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Perspective by: Merav Ozair, PhD<\/strong><\/em><\/p>\n Recently, stablecoins have proliferated \u2014 now prominently led by “traditional” financial entities. Bank of America and Standard Chartered are contemplating the launch of their own stablecoin, aligning with JPMorgan, which introduced its stablecoin, JPM Coin \u2014 now rebranded as Kinexys Digital Payments \u2014 to streamline transactions with their institutional clientele on their blockchain system, Kinexys (formerly Onyx).<\/p>\n Mastercard aims to integrate stablecoins into the mainstream, collaborating with Bleap Finance, a cryptocurrency startup. The goal is to allow stablecoins to be spent directly on-chain \u2014 devoid of conversions or middlemen \u2014 thus merging blockchain assets with Mastercard\u2019s global payment infrastructure.<\/p>\n In early April 2025, Visa joined the Global Dollar Network (USDG) consortium for stablecoins. The firm will be the initial traditional finance entity to join this consortium. In late March 2025, NYSE parent Intercontinental Exchange (ICE) revealed its exploration of applications for utilizing USDC (USDC<\/a>) stablecoin and US Yield Coin within its derivatives exchanges, clearinghouses, data services, and other markets.<\/p>\n What has spurred this renewed enthusiasm for stablecoins?<\/p>\n Recent actions by regulatory agencies in the United States and Europe have established clearer guidelines for cryptocurrency application. In the US, Congress is examining legislation aimed at defining formal standards for stablecoins, enhancing assurance among banks and fintech firms.<\/p>\n The European Union\u2019s Markets in Crypto-Assets regulation mandates that stablecoin issuers operating in the EU comply with certain financial benchmarks, including unique reserve criteria and risk management. In the UK, financial regulators intend to hold consultations for drafting regulations governing stablecoin application, further aiding their acceptance and utilization.<\/p>\n The Trump administration’s executive order 14067<\/a>, \u201cStrengthening American Leadership in Digital Financial Technology,\u201d endorses and \u201cadvances the creation and expansion of lawful and legitimate dollar-backed stablecoins globally,\u201d while \u201cforbidding the establishment, issuance, circulation, and utilization of a CBDC within the jurisdiction of the United States.\u201d<\/p>\n This executive order, together with Trump\u2019s World Liberty Financial company launching a stablecoin called USD1, signifies that we are entering the era of stablecoins, especially those tied to the USD.<\/p>\n Is there a necessity for more stablecoins?<\/p>\n Over 200 stablecoins exist, predominantly pegged to the US dollar. Two well-established stablecoins lead this ecosystem. Tether\u2019s USDt (USDT<\/a>), the earliest stablecoin, debuted in 2014, and USDC, launched in 2018, command 65% and 28% of the stablecoin market capitalization, respectively \u2014 both are centralized and fiat-collateralized.<\/p>\n Recent: <\/strong><\/em>Crypto aimed to usurp banks; now it\u2019s evolving into them in the stablecoin struggle<\/strong><\/em><\/a><\/p>\n Securing the third position is a relatively novel entrant, USDe, initiated in February 2024, which has about 2% of the stablecoin market cap and employs an unconventional mechanism based on derivatives within the crypto domain. Although it operates on a DeFi protocol on Ethereum, it incorporates centralized traits, as centralized exchanges manage the derivative positions.<\/p>\n There are three primary models of stablecoins:<\/p>\n Centralized, fiat-collateralized: <\/strong>A centralized organization holds reserves of the assets in a bank or trust (e.g., for currency) or a vault (e.g., for gold) and issues tokens (i.e., stablecoins) that represent a claim on the underlying asset.<\/p>\n<\/li>\n Decentralized, cryptocurrency-collateralized: <\/strong>A stablecoin is underpinned by other decentralized crypto assets. An example is the MakerDAO stablecoin Dai (DAI<\/a>), which is pegged to the US dollar and embodies the attributes of decentralization. While a centralized entity oversees centralized stablecoins, no single entity governs the issuance of DAI.<\/p>\n<\/li>\n Decentralized, uncollateralized: <\/strong>This mechanism guarantees the stability of the coin\u2019s value by regulating its supply through an algorithm executed by a smart contract. In some respects, this mirrors central banks, which also do not rely on reserve assets to maintain the stability of their currency\u2019s value. The distinction is that central banks, like the Federal Reserve, publicly set a monetary policy based on understood parameters, and their position as the issuer of legal tender lends credibility to that policy.<\/p>\n<\/li>\n<\/ul>\n Stablecoins are intended to be stable. They were created to mitigate the inherent volatility associated with cryptocurrencies. To uphold their stability, stablecoins should (1) be pegged to a stable asset and (2) adhere to a mechanism that preserves the peg.<\/p>\n USDe maintains its peg to the USD through delta hedging. It employs short and long positions in futures, which yield a 27% annual return \u2014 markedly higher than the 12% annual yield of other USD-pegged stablecoins. Derivative positions are deemed risky \u2014 the higher the risk, the higher the return. Consequently, it encapsulates inherent risk due to its dependence on derivatives, which contradicts the purpose of stablecoins.\u00a0<\/p>\n Stablecoins have persisted for over a decade. Throughout this period, there were no major depegging issues apart from the incident involving Terra. The downfall of Terra was not due to a reserve issue or mechanism but was linked to actions by fraudsters and manipulators.<\/p>\n TerraUSD (UST) had a built-in arbitrage mechanism between UST and the native coin of the Terra blockchain, LUNA. To generate UST, one needed to burn LUNA.<\/p>\n To incentivize traders to burn LUNA and generate UST, the creators of the Terra blockchain offered a 19.5% yield for staking, which is crypto jargon for earning 19.5% interest on a deposit, through what they labeled as the Anchor protocol.<\/p>\n Such a high-interest rate is simply unsustainable. Someone must borrow at that rate or higher for the lender to receive 19.5% interest. This mirrors how banks generate profit \u2014 they impose high charges on borrowing (like mortgages or loans) while providing low interest on deposits (like traditional savings accounts or certificates of deposit). Analysis of the Anchor protocol in January 2022 revealed it was operating at a loss.<\/p>\n One of the claims in lawsuits against Terraform Labs’ founders alleges that the Anchor protocol was a Ponzi scheme.<\/p>\n In March 2025, Galaxy Digital reached a $200-million settlement with the New York Attorney General over accusations that the cryptocurrency investing company promoted the LUNA digital asset without revealing its interest in the token.<\/p>\n In January 2025, Do Kwon, the founder of Terra, was deemed liable for securities fraud and is facing multiple charges in the US, including fraud, wire fraud, and commodities fraud. If regulators aim to prevent future incidents like Terra, they should focus on how to thwart fraudsters and manipulators from issuing or engaging with stablecoins.<\/p>\n Most stablecoins are centralized and collateralized assets. They are governed by a company that could misuse customers’ funds or mistakenly assert that reserves entirely back a stablecoin.<\/p>\n To deter corporate misconduct, regulators must closely oversee these companies and establish regulations akin to securities laws.<\/p>\nRegulatory transparency and endorsement<\/h2>\n
The stablecoin ecosystem<\/h2>\n
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Depegging, risk, and con artists<\/h2>\n
Decentralization: Reviving the principle of Bitcoin<\/h2>\n