last month that around $6.6tn in deposits in US commercial banks could be “at risk” of migrating to stablecoins, potentially forcing banks to raise interest rates to retain deposits or increase their wholesale funding.
To assuage those concerns, politicians in Washington are setting out the first rules for the market. Although the Genius legislation is not finalised, a firm outline is taking shape.
Issuers with more than $50bn in outstanding stablecoins will have to publish regular independently verified reports on their reserves. Foreign issuers are likely to be subject to the same oversight as US ones. Stablecoins offering interest to holders are likely to be banned, amid concerns that money will flow out of banks and money market funds.
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Technology companies face a higher bar to clear before they can launch their own stablecoins, and all issuers will have to comply with regulatory capital requirements that were toughened after the 2008 financial crisis. There will also be more stringent requirements on criminal activity checks in decentralised finance markets.
The current versions of legislation “would put Tether to a very high bar that we are very happy to meet”, said Paolo Ardoino, its chief executive.
But critics argue there are omissions, like sufficient consumer protections and thorough KYC checks. “It’s a light-touch regulatory framework,” says Amanda Fisher, policy director at Better Markets, a US advocacy group.
Hilary Allen, professor at the American University Washington College of Law, says taxpayers are “absolutely implicitly on the hook” because the bill does not contemplate any kind of deposit insurance or special resolution mechanism.
Other than a bailout, “the only thing that can happen is you have people with their money locked up in bankruptcy proceedings for a very long time, potentially not getting [back] 100 cents on the dollar,” she adds. “We’re sleepwalking into disaster with the integration of crypto and traditional finance.”
Yet the legislation firmly ties stablecoins to global finance and in particular US Treasuries, the asset that sets the price of all US debt.
Issuers are likely to have a strict list of acceptable liquid assets in which they can hold their reserves, including money market funds, repurchase agreements and Treasuries with a maturity of 93 days or less.
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Jeremy Allaire, chief executive of Circle, says this is a safer form of supervision than a bank that only holds a fraction of its deposits as cash reserves, and lends out the rest.
His own company hit a crisis in 2023 when Silicon Valley Bank collapsed. Circle had put $3.3bn of customer funds in SVB accounts and its USDC coin lost value when the news got out. The market was only reassured when the Federal Reserve stepped in to guarantee all SVB customer deposits.
“I think the very narrow definition of high-quality liquid assets here is very significant. We think that’s critical,” Allaire adds. “If I’m a treasurer in a company or if I’m holding collateral in a financial transaction, I need to know that this is as good as cash. It’s a foundational premise of a properly governed and run stablecoin.”
But the requirement is also likely to be disruptive for the $29tn US Treasury market. Mark Cabana, head of US rates strategy at Bank of America, estimates that every dollar that flows from a bank deposit into a stablecoin creates around 90 cents of additional demand for Treasuries. The government would have to issue more short-term debt to meet demand, potentially increasing volatility as the differential between short and long-term rates widened.
Policymakers are also weighing the potential impact if a stablecoin issuer were hit with a sudden wave of redemptions, such as a panic that forces holders to dump liquid stablecoins because they can’t sell other assets.
A paper from the BIS last month estimated that $3.5bn of outflows from stablecoins, over five days, could increase the yield on short-term US government debt by up to 0.08 percentage points over 10 days — comparable to a “small-scale” effort by a central bank to stimulate an economy, said authors Rashad Ahmed and Iñaki Aldasoro. A market 10 times larger “meaningfully influences” the transmission of Fed monetary policy, they added.
Another significant link lies in the plumbing that stablecoin issuers use to safeguard their reserves and pay back customers. Not only will other countries rely on US rules, those mechanisms could come under serious strain in a stressed market, says Emmons, the former St Louis Fed official.
A bank in Hong Kong may not have the same access to a Federal Reserve account as a US bank like JPMorgan, turning the “public good” US dollar into a vehicle for making other banking systems more fragile, he argues.
The currency swap agreements between the Fed and other central banks, developed after the 2008 financial crisis and extended during the pandemic, emerged “precisely because [the Fed] didn’t trust the stability of the other financial systems”, he adds.
“It is, though, very typical of the crypto worldview, represented by Vance, in that it’s so naive to believe that you can get the expansion of the US financial system and dollar proliferation without also spreading the instability.”
Additional reporting by Alex Rogers in Washington
Data visualisation by Ray Douglas