What is a stablecoin?

A stablecoin is a type of digital currency designed to maintain stable value by pegging to an external reference asset. Most stablecoins are fiat backed stablecoins pegged to the US dollar at a 1:1 ratio.

Common stablecoins include:

• USDC (USD Coin): Issued by Circle, backed by US dollar reserves and short term US Treasury securities
• USDT (Tether): Largest stablecoin by market capitalization at over $185 billion as of December 2025
• EURC: Euro-pegged stablecoin for European markets
• DAI: Crypto-backed stablecoin using Ethereum collateral

Stablecoins settle on blockchain networks like Ethereum, Base, Polygon, and Arbitrum. Transfers complete in seconds 24/7/365, compared to 1-5 business days for traditional cross-border transactions through correspondent banking.

Why were stablecoins created?

Stablecoins emerged to solve a fundamental problem in cryptocurrency: price volatility makes Bitcoin and Ethereum unusable as payment currencies.

Bitcoin's price can swing 5-10% in a single day. A business that accepts Bitcoin payment today might see that value drop 8% before they can convert to dollars, turning a profitable transaction into a loss. This volatility prevents cryptocurrencies from functioning as stable stores of value or reliable mediums of exchange.

Tether (USDT) launched in 2014 as the first widely-adopted stablecoin to address this problem. By pegging 1 USDT to 1 USD, Tether enabled traders to move value between crypto exchanges without converting back to bank-held dollars, avoiding withdrawal delays and fees.

Early use cases focused on crypto trading:

• Exchange liquidity: Traders could hold value in USDT between trades without returning to fiat currency
• Cross-exchange arbitrage: Moving funds between exchanges in minutes rather than days via bank wire
• Capital preservation: Exiting volatile positions into stable value without leaving the crypto ecosystem

As blockchain infrastructure matured, stablecoins expanded beyond trading into payment rails. The combination of dollar stability with blockchain settlement speed and global accessibility made stablecoins viable for cross-border payments, remittances, and B2B transactions—use cases where traditional banking remains slow and expensive.

The market validated this evolution. According to Visa's analysis, stablecoin transaction volume reached $5.7 trillion in 2024 after filtering out bot activity and automated trading, demonstrating stablecoins' emergence as payment infrastructure rather than just crypto trading tools.

How stablecoins maintain their peg

Stablecoin issuers use different mechanisms to keep value stable against reference assets.

Reserve backing

Fiat backed stablecoins hold reserves matching circulating supply. Circle maintains $1.00 in cash and US Treasury securities for every USDC token issued. Users redeem USDC for dollars through the issuer, creating arbitrage that maintains the peg.

When USDC trades below $1.00, arbitrageurs buy discounted tokens and redeem for $1.00, capturing profit while pushing price up. When USDC trades above $1.00, new tokens are minted and sold, increasing supply until price returns to $1.00.

Circle publishes monthly attestation reports from Grant Thornton showing exact reserve composition. This transparency helps maintain user confidence in the peg.

Cryptocurrency collateral

Some stablecoins use cryptocurrency collateral managed through smart contracts. DAI requires users to deposit $150 worth of Ethereum to mint $100 worth of DAI, creating a buffer against price volatility.

If collateral value drops too far, the protocol automatically liquidates positions to maintain backing. This overcollateralization protects the peg but makes the system capital-intensive.

Algorithmic mechanisms

Algorithmic stablecoin designs attempt to maintain pegs through programmatic supply adjustments without backing reserves. These systems expand token supply when price rises above target and contract supply when price falls.

However, algorithmic models have repeatedly failed. TerraUSD (UST) collapsed in May 2022, dropping from $1.00 to near zero as its mechanism failed under selling pressure, eliminating $40 billion in value. Similar failures occurred with Basis Cash, Iron Finance, and other algorithmic projects.

Most fintech operators avoid algorithmic stablecoins for payment infrastructure due to these stability risks.

Types of stablecoins

Different stablecoin designs serve different infrastructure needs:

Fiat-backed stablecoins

These maintain reserves in fiat currency or short term government securities:

• USDC: Monthly audits from Grant Thornton, reserves in cash and US Treasury bills
• USDT: Over $185 billion market cap, less transparent reserve reporting
• EURC: Euro-backed for European payment corridors
• USDP: Issued by Paxos with full reserve backing

Fiat-backed designs offer the most reliable peg stability, making them suitable for payment rails where price predictability matters.

Commodity-backed stablecoins

These peg to physical assets:

• PAXG (Paxos Gold): Represents one troy ounce of London Good Delivery gold stored in Brink's vaults
• XAUT (Tether Gold): Similar gold-backed structure

Commodity price volatility makes these less suitable for payment infrastructure than dollar-pegged alternatives.

Crypto-backed stablecoins

These use cryptocurrency collateral in smart contracts:

• DAI: Backed by Ethereum and other digitized assets with overcollateralization
• sUSD: Uses Synthetix Network Token (SNX) as collateral

Crypto-backed stablecoins maintain decentralization but face complexity that limits adoption in traditional payment infrastructure.

Algorithmic stablecoins

These use programmatic supply adjustments without reserves. After the TerraUSD collapse and other failures, few algorithmic stablecoins remain active. The design lacks robustness for production payment systems.

Stablecoins for cross-border payments

Stablecoins provide several advantages over traditional banking rails for cross-border transactions.

Settlement speed

Traditional international wire transfers take 1-5 business days through correspondent banking. Stablecoin transfers settle in seconds on blockchain networks operating 24/7/365.

A payment from Mexico to Nigeria completes in under 30 seconds with USDC on Polygon, compared to 3-5 days via SWIFT. Faster settlement reduces working capital requirements for platforms processing high volumes.

Cost efficiency

International wire transfers cost $15-50 per transaction through traditional banking, with additional fees for currency conversion and correspondent banking. Stablecoin transfers cost under $1 on networks like Polygon or Base.

At scale, a fintech processing $10 million monthly in cross-border payments might spend $50,000 on wire fees versus $5,000 using stablecoin rails—a 90% cost reduction. These savings improve unit economics for payment platforms, remittance apps, and global payroll providers.

Geographic coverage

Traditional banking rails face gaps in emerging markets where correspondent relationships are limited. Stablecoin infrastructure operates identically whether sending to New York or Lagos, as long as recipients have wallets.

This uniform coverage enables fintechs to expand to markets like Nigeria, Argentina, and Vietnam without establishing local banking partnerships. However, operators must still handle local currency conversion and comply with jurisdiction-specific regulations.

Pre-funding elimination

Correspondent banking requires maintaining pre-funded accounts in multiple currencies for same-day settlement. A payment platform supporting 20 corridors might need $2 million in idle capital across pre-funded accounts.

Stablecoin settlement eliminates this requirement, as transfers happen directly on-chain without nostro accounts. Capital efficiency improves, though platforms still need conversion infrastructure to exchange stablecoins for local currency.

Stablecoin regulation by jurisdiction

Regulatory frameworks for stablecoins vary significantly across markets.

United States

No comprehensive federal stablecoin regulation exists as of December 2025, though the Genius Act and similar proposals have been discussed in Congress. State-level money transmission licenses apply to stablecoin operations.

Key requirements:

• Anti money laundering (AML) and Know Your Customer (KYC) procedures under the Bank Secrecy Act
• State money transmitter licenses in operating jurisdictions
• Securities laws apply to stablecoins meeting Howey Test criteria

The regulatory uncertainty creates challenges for fintechs building long-term infrastructure, though major issuers like Circle and Paxos have established compliance frameworks.

European Union

The Markets in Crypto Assets (MiCA) regulation, effective from December 2024, establishes comprehensive stablecoin rules:

• Stablecoin issuers must obtain authorization
• Reserves held in segregated accounts
• Redemption rights guaranteed to users
• Disclosure requirements for reserve composition

MiCA brings clarity but imposes costs favoring established financial institutions over startups. Fintechs using stablecoins must partner with MiCA-compliant issuers.

Hong Kong

Hong Kong requires stablecoin issuers to obtain licenses from the Hong Kong Monetary Authority. Reserve requirements mandate 100% backing in high-quality liquid assets.

The framework positions Hong Kong as a compliant crypto hub while protecting users. Fintechs operating in Hong Kong can use approved stablecoins but face strict oversight similar to traditional financial services.

Emerging markets

Jurisdictions like Nigeria, Argentina, and Turkey see high stablecoin adoption as local currencies face inflation or capital controls. However, regulatory approaches vary:

• Nigeria: Central bank initially banned banks from facilitating crypto transactions before later allowing limited operations
• Argentina: High USDT adoption for preserving purchasing power amid peso devaluation
• Turkey: Restrictions on crypto use for payments despite high retail adoption

Fintechs must navigate fragmented local regulations even when using global stablecoin infrastructure.

Common stablecoin use cases

Financial services companies use stablecoins across multiple payment scenarios.

Global payroll and contractor payments

Payroll platforms use stablecoins to pay remote workers instantly without maintaining bank accounts in dozens of countries. Workers receive USDC or USDT and convert to local currency through exchanges or P2P platforms.

This eliminates 5-10% fees charged by traditional global payroll providers like Deel or Remote, while enabling instant payment rather than 3-5 day international wire transfers.

Remittances

Remittance platforms use stablecoins to reduce corridor costs. A sender in the US deposits dollars, the platform converts to USDC, transfers on-chain to the destination country, and converts to local currency for the recipient.

Total cost runs 1-2% compared to 6%+ for traditional remittance providers, while settlement happens in minutes rather than days.

Treasury management

Companies with international operations hold working capital in stablecoins rather than maintaining bank accounts in multiple currencies. This eliminates pre-funding requirements and reduces FX conversion costs.

A platform receiving $1 million daily from US customers can hold funds in USDC until needed for local currency payouts, eliminating FX risk during the holding period.

B2B cross-border payments

Businesses use stablecoins to pay international suppliers instantly. A manufacturer in the US can pay a Vietnamese supplier in USDT, with settlement completing in seconds rather than the 3-5 days required for SWIFT transfers.

The supplier receives payment faster and the buyer eliminates wire fees and correspondent banking charges.

Trading and DeFi

Crypto exchanges and DeFi platforms use stablecoins as the base trading pair and liquidity source. Traders deposit USDC or USDT rather than fiat currency, enabling instant deposits and withdrawals 24/7.

Money market funds in DeFi offer yield on stablecoin deposits, competing with traditional savings accounts. Both centralized exchanges (CEX) and decentralized exchanges (DEX) rely heavily on stablecoin liquidity.

Stablecoins vs traditional payment rails

Stablecoins offer different trade-offs compared to ACH, wire transfers, and card networks.

• Speed: Stablecoins settle in seconds versus 1-5 days for ACH and international wires. Only instant rails like RTP match stablecoin speed.
• Cost: Stablecoin transfers cost under $1 on efficient networks, compared to $0.05-$5 for ACH, $15-50 for wires, and 0.5-2% for card payments.
• Coverage: Stablecoins work identically across borders, while ACH is US-only, SEPA covers Europe, and wire transfers require correspondent banking relationships.
• Finality: Stablecoin transactions are irreversible once confirmed on-chain. ACH allows reversals up to 60 days. This finality reduces fraud risk but eliminates consumer protections.
• Regulatory clarity: Traditional rails like SEPA, SPEI, and Pix have well-established regulatory frameworks. Stablecoin regulation remains fragmented across jurisdictions, creating compliance uncertainty.
• User experience: Traditional rails integrate with existing bank accounts through Electronic Funds Transfer (EFT) systems. Stablecoins require users to manage wallets and understand blockchain transactions, creating friction.

Technical infrastructure considerations

Fintechs building on stablecoin infrastructure face specific technical requirements.

Blockchain selection

Different networks offer different trade-offs:

• Ethereum: Most established, highest liquidity, but gas fees can spike during network congestion
• Polygon: Low fees (under $0.01), fast confirmation, wide stablecoin support
• Base: Coinbase-backed, optimized for payments, growing adoption
• Arbitrum: Layer 2 scaling, low fees, Ethereum compatibility
• Tron: USDT's largest network by transaction volume, popular in Asia

Many platforms support multiple chains to optimize for speed, cost, and user preferences.

Wallet infrastructure

Platforms need secure wallet infrastructure for holding and transferring stablecoins:

• Custodial wallets: Platform controls private keys, simpler user experience, regulatory requirements similar to traditional financial services
• Non-custodial wallets: Users control private keys, reduced platform liability, more complex UX
• Smart contract wallets: Programmable accounts with features like spending limits and multi-sig approvals

Liquidity management

Platforms need on-ramps and off-ramps to convert between stablecoins and local currencies:

• Exchange partnerships: Integrate with centralized exchanges (CEX) for conversion
• OTC desks: Large-volume trades with market makers
• DEX aggregators: On-chain swaps through decentralized exchanges (DEX)
• Local payment processors: Partners in destination markets handling last-mile conversion to local rails like Pix, SEPA, or SPEI

Compliance integration

Platforms must implement:

• Transaction monitoring: Real-time screening for suspicious activity
• KYC/KYB verification: Identity and business verification for users
• Sanctions screening: OFAC and international sanctions list checking
• Reporting: Transaction reporting to regulators as required by jurisdiction

Risks and limitations

Stablecoins face several risk factors that fintechs must evaluate.

Regulatory risk

Unclear or changing regulations create uncertainty. A jurisdiction that allows stablecoin use today might restrict it tomorrow, forcing platforms to adjust infrastructure quickly.

Counterparty risk

Users depend on stablecoin issuers maintaining proper reserves. If an issuer fails to maintain backing or faces regulatory action, the stablecoin could lose its peg.

Smart contract risk

Bugs or exploits in smart contracts could result in loss of funds. While major stablecoins have been extensively audited, risks remain.

Liquidity risk

Converting large stablecoin amounts to local currencies requires sufficient liquidity in destination markets. Some emerging markets have limited liquidity, creating conversion challenges at scale.

Operational risk

Blockchain transactions are irreversible. Sending to the wrong address means permanent loss of funds. Platforms need robust controls to prevent errors.