Stablecoins have become one of the most debated topics in contemporary financial policymaking, especially following the enactment of the GENIUS Act in the United States. Beyond the U.S.—and outside monetary jurisdictions whose exchange rate regimes and monetary policies are closely aligned with the U.S. dollar—policy responses have diverged significantly, ranging from outright bans, as in China, to the careful implementation of supportive regulatory frameworks, as seen in the European Union.
Concerns around loss of monetary sovereignty and erosion of capital controls have been among the most frequently cited arguments against stablecoins, especially where they are perceived to compete with domestic currencies (for example, heavily dollarised economy like Cambodia (Odajima and Aiba 2019)). More recently, we see increasing concerns about their use in capital flights, disintermediation of the banking system and how they could act as run amplifiers in times of crisis.
Jurisdictions may, in fact, have overestimated the risks posed by stablecoins. Any meaningful exposure to stablecoins ultimately occurs through banks and other heavily regulated intermediaries—a fact that should provide regulators with sufficient comfort to regulate them. We therefore argue that authorities should proactively establish appropriate regulatory regimes and backstops for stablecoins. Doing so would help contain illicit use, facilitate monitoring, controlling in- and out flows, support responsible innovation, and reduce the likelihood of reactive, knee-jerk policy responses in the future.
What are stablecoins?
A stablecoin is a digital claim—issued in the form of a token—pegged to a reference asset, typically a fiat currency such as the U.S. dollar. Stablecoins are issued by private entities and are generally backed by reserve assets that usually include cash, treasuries, and money market instruments. Financial regulations such as the Genius Act in the US and MiCA in Europe, establish guidelines on the actual reserves, typically short-term treasuries and cash. While there are stablecoins that purport to establish a fiat peg via algorithmic trading, often in cryptocurrencies, those have gained neither traction nor support of the authorities.
At the time of writing this paper, the predominant use of stablecoins is as a medium for trading into cryptoassets—allowing transactions to occur without direct interaction with fiat currencies, accounting for roughly 50 per cent of usage. They serve as the cash layer for tokenised assets and decentralised finance (DeFi) applications, representing another 20–25 per cent of overall usage. Cross-border transfers by individuals and SMEs constitute another, still modest but growing, use case. Currency substitution and circumvention of capital controls are often highlighted in policy debates; such uses remain negligible in scale at present.
At present, outstanding stablecoins are overwhelmingly U.S. dollar-denominated, with a total market size of around USD 300 billion. Tether (USDT) and Circle’s USD Coin (USDC) are the dominant issuers, with outstanding supply of approximately USD 185 billion and USD 75 billion, respectively. By contrast, the next largest segment, euro-denominated stablecoins, remains below USD 700 million, while only negligible amounts of stablecoins are issued in other currencies such as JPY, SGD, and GBP. Stablecoins are involved in over 80 percent of trading volume on major centralized crypto exchanges (Waller 2025).
Diverse attitudes
Jurisdictions have adopted markedly different approaches to the regulation of stablecoins. At one end of the spectrum, the United States, along with major financial centres such as Singapore and Hong Kong, has taken an increasingly supportive stance, while China has opted for an outright ban. The European Union has pursued a more calibrated and permissive regulatory approach, whereas many other jurisdictions remain in a wait-and-watch mode. The benefits of stablecoins are particularly evident for the United States, where their widespread use reinforces global demand for the U.S. dollar and U.S. dollar- denominated assets, potentially lowering the cost of debt and capital for both the U.S. government and private firms. Furthermore, with the GENIUS Act of 2025, USD-issued and domiciled stablecoins are required to hold US dollars, funds at regulated depository institutions, certain short-term Treasuries, Treasury-backed reverse repurchase agreements, and money market funds..
From stablecoins to banking
Under a scenario of large-scale migration of bank deposits into stablecoins, the banking sector’s capacity to extend credit could be materially impaired, with funds potentially flowing toward the jurisdiction of the currency in which the stablecoin is denominated. As stablecoins become increasingly integrated with decentralised finance (DeFi) through smart contracts, they may begin to perform bank-like functions outside the traditional regulatory perimeter. Furthermore, if domestic stablecoin users use foreign-issued stablecoins, it might lead to disintermediation out of the domestic financial system into foreign treasuries serving as reserves.
Similarly, a sharp increase in redemption pressure could have serious implications for sovereign debt markets – with the potential to generate turbulence even in the most liquid market. Crypto exposure contributed to failure of Silvergate bank and Signature bank because of large crypto-related deposits and volatile withdrawals (Tierno 2023). Competitive pressures to scale and a search for yield may erode the quality and liquidity of reserves – amplifying systemic fragilities. The borderless and continuous (24×7) nature of stablecoin markets could amplify and accelerate stress events, leaving authorities with limited time to facilitate orderly market adjustments.
The Artificial Intelligence (AI) connection
Consider an AI agent operating within a DeFi protocol that automatically executes algorithmic trading strategies. By continuously analysing public information and inferring crowd behaviour, such an agent could anticipate market tipping points well ahead of any human intervention, potentially rendering traditional safeguards such as circuit breakers ineffective. While AI-driven systems may contribute to market efficiency and stability under normal conditions, periods of extreme stress could trigger highly synchronised responses, amplifying shocks through speed, scale, and feedback loops.
Transmission pathways to crisis
The major risks commonly associated with the widespread adoption of stablecoins are typically identified across three key dimensions:
- Currency substitution: undermines the effectiveness of domestic monetary policy.
- Alternative payment channels: emergence of faster and cheaper payment mechanisms outside the control of authorities.
- Transmission of crypto-market volatility to real economy: volatility and stress in crypto-asset markets may spill over into financial markets.
The argument that stablecoins inherently threaten monetary sovereignty often overlooks deeper gaps in the institutional frameworks governing domestic currencies. Where a currency is well managed and supported by credible monetary and fiscal institutions, the risk of a direct challenge to monetary sovereignty is limited. Stablecoins may, however, exacerbate pre-existing vulnerabilities by providing an additional channel for currency substitution in already fragile monetary regimes. The circumvention of existing capital controls through cross-border stablecoin transfers could pose challenge in absence of effective international coordination and enforcement. Stress originating in crypto-asset markets could also translate into sudden redemption pressures on stablecoins, with spillovers into financial markets.
Policy options
Concerns about stifling innovation and foreclosing potentially beneficial use cases often deter governments from imposing outright bans. Central banks, however—given their role in maintaining financial stability—have generally adopted a more cautious stance and tend to advocate strict and comprehensive approach towards stablecoins.
Broadly, policy responses to stablecoins can be grouped into three approaches:
- Adopting a hands-off or “do nothing” approach;
- Incorporating stablecoins into the existing regulatory framework;
- Reducing the structural “pull factors” that drive demand for stablecoins.
The passive “do nothing” strategy is the least desirable, as it risks allowing vulnerabilities to accumulate unchecked. Authorities should develop a deep operational understanding of stablecoin technologies within the lead institution for financial stability oversight, in coordination with monetary policy committee and various financial supervisory authorities. This includes identifying potential trigger points, standing ready to intervene when risks materialise, and building comprehensive data infrastructures to capture exposures across banks and non-bank entities, leverage, and interconnections within the financial system.
It would, consequently, be important for the authorities to proactively engage with stablecoins issuers, so as to monitor and control movements in and out of domestic fiat currency to foreign stablecoins. Authorities retain influence over the interface between stablecoins and the domestic payment system. By putting in place appropriate monetary and liquidity management tools, and by establishing clear guidelines governing flows between the fiat payment system and stablecoins, authorities can design effective safeguards. Such mechanisms would help mitigate the risk of stablecoins being used as channels for rapid capital outflows during periods of financial stress. By not having the necessary control mechanisms in place, there is a danger that the stablecoin use might happen outside of the control space, which would then frustrate future attempts at exercising controls.
Finally, strengthen confidence in the domestic currency through prudent fiscal and monetary policies; efficient, reliable, and low-cost payment and remittance systems.
References
Odajima, Ken and Daiju Aiba (2019). “Dollarization in Cambodia: A Review of Recent Empirical Findings from a Nation-Wide Survey”. In: Asian Studies
65.1. Reviews recent data showing high financial dollarization in Cambodia,
pp. 24–44. doi: 10.11479/asianstudies.65.1_24. url: https://www. jstage.jst.go.jp/article/asianstudies/65/1/65_24/_article/- char/ja/.
Tierno, Paul (2023). Banking and Cryptocurrency: Policy Issues. CRS Report R48430. Discusses the concentration of crypto deposits at Silvergate and Signature and how volatile crypto-related withdrawals contributed to deposit depletion and bank stress. Congressional Research Service
Waller, CJ (2025). “Reflections on a Maturing Stablecoin Market”. In: Speech to A Very Stable Conference (12 February), https://www. federalreserve. gov/newsevents/speech/waller20250212a. htm.