STABLECOINS DEFINED
Stablecoins are digital assets designed to maintain a stable value by being pegged one-to-one to an underlying asset, such as a fiat currency like the U.S. dollar. Reserve assets held by the stablecoin issuer support this peg.
For now, stablecoins are typically issued by non-bank entities and backed by reserves like cash or highly liquid securities, although regulatory developments may enable bank-affiliated entities to issue stablecoins. Two issuers, Tether (USDT) and Circle (USDC), currently dominate the market. The vast majority of stablecoins are denominated in USD.
Every transaction is logged on a blockchain, which is a shared digital ledger. Designed to maintain a stable value, stablecoins stand apart from cryptocurrencies like Bitcoin or Ethereum, which fluctuate widely in price.
REGULATORY LANDSCAPE
Regulations affecting the stablecoin space continue to develop. In the U.S., the GENIUS Act of 2025 created the first federal framework for stablecoins. The act requires issuers to operate under regulated standards — lending legitimacy to stablecoins as a payment method and form of liquidity — and allows permitted payment stablecoin issuers (PPSIs) to issue payment stablecoins, which are stablecoins that can be used for payment or settlement.
Outside the U.S., regulation is advancing quickly. In 2023, the European Union introduced rules for stablecoins through Regulation on Markets in Crypto-Assets (MiCA). MiCA sets legal parameters for stablecoin payments and requires issuers to partner with licensed financial institutions. In the UK, stablecoin regulations are in development and expected to be finalized in 2026. Rules and regulations are already in place in Hong Kong, Japan and Singapore, where about 60% of stablecoin payments activity originates, according to McKinsey & Company.1
HOW THEY WORK
Stablecoins are “tokenized” representations of real-world assets. When issued, a digital token is created, and corresponding reserves are deposited that match its value.
The process unfolds as follows:
- The stablecoin issuer defines the legal/regulatory setup, reserve structure, smart contract and token design and obtains government/regulatory approval, triggering ongoing regulatory supervision.
- Institutional clients and exchanges (such as Coinbase) deposit fiat funds with the issuer.
- The issuer allocates funds into reserve assets.
- Tokens are minted one-to-one against reserves.
- Tokens are distributed to wallets or exchanges.
Throughout the process, regulators and independent auditors perform regulatory and legal checks, including audits, disclosures and compliance monitoring.