Stablecoins: A new way to pay?

In recent months, stablecoins have emerged as a legitimate disruptor in the financial services industry. New legislation, a hot initial public offering (IPO), and support from the Trump administration have all coincided to give the technology its breakthrough moment.

In March, Treasury Secretary Scott Bessent stated that the U.S. would use stablecoins to “keep the dollar as the dominant reserve currency in the world” and the industry is forecast to reach US$2 trillion in size by 2028. But what are stablecoins, how are they used, and why has the U.S. government developed such an interest in them?

A path to a digital dollar

Although they are a subset of the crypto universe, stablecoins are distinct from more prominent cryptocurrencies, such as Bitcoin or Ether. Stablecoins exist as a form of digital cash on the blockchain¹, enabling users to transact with each other and settle trades in the world of decentralised finance². There are several fundamental differences between a stablecoin and its crypto peers. Most importantly, stablecoins aim to maintain a fixed price and offer on-demand redeemability back to hard currency.

The defining principle of a stablecoin is that its value is pegged to a reference asset (like a currency, stock or commodity) which is usually the US dollar. Their issuers enforce this peg through a variety of methods. Most commonly, a stablecoin is 100% collateralised by reserves comprised of cash and high-quality liquid assets such as short-term bonds. Alternatively, issuers use algorithms to adjust the coin’s supply – creating or destroying tokens as needed – to maintain price stability. This means that, unlike Bitcoin or Ether, stablecoins are not speculative assets³ and typically don’t experience wild swings in their value over short periods of time. In theory, the holder of a dollar-denominated stablecoin should be able to redeem one unit of their stablecoin for a real US dollar at any time⁴.

A feature that differentiates stablecoins from traditional low volatility assets, such as deposits or money market funds, is that they do not pay any yield. Typically, an investor would expect to accrue interest on a deposit or fixed income investment that they hold, but with stablecoins this is not the case. Even coins that are backed by interest-bearing assets, such as short-term bonds, do not generate a return for the investors. Instead, the issuer keeps any income earned on their reserve assets. This is how companies such as Circle, a leading stablecoin issuer, generate revenue. In 2024, Circle made nearly US$1.7 billion in revenue from its reserve assets – none of this was returned to holders of its USDC⁵ stablecoin. Despite this unconventional business model, Circle’s stock price rose rapidly following its recent IPO, reflecting the strong enthusiasm around stablecoins of late.

Figure 1: Circle Share Price

Source: Bloomberg, 2025. Figures are in US Dollar.

What are they used for?

Today, stablecoins are predominantly used for liquidity and as collateral within the crypto ecosystem. If you are transacting across different cryptocurrencies, you can use stablecoins to route capital between exchanges and as a bridge back to traditional currencies, such as the dollar or the euro. These use cases accounted for 92% of transaction volume last year. More recently, stablecoins have also become popular as a method of accessing the US dollar in countries with volatile currencies, high inflation, or capital controls. In Turkey, for example, where the local currency rapidly depreciated amid hyperinflation and political turbulence, stablecoin purchases briefly reached 4% of GDP, providing a cheap and efficient method of accessing hard currency and preserving the value of savings.

There are clear benefits to transacting with stablecoins. They can be traded 24/7 – including during weekends and holidays – and settlement is instantaneous. This removes any counterparty risk and involves substantially fewer costs than the equivalent process in traditional banking systems.

Despite being less than ten years old, the stablecoin market is already massive. Its market capitalisation surpassed $250 billion earlier this year (in US dollar) and in 2024 total transaction volume was $28 trillion (in US dollar), surpassing that of Visa and Mastercard combined. The market is dominated by two issuers, Tether and Circle, who account for nearly 90% of the overall supply. Both of their coins are pegged to the U.S. dollar and rely on reserves comprised largely of U.S. Treasuries to keep their price at US$1.

Figure 2: Stablecoins Market Capitalisation

Source: RWA.xyz. 2025. Figures are in US Dollar.

The total value of the Stablecoin market has doubled over the past eighteen months, yet they still only account for less than 1% of global money flows. As they become increasingly mainstream, the use cases for stablecoins should continue to grow and evolve.

Walmart Coins and Amazon Dollars

Developments in the space have attracted the attention of several retail giants. Amazon and Walmart are reportedly exploring the launch of U.S. dollar-backed digital currencies to gain tighter control over their payment ecosystems and sidestep fees charged by Visa, Mastercard and other card networks. Both companies have filed blockchain-related patents in recent years – Amazon’s 'Project Wyvern' patent hints at a token that could integrate with Amazon Pay, while Walmart’s filings reference real-time settlement and fraud prevention measures. These moves signal a strategic push to build their own payment systems into their platforms, and stablecoins might be the solution.

However, Bank of America analysts have expressed scepticism about the feasibility of this approach. They argue that deploying stablecoins in point-of-sale retail environments poses economic challenges, calling into question the viability of stablecoins for everyday transactions.

A recent retail report from U.S. credit card issuer, Capital One, reveals that 73% of retail spending is conducted via credit cards. Shoppers have grown accustomed to lucrative rewards programs – airline miles, premium points, cash-back tiers, airport lounge access, and early ticket presales. To persuade customers to trade in these benefits for a 'Walmart Coin' or 'Amazon Dollar', retailers would need to offer equally, if not more compelling incentives. However, analysts argue that the cost of offering comparable perks would likely outweigh any potential financial gains from bypassing traditional card processing fees.

Exclusivity further complicates the picture. A consumer with a Walmart-issued stablecoin token would find it useless on Amazon or eBay, limiting the token’s use and overall appeal. Instead, early adoption may emerge among B2B partners – suppliers and logistics providers who conduct heavy transaction volumes with these retailers. For them, using stablecoins could mean real-time payment settlements, improved cash-flow forecasting, and reduced counterparty risks – advantages that align closely with US corporate treasury priorities rather than consumer loyalty schemes.

A stroke of GENIUS

In July, Congress enacted the bipartisan6 Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, marking the first clear federal framework for stablecoin issuance and lending some much-needed legitimacy to the technology. The US federal law limits issuers to insured depository institutions, bank subsidiaries, and nonbank financial firms chartered by the Federal Reserve. It mandates that reserves back stablecoins exclusively with cash or cash-like instruments – U.S. Treasury bills, overnight repurchase agreements, and money market funds – ensuring that stablecoins are secured and reliably backed. Major U.S. banks, including JP Morgan Chase and Citigroup, are reportedly in talks to launch a joint stablecoin initiative, crystallising the shift from experimentation to institutional participation.

Simultaneously, the U.S. House passed legislation barring the Federal Reserve from issuing a Central Bank Digital Currency (CBDC). Spearheaded by Senators Cynthia Lummis and Kirsten Gillibrand, advocates warn that a government-issued digital dollar could pose undue surveillance risks and privacy intrusions. This legislative stance contrasts with China’s digital-currency approach, where the People’s Bank of China began piloting the e-CNY⁷ in 2021 and cracked down on private crypto ventures. While Beijing’s centralised interests initially drove the crypto ban, concerns over ceding technological leadership to the U.S. have prompted a subtle shift.

Hong Kong’s recent stablecoin law offers a glimpse of China’s evolving strategy. By permitting regulated issuers to operate in the territory, Hong Kong serves as a test bed for controlled experimentation with private digital currencies. Over 260 million e-CNY wallets have been opened, yet consumer usage remains limited to government-subsidised scenarios and pilot programs. The Hong Kong framework may reveal how private stablecoins can coexist alongside a state-issued digital yuan, balancing innovation with oversight.

Unstablecoins

Perhaps unsurprisingly, the track record of private money issuance is not without blemish. Most notably, in 2022, a prominent algorithmic stablecoin known as Terra completely collapsed over a one-week period. The Terra algorithm used two separate stablecoins together: TerraUSD, a stablecoin pegged to the US dollar, and Luna, a separate cryptocurrency that was tasked with stabilising TerraUSD. Unlike collateralised stablecoins backed by cash or bonds, algorithmic stablecoins balance supply and demand to maintain a stable price. In this case, when TerraUSD traded below one dollar, users could buy at that discount and convert their TerraUSD coin into one dollar of Luna to lock in a theoretical 'risk-free' profit. Conversely, when TerraUSD traded at a premium, users could convert their Luna to Terra. This 'burn-and-mint' mechanism created an arbitrage incentive⁸ intended to smooth out price fluctuations. By tinkering with supply as necessary, small deviations to the dollar peg would self-correct through user actions without the need for centralised intervention.

However, the supposed stability was not as advertised and in May 2022 a sudden surge of demand for over US$2 billion of withdrawals sent TerraUSD tumbling below its dollar peg. As TerraUSD fell, traders raced to convert the de-pegged coins to Luna and immediately sell their Luna for dollars, hoping to lock in a small profit. Instead of stabilising, this cascade trigged a rapid 'death spiral'. Within days, both tokens cratered, erasing nearly US$45 billion in market value and exposing the fragility of purely algorithmic pegs.

Figure 3: TerraUSD Price Crash

Source: CoinMarketCap, 2025. Figures are in US Dollar.

Even Circle – widely regarded as the most transparent and reliable of the stablecoin issuers – has experienced wobbles in the past. When Silicon Valley Bank (SVB) collapsed in March 2023, Circle found itself in a tricky situation as it held US$3.3 billion of its US$42 billion reserves at SVB. Stablecoin holders feared Circle would have insufficient reserves to meet withdrawals sparking an un-pegging of its Stablecoin, USDC, driving its price as low as US$0.88. The magnitude of the sell off did not correspond to how Stablecoins are supposed to work, as USDC’s reserve should have helped keep the price steady. Even if the SVB funds were lost entirely, the remaining holdings implied a floor of roughly US$0.93 per USDC.

Despite this theoretical floor, panic and fear eroded confidence in the coin, triggering deep outflows. Only after U.S. authorities extended Federal Deposit Insurance Corporation (FDIC)9 insurance to all SVB deposits did panic subside, allowing Circle to resume 1:1 redemption and restoring confidence in USDC. The episode serves to temper optimism about stablecoins, questioning how 'stable' they are in moments of market panic.

From blockchain to bonds

The U.S. government’s sudden interest in stablecoins may stem from the demand that they could generate for U.S. assets. Today, stablecoin issuers hold approximately US$120 billion of U.S. Treasury bills (T-bills) but the U.S. Treasury Department has forecast that this number could rise to US$1 trillion by 2028. Regulatory proposals such as the GENIUS Act would mandate 1:1 reserves for any stablecoin issued and limit permissible reserves to high-quality, liquid, U.S. dollar assets like T-bills. These reserve requirements would provide an additional and growing source of demand for U.S. debt.

We note though that stablecoins are already a massive player in the Treasury market. In 2024, stablecoin issuers purchased more U.S. short-term debt than Japan or Germany. Beyond generating demand for their debt, U.S. policymakers view stablecoin adoption as a vector for 'bottom-up' dollarisation¹⁰, where global users opt for a digital dollar over less stable local currencies. As the stablecoin market grows, there is an opportunity to further entrench the U.S. dollar’s role as the world’s primary reserve currency.

Figure 4: Net U.S Treasury Bill Purchases

Source: U.S.Treasury International Capital System, Tether, Circle. Stablecoin net U.S. Treasury Bill purchases is the sum of Tether and Circle reserve changes in 2024. Changes from December 2023 to December 2024. Figures are in US Dollar.

The future of Stablecoins

Stablecoins represent an interesting new development in the world of digital payments. The bipartisan regulatory support for the industry has laid the groundwork for further adoption. Stablecoins will enable users and businesses to move money around the world with speed fit for the digital age, exposing the slow and clunky nature of the traditional financial system.

However, with private entities issuing and controlling this money in the US, some caution is warranted. Previous episodes have shown that Stablecoins are not always as stable as advertised. Stronger regulation and oversight should in theory protect against future collapses but with each new technology paradigm shift, often new unforeseen risks emerge. One thing does seem clear however: Stablecoins and blockchain payments are not going away and their role in the financial system will continue to grow in the coming years.

¹ Blockchain is a decentralised digital ledger that securely records transactions across a network of computers, making the data transparent, tamper-resistant, and verifiable without a central authority.

² Decentralised finance (DeFi) is a way of using financial services like lending, borrowing, or trading without banks or middlemen, by using blockchain technology instead.

³ A speculative asset is something you invest in with the hope that its value will increase significantly in the future, even though there's a high risk it might not. These assets often don’t have much intrinsic value or cash flow, and their prices are driven by investor sentiment, hype, or future expectations rather than fundamentals.

⁴ Redemptions can be made 24/7, however it would not settle in your usual bank account 24/7

⁵ USDC is a stablecoin backed by U.S. dollar reserves, designed to maintain a 1:1 value with the dollar and used for fast, secure digital payments

⁶ Bipartisan: Supported by two major political parties, often indicating cross-party cooperation on legislation or policy.

⁷ e-CNY is China’s official digital currency, issued by its central bank, designed to function like digital cash for everyday use.

⁸ An arbitrage incentive is a chance to make a profit by taking advantage of price differences between markets.

⁹ Federal Deposit Insurance Corporation (FDIC) is a U.S. government agency that protects bank deposits of up to $250,000 per depositor if a bank fails.

¹⁰ Bottom-up dollarisation refers to a process where individuals and businesses in a country voluntarily start using a foreign currency for saving and transactions, without official government endorsement.