The rapid growth of stablecoins has attracted significant attention from policymakers and financial regulators worldwide, as reflected in the publication of a recent departmental paper from the International Monetary Fund. Drawing on the findings of the paper and associated insights, we explore the key features of the stablecoin landscape.
Background
The 'State of Crypto 2025 report', published by a16z crypto in October 2025, underlined the exponential growth in stablecoins, with transaction volumes across cryptocurrency exchanges and decentralised finance (DeFi) platforms now reaching the levels of activity of the world's largest payment networks. In the previous 12 months, stablecoins processed US$46 trillion in annual transactions – a 106% increase from the previous year. The 'adjusted basis' figure (which takes account of bots and other artificial inflationary activity) is US$9 trillion.
However, while stablecoin adoption presents great opportunities, it also poses risks to financial stability, monetary policy and market integrity, along with financial crime threats.
It is therefore timely that the International Monetary Fund (IMF) published a departmental paper on 4 December 2025, entitled 'Understanding Stablecoins', which examines the key characteristics of stablecoins, their potential applications, associated risks and the emerging regulatory responses across major jurisdictions (IMF Paper).
What are stablecoins?
Stablecoins are a category of digital assets designed to maintain price stability relative to a specified asset, or basket of assets. Their appeal lies in combining the technological benefits of blockchain-based tokens – such as programmability, rapid settlement, and borderless transferability – with the price predictability associated with traditional currencies.
Stablecoins can be grouped into a number of sub-categories based on their stabilisation mechanisms:
| Stablecoin type |
Stabilisation mechanism |
Reserve assets |
Key characteristics |
| Fiat-backed |
Direct currency reserves |
Fiat currency deposits, short-term government securities |
Most common; theoretically lowest risk; dependent on reserve management |
| Asset-backed |
Commodity or securities reserves |
Precious metals, bonds, diversified portfolios |
Value linked to underlying asset performance; complexity in valuation |
| Algorithmic |
Automated supply adjustment |
Minimal or no reserves |
Relies on market mechanisms; highest failure risk; several high-profile collapses including the collapse of TerraUSD in March 2022 |
| Hybrid |
Combination of mechanisms |
Mixed reserve types with algorithmic elements |
Balances stability approaches; variable complexity |
Although stablecoins have been in issuance for over a decade (with the first stablecoins emerging in 2014), it is only relatively recently that their popularity has soared. Since 2024, stablecoins' issuance has doubled, reaching around US$300 billion in September 2025. Today the majority of stablecoins are denominated in US dollars; the two largest stablecoins (USDT (issued by Tether) and USDC (issued by Circle)) account for around 90 per cent of the market.
The IMF Paper places the phenomenon of stablecoins within the context of the tokenisation of financial assets and money, and explains the relationship between stablecoins, traditional and tokenised forms of money and electronic money (See Table 1 on p. 12 of the IMF Paper).
Current applications and market development
As the IMF Paper shows, there are a range of use cases for stablecoins with varying levels of adoption to date (summarised in the table below). Beyond trading, stablecoins increasingly support cross-border payments and remittances. Their ability to settle transactions rapidly and at relatively low cost—particularly compared to traditional correspondent banking arrangements—has attracted users seeking efficient international money transfers. Some jurisdictions with currency instability or capital controls have witnessed growing adoption as individuals seek alternatives for preserving value and conducting transactions.
| Use case |
Description |
Current adoption level |
Primary users |
| Crypto trading |
Facilitating movement between cryptoassets |
Very high |
Cryptocurrency exchanges, traders |
| Cross-border payments |
International money transfers |
Growing |
Remittance users, businesses |
| Decentralised finance |
Collateral and denomination for DeFi protocols |
High |
DeFi platforms, yield seekers |
| Commercial payments |
Merchant acceptance for goods/services |
Nascent |
Payment processors, select merchants |
| Store of value |
Preserving wealth in unstable economies |
Moderate |
Individuals in high-inflation jurisdictions |
Potential benefits
Proponents of stablecoins have identified several potential advantages that could enhance the delivery of financial services.
| Benefit |
Specific advantages |
Potential impact |
| Settlement speed |
Near-instantaneous transaction finality; 24/7 operation |
Significant improvement over multi-day clearing cycles |
| Cost efficiency |
Reduced intermediaries; lower transaction fees |
Particularly beneficial for cross-border payments and remittances |
| Programmability |
Smart contract integration; automated compliance |
Enhanced automation of complex financial arrangements |
| Financial inclusion |
Access for underbanked populations; mobile-based solutions |
Expansion of financial services to underserved markets |
| Treasury management |
Unified digital currency across jurisdictions |
Simplified international operations; reduced FX costs |
Risks and challenges
Despite these potential benefits, stablecoins present substantial risks that regulatory authorities increasingly recognise as requiring robust policy responses.
| Risk category |
Specific threats |
| Financial stability |
Systemic importance; contagion channels; reserve fire sales. The interconnectedness between major stablecoin issuers and banks was highlighted when Silicon Valley Bank (SVB) collapsed in March 2023. Circle, the issuer of USDC, had approximately US$3.3 billion of its reserve assets in SVB. SVB's failure led to USDC fire sales, which in turn led to the "depegging" of the USDC, falling to around US$0.88 until the Federal Deposit Insurance Cooperation guaranteed all deposits held at SVB. |
| Run risk |
Mass redemption events; inadequate reserves |
| Monetary policy |
Weakened transmission; currency substitution. If substantial economic activity shifts to stablecoins pegged to foreign currencies, domestic monetary authorities might find their policy tools less effective. |
| Operational risks |
Operational failures; cyber vulnerabilities; errors in smart contracts |
| Consumer protection |
Unclear redemption rights; lack of deposit insurance |
| Financial crime |
Money laundering; sanctions evasion (see the discussion on pages 29-30 of the 36-38 of the IMF Paper). |
| Market integrity |
Manipulation; conflicts of interest |
Emerging regulatory frameworks
Over the past few years, regulatory authorities worldwide have been developing regimes to govern stablecoin arrangements that seek to recognise these risks and challenges. According to a joint Financial Stability Board (FSB) and IMF status report published in October 2024, entitled 'G20 Crypto-Asset Policy Implementation Roadmap', almost all FSB member jurisdictions have plans to establish regulatory regimes for stablecoins, whether through new or revised regulatory frameworks. Among non-FSB members, stablecoin regulation is also being considered although, as the IMF Paper notes, implementation is particularly challenging in emerging markets and developing economies, along with lower-income countries, with a number of obstacles identified including poor data, complex legislative or regulatory processes, capacity gaps in both the private and public sectors, and lack of consumer awareness.
The table below, which is a reproduction of Table 2 on page 41 of the IMF Paper, provides a snapshot of the regulatory landscape, looking at some of the key elements of the stablecoin regulatory frameworks in Japan, the European Union, the United States, and the UK (see the IMF Paper for additional commentary).
Selected requirements of stablecoin regulations
|
Eligible reserve assets |
Redemption rights and restrictions |
Prudential requirements |
Application to foreign-issued stablecoins |
| Japan |
50 per cent of reserves in short-term government bonds, redeemable time deposits; remainder must be in demand deposits |
Redemption without delay |
Fixed minimum |
Service provider needs to secure the reserves for Japanese holders |
| European Union |
30 per cent (60 per cent for significant issuers) minimum deposits in credit institutions |
Redemption with no delay at par without fees until the recovery plan is activated |
Risk based + supervisory discretion |
A separate legal entity and reserve assets in EU |
| United States |
Cash, demand deposits, money standing to the credit of an account with a Federal Reserve Bank, Treasury bills, Treasury reverse repo |
Timely redemption with clear policies |
Risk-based |
Reserves in a US financial institution sufficient to meet liquidity demands of US holders |
| United Kingdom (proposed) |
'Core backing assets', which includes short-term cash deposits (minimum five per cent) and government debts |
Redemption at par with limiting the max fees at the latest by the end of the next business day |
Risk based |
Under consultation |
| |
For systemic stablecoins, the UK proposes at least 40 per cent are held as deposits at the central bank with up to 60 per cent held in short-term sterling-denominated UK government debt securities |
For systemic stablecoins, redemption at par by the end of day on which a valid redemption request is made and in real time wherever possible, while fees should be proportionate to costs incurred and free of charge where possible |
|
|
While regulatory frameworks draw on policy recommendations from the IMF, the FSB and international standard-setting bodies such as the International Organization of Securities Commissions, the Basel Committee on Banking Supervision, the Committee on Payments and Market Infrastructures, as well as the Financial Action Task Force, differing approaches are being taken to the design of regulatory frameworks for stablecoins.
Main similarities in regulatory approaches
Common features include:
- an authorisation regime requiring issuers to be legal entities
- requiring full 1:1 backing of stablecoins with high-quality liquid assets in the denomination of the stablecoin (reserves)
- mandating segregation and safeguarding of these reserves from issuers’ creditors
- ensuring holders have statutory redemption rights
- prohibiting interest payments to the holders of stablecoins.
Key differences in regulatory approaches
It is clear from a comparison of different countries that regulators have taken varying approaches in several areas:
- Who can issue stablecoins: Some countries only allow non-banks to issue stablecoins, whilst others permit commercial banks to do so.
- Which issuers are covered: Some frameworks apply to foreign stablecoin issuers if they target local consumers or reference the local currency. Others only cover issuers registered domestically or subject to equivalent regulation.
- How redemption works: Requirements differ on timing, fees, and enforcement. Some countries require same-day redemption with no fees, while others allow issuers to charge fees or do not specify timeframes.
- Protection for holders: Some countries require issuers to keep reserves separate from their own assets and explicitly give holders priority claims if the issuer fails. Others only require segregation without the explicit priority right.
- Rules for systemically important issuers: Some regimes impose additional, stricter requirements on issuers considered systemically important.
The impact of these differences on financial stability and cross-border cooperation between regulators remains to be seen.
Conclusion
Stablecoins occupy an increasingly important position at the intersection of traditional finance and digital innovation. Their potential to enhance payment efficiency, reduce costs, and expand financial access is substantial but must be weighed carefully against the risk they pose to financial stability, monetary policy, and market integrity, as well as their impact on consumer protection and financial crime risks.
As stablecoins become more integrated into mainstream financial services, compliance professionals in banks, payment providers and other financial institutions will need to gain greater understanding of the underlying concepts that underpin them, the associated risks, along with the emerging regulatory regimes. The valuable research and analysis in the IMF Paper should greatly assist them in achieving this and will serve as a useful springboard for building appropriate compliance and risk assessment frameworks and programmes.
This article has been published in www.compliancemonitor.com and www.i-law.com
