Stablecoin

A stablecoin is a crypto asset that is designed to maintain a stable value relative to a reference asset — most commonly a major fiat currency such as the US dollar or the euro, though some are referenced to commodities (gold) or baskets of assets. Stablecoins have become critical infrastructure in crypto markets: they serve as the primary medium of exchange on crypto trading platforms, the settlement currency for DeFi protocols, and an increasingly important payment mechanism in cross-border transactions. The global stablecoin market exceeded $200 billion in aggregate market capitalisation in 2025, making it one of the most policy-significant segments of the crypto asset market.

Taxonomy

Stablecoins are categorised primarily by their stabilisation mechanism. Reserve-backed stablecoins hold assets in segregated reserves equal to (or exceeding) the stablecoins in circulation; the holder’s claim is backed by those reserves. Fiat-backed stablecoins hold cash and cash equivalents; commodity-backed stablecoins hold physical commodities or commodity derivatives. Crypto-collateralised stablecoins hold other crypto assets as collateral, typically over-collateralised to absorb price volatility. Algorithmic stablecoins maintain their peg through supply-contraction mechanisms rather than asset reserves, using protocol-level incentives to balance supply and demand.

Single-currency stablecoins (pegged to one fiat currency) are distinct from multi-currency or basket-referenced tokens (pegged to a weighted basket of fiat currencies or assets). The distinction matters regulatorily: MiCA treats them differently, and the systemic risk profile differs substantially.

Major Stablecoins

Tether’s USDT is the largest stablecoin by market capitalisation and daily trading volume, historically operating from offshore domiciles with limited regulatory oversight and persistent questions about reserve composition, though its reserve attestations have improved since 2020. Circle’s USDC is the most regulated major stablecoin: Circle is licensed in multiple jurisdictions, publishes monthly reserve attestations by a major accounting firm, and was an active participant in the GENIUS Act legislative process. BUSD (Binance USD, issued by Paxos) was discontinued in 2023 following NYDFS regulatory action. FDUSD (First Digital USD) has grown as a BUSD replacement in Asian markets.

The TerraUSD Cautionary Tale

The collapse of TerraUSD (UST) in May 2022 remains the defining cautionary tale of algorithmic stablecoin design. UST maintained its peg through an algorithmic relationship with LUNA, a sister token: UST could be redeemed for $1 worth of LUNA, creating an arbitrage mechanism designed to maintain the peg. When UST confidence broke and redemptions accelerated, the LUNA supply expanded hyperinflationary ally to meet redemption demand, destroying LUNA’s value and with it the stabilisation mechanism. Approximately $40 billion in market value was destroyed in under two weeks. The Terra collapse directly accelerated regulatory action on stablecoins globally, including MiCA’s strict reserve requirements and the GENIUS Act’s prohibition on algorithmic stablecoins for the payment stablecoin category.

Regulatory Frameworks

The GENIUS Act (US, enacted 2025) created a federal licensing framework for “payment stablecoins” — stablecoins used primarily as payment instruments. It requires 1:1 reserve backing with cash or cash equivalents, independent audit, and either a federal bank charter or a state-licensed trust company structure. It explicitly prohibits the issuance of algorithmic stablecoins under the payment stablecoin label.

MiCA (EU) creates two stablecoin categories. E-money tokens (EMTs) are single-currency stablecoins referenced to one fiat currency; they are regulated equivalently to e-money under PSD2 and require e-money institution authorisation. Asset-referenced tokens (ARTs) are stablecoins referenced to multiple fiat currencies, commodities, or other assets; they face stricter reserve composition requirements, governance rules, and — if they exceed significance thresholds — direct EBA supervision. Singapore’s MAS has a single-currency stablecoin framework requiring 1:1 reserve backing and licensing. Hong Kong’s Stablecoin Ordinance, enacted in August 2025, requires fiat-backed stablecoin issuers to hold a Hong Kong licence.

Stablecoins vs CBDCs

Whether stablecoins and CBDCs are complementary or competing is a live policy debate. In the US, the Trump administration’s stablecoin strategy (GENIUS Act framework, private sector issuers) and its CBDC prohibition suggest a deliberate policy choice to use private stablecoins as the dollar’s digital payment vehicle rather than a government-issued CBDC. In the EU, the Digital Euro and EMT frameworks may coexist or may compete for the same payment use cases. The difference is governance: a stablecoin is a private liability; a CBDC is a public one.