Cross border payments generate over $23.5trillion of transactions p.a., so the potential for stablecoins as an alternative mechanism for making payments is huge. Little wonder we are seeing more and more institutional interest in stablecoins, with a recent example being three of Japan’s’ biggest banks using stablecoins alongside SWIFT. However, there is a lack of regulatory clarity around digital money in many countries and in some countries, such as the UK, regulated companies are not even able to issue stablecoins, leaving the market open for overseas unregulated operators. Yet Andrew Bailey, Governor at the Bank of England, is cognisant for the need to embrace technology: “harnessing digital technology to improve strikes me as having real potential, say in areas like solving late payment for firms by enabling automatic release of funds when goods are delivered”. Therefore, if we were to look at the ideal characteristics for a stablecoin, it would arguably have the following features:
· pays interest on deposits
· be backed by very secure assets (high quality money market funds or central bank deposits) - not commercial bank balance sheets due to sustainability concerns and/or potentially commercial bank balance sheet risk.
· enables 24/7 payments
· offers programmability
Arguably, the most important feature above is the ability to offer programmability, so helping to automate payments. Think of it as a way of offering ‘conditional escrow’. Unfortunately, stablecoins which are typically being promoted today do not enjoy all of these characteristics and so it is understandable that traditional regulated firms are cautious of using them and regulators equally have their reservations.
Stablecoins have undergone considerable evolution since their inception. Launched in 2014, the first stablecoin was BitUSD - in 2014, Tether was also launched and is currently the largest stablecoin. Notably, because it does not pay interest to customers, it has succeeded in generating $13billion of profit in 2024 - as a comparison, Goldman Sachs is reported to make $14billion profit on turnover of $53.5billion in 2024. Essentially, stablecoins were initially established as a cryptocurrency to offer less volatility than the likes of Bitcoin, Ethereum, etc, and they were dominated by fiat-collateralised models. Since then, the type of stablecoin has expanded to include algorithmic and hybrid stablecoins, each addressing specific challenges and offering distinct benefits. An example of an alternative stablecoin is the world’s 5th biggest stablecoin, the USDe from Ethena - launched less than a year agon and already valued at over $6billion offering a yield of 27% p.a. It’s objective is to track to track the US $ and be a “synthetic $” but with an alternative investment strategy, since it aims to be the “first censorship-resistant, scalable and stable crypto-native solution for money achieved by delta-hedging staked Ethereum collateral.”
Cross border payments v using a stablecoin
Source: Teamblockchain/Nilio
Types of stablecoins:
· Fiat-collateralised stablecoins, such as USDC and USDT, continue to lead the market. These are backed by reserves in fiat currencies or short-term securities, ensuring their value remains stable. In 2025, transparency and real-time audits have become common, enhancing trust and ensuring compliance with regulatory standards.
· Commodity-backed stablecoins (pegged to assets such gold) have emerged as alternatives that offer a store of value, particularly in times of economic volatility. Tokenisation of commodities has strengthened the appeal of these stablecoins, offering investors an innovative way to manage assets.
· Algorithmic stablecoins, which use smart contracts and algorithms to maintain price stability, faced challenges in their early stages. However, by 2025, more robust models have emerged, with improved resilience against market fluctuations. Hybrid stablecoins, combining both collateralised and algorithmic features, have gained traction particularly in decentralised finance (DeFi). These models balance the benefits of both approaches, offering greater scalability and stability.
Furthermore, the stablecoin ecosystem has embraced advancements in several key areas, including blockchain scalability, privacy and interoperability. Layer 2 solutions have enhanced the scalability of stablecoins, reducing transaction costs and increasing efficiency. Privacy-preserving technologies, such as zero-knowledge proofs, are now being integrated into stablecoin transactions, allowing for secure and confidential transfers without compromising regulatory compliance. Additionally, cross-chain compatibility has been developed, enabling stablecoins to function seamlessly across multiple blockchains, further boosting their utility in DeFi and global payment systems. Unsurprisingly, as stablecoins have grown in prominence, then regulatory clarity has become a crucial factor in their widespread adoption. In 2025, governments and international regulatory bodies have established frameworks to address stablecoin issuance, reserve management and consumer protection. These frameworks now categorise stablecoins based on their underlying assets (whether fiat, commodity or algorithmic) and their intended use, such as payments, investments or DeFi applications. There is growing pressure for stablecoin issuers to undergo real-time audits and ensure robust reserve backing; this transparency helps reduce systemic risks and ensures that the value of stablecoins remains secure. Issuers must equally comply with licensing, anti-money laundering (AML) and know-your-customer (KYC) regulations, further ensuring consumer protection. In addition, the rise of central bank digital currencies (CBDCs) has influenced the regulatory landscape - stablecoins and CBDCs are seen as complementary, with stablecoins acting as a bridge between decentralised systems and central bank-issued currencies. Governments are working on interoperability standards to facilitate smooth interactions between stablecoins and CBDCs, ensuring regulatory consistency across borders.
However, regulators continue to address several risks, such as market manipulation, systemic instability and consumer protection. Measures are also being implemented to ensure clear guidelines for taxation and reporting of stablecoin transactions - stablecoins have become integral to various sectors, including DeFi, cross-border payments, institutional finance and financial inclusion. For remittances, workers abroad can use stablecoins to send money home instantly and affordably, bypassing traditional banking fees. They also streamline international business-to-business payments by providing fast, transparent and cost-effective settlement. In addition, institutional adoption of stablecoins has grown with financial institutions and enterprises using them for operational efficiency and investment - companies leverage stablecoins for treasury management and to hedge against currency volatility. Retailers and e-commerce platforms have also begun accepting stablecoins, hence increasing payment flexibility. Additionally, institutional participation in DeFi has surged, with hedge funds and asset managers using stablecoins for yield generation and portfolio diversification. In decentralised finance, stablecoins are crucial for enabling lending, borrowing and trading activities - they provide liquidity to decentralised exchanges (DEXs) and liquidity pools, enabling low-slippage transactions. Additionally, stablecoins underpin yield farming and staking where users can earn rewards by providing liquidity or staking assets in DeFi protocols. These coins also support derivatives and synthetic assets, creating new financial instruments within DeFi ecosystems.
Stablecoins have also expanded access to financial services in regions with limited banking infrastructure. In inflation-prone economies such as in Latin America, individuals use stablecoins to hedge against currency devaluation, providing a stable store of value. Stablecoins also enable microfinance and savings programs, as well as machine to machine payments, so contributing to financial inclusion and economic empowerment.
However, whilst stablecoins have seen significant progress, several challenges remain. Scalability and efficiency are critical concerns because the growing adoption of stablecoins places increased demand on blockchain networks. Ensuring that these networks can handle high transaction volumes whilst maintaining low fees is essential for continued growth, although, given the volumes stablecoins have been processing, this appears to be less and less of a concern. Education and awareness will also play a key role in the adoption of stablecoins especially for regulators who often associate stablecoins with nefarious actors in the cryptocurrency market. The result of this is that in some jurisdictions the technology (i.e. blockchains and DLTs) that powers stablecoins is being regulated as opposed to the commercial outcome. Hence, it is imperative that businesses and regulators understand the benefits of stablecoins and how they can be integrated into existing financial systems. Lastly, developing universal standards and interoperability protocols will be crucial to ensuring that stablecoins integrate seamlessly with both traditional and digital financial systems and interoperability will be key to supporting global adoption and creating a unified digital financial ecosystem.
Undoubtedly, stablecoins have become an integral part of the evolving digital currency landscape. With advancements in technology, regulatory frameworks and adoption trends, stablecoins are poised to play an increasingly important role in the global financial ecosystem. And, as they continue to bridge the gap between traditional financial systems and the decentralised world of cryptocurrencies, their influence will only grow. So, although challenges such as scalability, regulation and environmental impact remain, the future of stablecoins looks promising, with innovations and cross-industry collaboration driving their continued evolution.
This article first appeared in Digital Bytes (11th of February, 2025), a weekly newsletter by Jonny Fry of Team Blockchain.