The great debate: are stablecoins really stable?

They promise crypto speed with cash stability, but can stablecoins really offer the best of both worlds?

Stablecoins have emerged as one of the most promising – and misunderstood – crypto innovations. Designed to combine the speed and transparency of crypto with the reliability and familiarity of fiat money, stablecoins aim to make digital payments as stable as cash.

From instant cross-border payments to real-time interbank settlement, cheaper remittances to more efficient trade financing, stablecoins could transform how digital value moves. Yet as adoption grows, so do questions about trust, regulation and how ‘stable’ stablecoins really are in a volatile market.

What are stablecoins?

Stablecoins are a class of digital currencies designed to maintain a stable value by pegging their price to a reserve asset. The main goal of stablecoins is to offer the benefits of blockchain-based transactions, such as speed, transparency and low fees, without the volatility of crypto assets such as Bitcoin or Ethereum.

Why have stablecoins grown in popularity?

Stablecoins in circulation have doubled over the last 18 months, according to McKinsey estimates. They offer near-instant settlement and thus have speed and cost advantages over traditional banking infrastructure.

The volume of stablecoin transactions has grown organically over the last four years. If that growth rate were to continue, stablecoin transactions could surpass legacy payment volumes in less than a decade, says McKinsey.

The re-election of President Donald Trump in November 2024 has signalled a friendlier policy stance towards crypto in general. The so-called GENIUS Act, a comprehensive legal framework for the issuance and regulation of payment stablecoins, passed into law in July 2025. And stablecoin usage for payments has risen 70% since, Bloomberg reports.

Various banks and financial companies are looking to issue stablecoins. This includes a group of nine European banks that have announced their intention to launch a euro-backed stablecoin, and ten major international banks that are exploring the issuance of stablecoins pegged to G7 currencies.

How stable are stablecoins?

Stablecoins, as the name suggests, are designed with stability in mind. Being pegged to a less volatile asset, such as the US dollar, euro or gold, could make them more stable than other cryptocurrencies. However, this depends on several factors.

Firstly, the specific mechanism used to maintain the peg.

There are four main types of stablecoin:

1. Fiat-collateralized stablecoins — backed by traditional currency reserves (e.g. USD Coin or USDC which is backed by the US dollar)
2. Crypto-collateralized stablecoins — backed by other cryptocurrencies (e.g. DAI)
3. Commodity-backed stablecoins — pegged to assets like gold (e.g. PAX Gold or PAXG)
4. Algorithmic stablecoins — use code and smart contracts to manage supply and maintain price stability, not real-world assets (e.g. UST, though now largely discredited)

Stablecoins backed by real-world assets, such as 1:1 against fiat currencies, are generally considered safer than those that rely on other methods. As the name suggests, algorithmic stablecoins maintain a stable price through algorithms. How this works varies but generally it involves dynamically adjusting the token supply, yet this method has proved to be more vulnerable to price fluctuations.

Secondly, a lack of clarity around reserves.

The nature of reserves and who is holding them can also impact the stability of stablecoins. Fiat-collateralized stablecoins are generally the most stable, but this depends on the make-up of reserves and the stability of the custodian.

If the issuer collateralizes the stablecoin with riskier assets instead of merely cash, this may affect stability. Similarly, if reserves are lost, stolen or mismanaged by the custodian, the stablecoin may no longer be fully backed and its value compromised.

Thirdly, the degree of market volatility.

Events in the crypto market more broadly could cause stablecoins to lose their pegs to reference assets. Examples include the TerraUSD and FTX crashes, security breaches at crypto exchanges and regulatory enforcement actions.

If investors choose to cash out their stablecoins, it could mimic a ‘bank run’ with the resulting liquidity crises, contagion risks and potential collapse of the stablecoin.

What is the regulatory position on stablecoins?

Regulation can go some way to building trust in stablecoins. That’s primarily by protecting consumers, preventing financial crime, supporting innovation and ensuring fair competition.

The challenge is that while crypto is global and cross-border by default, regulation tends to be national in scope. Differing start points, gaps and enforcement may also create regulatory arbitrage and uncertainty. However, several major jurisdictions are introducing policy and regulatory frameworks for stablecoins.

The European Union has introduced MiCA (Markets in Crypto-Assets Regulation), an EU-wide regime for crypto assets, including stablecoins. The US passed the GENIUS Act (Guiding and Establishing National Innovation for US Stablecoin Act) in July 2025 with various provisions to protect consumers and combat illicit activity. Singapore, Hong Kong and Japan among other jurisdictions also have dedicated regulatory frameworks for stablecoins.

How do businesses position themselves to take advantage of the stablecoin opportunity?

As infrastructure improves and regulation catches up, stablecoins could become a standard payment rail alongside traditional systems. The ability to pay with stablecoins, settle quickly, and tap into decentralized finance gives forward-thinking businesses an edge.

How businesses respond is similar with to any other type of technology and begins with the fundamentals. Businesses must be able to identify a strategy and business case for stablecoin use. And understand the specific use cases that apply to their own value chain.

Businesses are advised to engage legal and risk colleagues early and map the regulatory requirements of their proposition and the markets in which they operate.

They must then choose the right partners, for example for issuance, custody, payment and blockchain. Plus, consider how they innovate and take advantage of developments, particularly around programmable payments and tokenization.