Source: Chainalysis; Compiled by: Whitewater, Golden Finance

Stablecoins have quietly become a powerful force in the global cryptocurrency market, accounting for trillions of dollars in cryptocurrency transactions recorded in recent months. More than two-thirds.

Unlike most cryptocurrencies (which often experience wild price swings), stablecoins align 1:1 with less volatile assets such as fiat currencies or commodities. ratio to maintain consistent and predictable value.

Globally, stablecoins are gaining momentum as a medium of exchange and store of value, filling the void left by traditional currencies, especially in an era of currency instability and limited use of the U.S. dollar (USD). area. Businesses, financial institutions (FIs), and individuals are leveraging stablecoins for a variety of use cases, from international payments to liquidity management to protection against currency fluctuations. Stablecoins facilitate faster and more cost-effective transactions compared to traditional financial systems, which has accelerated global adoption of stablecoins.

As regulatory momentum around cryptocurrencies continues to build, stablecoins are becoming the focus of discussions about the technologies shaping the future of finance.

What is a stablecoin?

Stablecoins are programmable digital currencies that are typically pegged 1:1 to fiat currencies such as the U.S. dollar. Stablecoins, primarily issued on networks like Ethereum and Tron, combine the power of blockchain technology with the financial stability required for real-world use cases for cryptocurrencies.

The launch of Bitcoin in 2009 revolutionized the world's financial infrastructure by introducing a decentralized peer-to-peer trading system that eliminated the need for intermediaries. However, its limited supply and speculative trading dynamics result in wild price fluctuations, making its native token, Bitcoin (BTC), difficult to use as a medium of exchange. Likewise, when Ethereum emerged a few years later, it built on Bitcoin, extending the functionality of the cryptocurrency to programmability through smart contracts. This innovation spurred the rise of decentralized finance (DeFi), but like Bitcoin, Ethereum’s native token, Ethereum (ETH), has suffered from huge price swings.

Stablecoins first emerged in 2014 and combine the technical advantages of blockchain (such as transparency, efficiency and programmability) with the financial stability needed for widespread adoption. By solving the problem of cryptocurrency price volatility, stablecoins unlock new use cases beyond trading and speculation, attracting a wide range of cryptocurrency users (both retail and institutional).

Types of Stablecoins

Stablecoins maintain their value through a variety of mechanisms designed to ensure price stability.

Fiat-pegged stablecoins

Fiat-pegged stablecoins are by far the most popular type of stablecoin, with their value pegged 1:1 to traditional currencies, including the U.S. dollar and the euro (EUR) is the most common benchmark. The stability of these stablecoins is derived from reserves held in fiat currency or equivalent assets, which act as collateral.Collateral. Examples include Tether (USDT) and USD Coin (USDC), which are pegged to the U.S. dollar, and Stasis Euro (EURS), which is pegged to the euro.

Commodity-pegged stablecoins

Commodity-pegged stablecoins are tied to the value of a physical asset such as gold, silver, or other tangible commodities. These stablecoins allow users to gain access to commodity investment opportunities without directly owning the commodity. For example, PAX Gold (PAXG) is a stablecoin backed by gold reserves, where each token represents one troy ounce of gold stored in a secure vault. Another example is Tether Gold (XAUT), which also offers stability backed by gold.

Cryptocurrency-backed stablecoins

Cryptocurrency-backed stablecoins are backed by reserves of other cryptocurrencies. These stablecoins typically use overcollateralization (i.e., the value of assets held in reserves is greater than the pegged value) to mitigate the inherent volatility of their underlying assets. For example, Dai (DAI) is backed by cryptocurrencies such as ETH and is maintained through a smart contract system within the MakerDAO protocol. Users deposit collateral to mint Dai, ensuring its stability despite fluctuations in the collateralized cryptocurrency.

US Treasury-Backed Stablecoins

US Treasury-backed stablecoins, such as Ondo’s USDY and Hashnote’s USYC, differ from traditional fiat-backed stablecoins that are backed by cash reserves or liquid assets. Backed by U.S. Treasuries and repurchase agreements, they provide income directly to holders, essentially acting as tokenized money market funds and attracting investors seeking safety, passive income, and regulatory consistency.

Algorithmic Stablecoins

Algorithmic stablecoins maintain their value through a programmed mechanism that adjusts supply based on market demand without relying on direct collateral. Examples of algorithmic stablecoins include Ampleforth (AMPL), which dynamically adjusts its supply to stabilize price, and Frax (FRAX), a partially algorithmic stablecoin that combines collateral with algorithmic adjustments. Ethena’s USDe is a synthetic USD-pegged stablecoin that uses crypto assets and automatic hedging to maintain its USD value without the need for direct fiat currency holdings. While these models are innovative, they face challenges in maintaining long-term stability, as seen with the collapse of TerraUSD (UST) in 2022, which highlighted the risks associated with purely algorithmic stabilization mechanisms.

Stablecoins in the Cryptocurrency Market

Beyond the realm of speculation, stablecoins play an important role in the cryptocurrency market, providing a reliable medium of exchange, a store of value, and a bridge between TradFi and cryptocurrencies . As important liquidity providers, stablecoins underpin much of the activity in decentralized finance (DeFi), centralized exchanges (CEX) and cross-border payments.

As we can see below, the stablecoin market has matured globally, replacing BTC as the asset of choice for daily transactions.

Regions such as Latin America and sub-Saharan Africa are embracing stablecoins as a hedge against local currency instability, providing a more reliable means of trading and preserving value. In these regions, retail adoption of stablecoins is primarily due to their use for low-cost remittances, safe savings in areas with volatile currencies, and access to DeFi services such as lending and staking.

While stablecoins are growing in popularity among institutions, much of their growth is driven by transfers under $1 million — our benchmark for non-institutional activity — which we report in the annual This was researched in the Cryptocurrency Geography report. Below, we examine the growth in retail and professional-scale stablecoin transfers between July 2023 and June 2024 compared to the same period last year.

Latin America and sub-Saharan Africa are the regions with the fastest growth in stablecoin transfers at both retail and professional scale, with year-over-year growth of more than 40%. East Asia and Eastern Europe followed, with year-on-year growth of 32% and 29% respectively.

At the same time, retail stablecoin activity has grown significantly in markets such as North America and Western Europe, but at a slower pace, likely due to strong local financial infrastructure, despite the growing presence of institutional investors in these regions Locally adopt stablecoins for liquidity management, settlement and entry into cryptocurrencies. Notably, Western Europe is home to the world’s second-largest merchant services market, with the UK leading the region with 58.4% year-over-year growth. Stablecoins dominate these services, consistently accounting for 60-80% of the market every quarter, as shown in the chart below.

In the Middle East and North Africa, stablecoins and altcoins have taken a larger market share, surpassing traditional dominant assets such as BTC and ETH, especially in Turkey, Saudi Arabia and UAE.

It is worth noting that Türkiye’s stablecoin trading volume as a proportion of GDP is also far ahead of the world.

In East Asia, interest in stablecoins from potential issuers surged after Hong Kong launched its stablecoin sandbox. Upcoming stablecoin regulation will pave the way for stablecoins to be listed on retail exchanges, which could provide a boost to Hong Kong’s web3 ambitions.

In Central and South Asia and Oceania, stablecoins are widely used for cross-border trade and remittances, bypassing the challenges of traditional banking. Singapore and others have enhanced people’s confidence in stablecoins through regulatory frameworks, making stablecoins an important tool for retail and institutional users.

Global Stablecoins and Regulation

Stablecoins have become a priority for regulators around the world as they are rapidly adopted in the global financial system and play an increasingly important role in a variety of use cases. and regulators are grappling with the challenge of creating a framework that encourages innovation while ensuringConsumer protection, financial stability and compliance with anti-money laundering and counter-terrorism financing (AML/CFT) standards.

European Union (EU)

The European Union (EU) has launched Market Regulation in Crypto-Assets (MiCA), which aims to create a unified crypto-asset framework for crypto-asset issuers and service providers (including stablecoins) in the EU . MiCA represents a significant shift from anti-money laundering-focused regulation (introduced by the Fifth Anti-Money Laundering Directive) to a comprehensive regulatory framework establishing prudential and conduct obligations. MiCA focuses on strengthening consumer protection and ensuring market integrity and financial stability. MiCA’s stablecoin framework comes into effect on June 30, 2024, while regulations governing cryptoasset service providers (CASPs) will come into effect on December 20, 2024. While MiCA is a European regulation that applies to all 27 EU member states, the responsibility for licensing and supervising issuers and CASPs lies with the respective authorities.

MiCA has established two different types of stablecoins: (i) Asset-Referenced Tokens (ART), designed to maintain a stable value by reference to another value or right, or a combination of both , including one or more official currencies, commodities or crypto-assets; (ii) Electronic Money Tokens (EMT), designed to maintain a stable value by reference to the value of an official currency, such as the Euro or the US Dollar. ART and EMT issuers in the EU must obtain appropriate MiCA licenses, including publishing a detailed white paper, and adhere to strict rules regarding governance, reserve asset management and redemption rights.

EMT (considered both a cryptoasset and a fund) is a means of payment, while ART is considered a means of trading, requiring issuers to report trading activity in greater detail. In addition, ART may be subject to distribution restrictions. Major stablecoins, so-called “major” stablecoins, face stricter regulation, including higher capital requirements and reserve asset obligations, and are regulated directly by the European Banking Authority (EBA), rather than by regulators. While MiCA has the potential to become a global standard, challenges such as unclear implementation and overlapping classifications serve as reminders that additional guidance is needed to ensure smooth implementation and adoption.

Singapore

The Monetary Authority of Singapore (MAS) has finalized the country’s stablecoin regulatory framework, focusing on single-currency stablecoins (SCS) pegged to the Singapore dollar or any G10 currency in circulation in Singapore. The framework focuses on value stability, capital adequacy, redemptions and disclosures to ensure prudential soundness and consumer protection. Stablecoin issuers that meet all requirements of the framework can apply to be recognized as “MAS-regulated stablecoins.”

Hong Kong

Hong Kong is a special administrative region with a different legal and regulatory framework from mainland China. This separation enables Hong Kong to develop progressive regulation around stablecoins and other crypto-assets. Hong Kong Monetary Authority (HKMA)A regulatory framework has been developed for stablecoin issuers, acknowledging the rapid development of the digital currency landscape. Even as the legislation nears completion, the HKMA has launched a sandbox to enable industry stakeholders with compelling use cases to develop and test their business models, facilitating two-way discussions on regulation and risk management. In July 2024, three projects were included in the sandbox.

Japan

Japan is one of the first countries in the world to establish a stable currency regulatory framework. The framework places a strong emphasis on stability and oversight, allowing banks, trust companies and funds transfer service providers to issue fiat-backed stablecoins under strict reserve requirements. Large companies such as Mitsubishi UFJ Financial Group (MUFG) are reportedly exploring stablecoin opportunities, but the market is still in its infancy, with no stablecoins listed on local exchanges or electronic payment instrument service providers (EPISPs) registered. Recently, Japan’s Financial Services Agency is reviewing stablecoin rules and taking into account international experience.

United States

The regulation of stablecoins in the United States is still in progress, and there is great uncertainty and controversy. While stablecoins such as USDC and USDT have been widely used in payments and financial services, the lack of a comprehensive regulatory framework poses challenges for both issuers and users. Initiatives to address the issue include proposed legislation such as the Stablecoin Act introduced by the House Financial Services Committee in 2023, which seeks to establish clear rules for issuers regarding reserves, transparency and anti-money laundering (AML) compliance.

Major Stablecoin Issuers

While there are hundreds of stablecoins currently in circulation, the majority are issued by Tether, followed by Circle. Other issuers, although with smaller market shares, are actively changing the stablecoin landscape.

Tether (UDST)

Tether (USDT) is the largest stablecoin by market capitalization, accounting for the vast majority of stablecoin supply and providing liquidity to many blockchains. Tether’s reserves and financial transparency have been under scrutiny, but the company pointed to audits and market stress tests as evidence of its solid position. Tether holds nearly $100 billion in U.S. Treasury securities, with the majority of its assets managed by Cantor Fitzgerald, making its reserve assets comparable to those of major Tether. Tether continues to expand its product offerings to include UAE dirham-backed tokens and gold-backed stablecoins, focusing on markets where these assets provide tangible value.

Circle (USDC)

Circle issues USDC, the second largest stablecoin by market capitalization. USDC is known for its transparency, with its reserves certified every week. Reserves are held in the form of cash and short-term U.S. Treasury securities, providing users with a high level of transparency and assurance.

Paxos

Paxos issues Pax Dollar (USDP) and provides stability for PayPalCoin PayPal USD (PYUSD) and other stablecoin projects around the world provide infrastructure. Paxos emphasizes transparency and trust, adhering to portfolio management guidelines and issuing monthly assurance reports to verify reserves.

PayPal (PYUSD)

PayPal has entered the stablecoin market with PayPal USD (PYUSD), issued in partnership with Paxos. PYUSD is designed for payments, is backed by a Paxos-managed reserve, and provides regular transparency reports to the public.

Use Cases for Stablecoins

Stablecoins, once primarily used for cryptocurrency trading, have become versatile tools for everyday use cases, providing broad utility to the crypto-native ecosystem and TradFi.

Access to DeFi

Stablecoins are the backbone of many DeFi protocols, facilitating lending and yield farming. They have no price fluctuations and are ideal for liquidity pools to reduce impermanent losses and maintain the efficiency of decentralized exchanges (DEX). Stablecoins can also enable global financial services, allowing users in economically unstable regions to participate in DeFi markets without having to suffer the effects of local currency fluctuations.

Payments and Peer-to-Peer (P2P) Transactions

Stablecoins are increasingly used for everyday payments and P2P transfers. Their ability to process transactions quickly and cost-effectively, often with minimal fees, makes them an attractive option for users compared to traditional banking systems. In P2P transactions, stablecoins provide individuals with a simple and secure way to exchange value without the need for an intermediary. This is particularly valuable in areas without access to reliable banking systems.

Cross-border transactions and remittances

Cross-border payments and remittances are one of the most transformative use cases for stablecoins. They offer a faster and cheaper alternative to traditional money transfer services, which often involve high fees and slow processing times. Migrant workers (often unbanked or lacking banking services) use stablecoins to send money home, and businesses use them to settle international invoices. Stablecoins offer a solution that can bypass the inefficiencies of the traditional financial system, enhance financial inclusion and reduce friction in cross-border transactions.

For example, sending $200 from sub-Saharan Africa using stablecoins is approximately 60% cheaper compared to traditional fiat-based remittance methods, as shown below.

Foreign Exchange (FX) and Trade Finance

For FX and trade finance, stablecoins enable businesses to transact in a globally accepted digital currency, reducing reliance on intermediaries and mitigating Risks related to exchange rate fluctuations. Stablecoins simplify transactions for importers and exporters, providing a stable and transparent medium for international trade, especially in areas with limited access to foreign exchange.

Storage of value in economic instability or inflation

Stablecoins have become the value of choice in areas facing economic instability or high inflationstorage. By tying their value to an asset such as the U.S. dollar, stablecoins provide a way for individuals and businesses to maintain purchasing power and protect their assets from fluctuations in local currencies. This use case is particularly valid in emerging markets, which have limited access to stable financial instruments and a strong need for direct access to the U.S. dollar.

Stablecoins often trade at a premium in regions with high inflation, reflecting users' willingness to pay for stability and faster money movement. Currency instability in emerging markets can lead to significant losses in GDP over time, further driving demand for stablecoins.

Illegal Activities in the Stablecoin Ecosystem

While stablecoins have gained significant attention for their legitimate use cases, they have also been exploited by high-risk and illegal actors to conduct a variety of illicit activities. Their stability and global accessibility make them an attractive tool for bad actors trying to circumvent financial controls and avoid detection—although the inherent transparency and traceability of blockchains often make this a poor choice. choice.

While we estimate that less than 1% of on-chain transactions are illegal, stablecoins have been used for activities such as money laundering, fraud, and sanctions evasion. Due to their relatively high liquidity and high acceptance on cryptocurrency exchanges, stablecoins can be used to quickly transfer value across borders without relying on traditional financial institutions.

Using Stablecoins to Evade Sanctions

The practice of evading sanctions through stablecoins and other cryptocurrencies has become increasingly prominent as Russia and others explore alternatives to bypass Western financial restrictions. Stablecoins may be used by entities in sanctioned regions to facilitate international trade or transfer funds to entities in non-sanctioned jurisdictions. These campaigns exploit the anonymous nature of blockchain transactions to obscure the source of funds, often through a complex network of wallets and exchanges. While large-scale sanctions evasion remains challenging due to cryptocurrency market liquidity constraints and the transparency of blockchain transactions, smaller-scale activities such as the transfer of funds from sanctioned entities and public figures bring security and compliance risk.

How Stablecoin Issuers Cooperate with Law Enforcement

Stablecoin issuers have increased their efforts to combat financial crime and support global law enforcement and regulatory investigations. Issuers such as Tether work closely with global law enforcement agencies, financial crime units and regulators such as the Financial Crimes Enforcement Network (FinCEN), using Chainalysis to monitor transactions in real time and identify suspicious activity. Most centralized stablecoin issuers also have the power to freeze or permanently delete or “destroy” tokens in wallets associated with confirmed criminal activity, thereby stopping illegal transactions and helping to recover stolen funds.

Which stablecoin issuers can destroy and freeze tokens?

Stablecoins issued by centralized services, such as USDC (Circle), USDT (Tether), BUSD (Paxos) and TUSD (Techteryx), can be frozen or destroyed by their issuers to comply with regulations or prevent illegal activities. In contrast, go to ChinaCentralized stablecoins, such as DAI (MakerDAO), FRAX (Frax Finance) and LUSD (Liquity), are managed by protocols and smart contracts and therefore are not subject to freezing or destruction by any centralized institution. The balance between compliance and user autonomy is an important consideration for decentralized technologies.

The Future of Stablecoins

Stablecoins not only represent a critical intersection between blockchain and traditional financial systems, but also open up new avenues for economic participation. Adoption continues to grow across regions and industries, supported by regulatory advances designed to provide clarity and build trust between users and institutions. As frameworks such as MiCA in Europe and guidelines from markets such as Singapore and Japan take shape, stablecoins will gain further legitimacy and integrate into the mainstream financial system.

The future of stablecoins is not without challenges. Regulatory uncertainty in major markets, exploitation by illegal actors, and reserve transparency issues persist, and if not effectively addressed, these issues could undermine market confidence and hinder wider adoption. Stablecoins, on the other hand, offer huge opportunities for financial inclusion, especially in underserved areas, and are actively revolutionizing payments, remittances, and trade finance by reducing costs and increasing speed. The role of stablecoins in creating new financial products and streamlining cross-border trade further illustrates their transformative potential.

As regulations and technology continue to advance, stablecoins have the potential to unlock new opportunities, narrow the gap between economies and enable greater global financial connectivity. Their continued development will play a central role in defining the future of cryptocurrencies and TradFi.