The year 2025 will become a watershed for the development of stablecoins, as the global regulatory framework accelerates its implementation and continues to improve, with the former 'gray area' being clearly delineated as regulatory territory. This market, valued at over $250 billion, is undergoing the pain and transformation from wild growth to compliance.

The core definition, classification, and importance of stablecoins.

(1) The core definition of stablecoins.

Stablecoins are a special type of cryptocurrency, with the core goal of maintaining value stability (as opposed to cryptocurrencies like Bitcoin and Ethereum that seek price growth), achieving value anchoring through pegging to fiat currencies, commodities, or crypto assets, or relying on algorithms, providing a value benchmark for the highly volatile digital asset market.

Stablecoins essentially serve as 'bridge assets' connecting the traditional financial world with the crypto digital world. They inherit the technological advantages of cryptocurrencies (such as global reach, 24/7 operation, programmability, and peer-to-peer transfer), while also possessing the value stability of traditional fiat currencies, currently underpinning trillions of dollars in transactions within the crypto ecosystem each month.

(2) Types of stablecoins.

Based on different anchoring mechanisms, stablecoins are mainly divided into three categories:

1. Fiat-collateralized stablecoins: pegged 1:1 to fiat currencies (such as the U.S. dollar), with reserve assets primarily consisting of cash and short-term government bonds, typical representatives being USDT (issued by Tether) and USDC (issued by Circle), with core risks related to the authenticity and transparency of reserve assets.

2. Crypto-collateralized stablecoins: over-collateralized with other crypto assets (usually over 150% collateralization rate), automatically adjusting collateral rates through smart contracts to maintain stability, with DAI (issued by MakerDAO) as a typical representative, where the core risk lies in the liquidation risk triggered by a sharp decline in the price of collateral assets.

3. Algorithmic stablecoins: not backed by physical collateral, rely on algorithms to adjust supply and demand (such as minting new coins and destroying old ones) to maintain price stability, with a typical case being the collapse of UST in 2022, where the core risk lies in the 'death spiral' after the algorithm fails (a vicious cycle: price drops lead to panic, panic triggers sell-offs, and sell-offs further drive down prices until the system collapses).

(3) The importance of stablecoins.

The importance of stablecoins is specifically reflected in the following four core functions:

1. The most original and fundamental function of stablecoins is to serve as the 'medium of exchange', 'value metric', and 'safe haven' in the cryptocurrency ecosystem.

In cryptocurrency trading, the vast majority of trading pairs (such as BTC/USDT, ETH/USDC) use stablecoins as the pricing unit (value metric) rather than the highly volatile Bitcoin or Ethereum. This provides investors with a clear standard for measuring value and avoids the confusion of measuring volatile assets against other volatile assets.

When the market experiences severe fluctuations or uncertainties, traders can quickly exchange high-risk assets such as Bitcoin and Ethereum for stablecoins (like USDT, USDC) to mitigate risk, lock in profits, or temporarily exit the market, without needing to fully withdraw funds from the crypto ecosystem (converting back to fiat currency is often time-consuming and expensive). This greatly enhances capital efficiency and market liquidity.

2. Stablecoins exhibit low cost, fast speed, and strong financial inclusivity in global payments and remittances.

Stablecoins leverage blockchain technology to bring revolutionary changes to cross-border payments and remittances. Compared to traditional bank wire transfers (which may take days and incur high fees), stablecoin transfers can be completed in minutes at very low fees, unaffected by business days or time zones.

Additionally, stablecoins provide access to the global financial system for hundreds of millions of people without bank accounts but who can access the internet; people only need a digital wallet to receive and hold value-stable assets.

3. Stablecoins are the lifeblood of decentralized finance (DeFi).

Without stablecoins, the prosperity and development of DeFi would be hard to imagine. Almost all lending, trading, and derivatives protocols use stablecoins as the underlying asset. For example, in lending protocols like Aave and Compound, users deposit large amounts of stablecoins like USDC and DAI to earn yields or lend stablecoins for other investment operations, with interest rate markets largely built around stablecoins. In MakerDAO, the DAI stablecoin is the core output of the entire protocol, where users generate DAI by over-collateralizing other crypto assets, thus converting volatile assets into stable assets. In decentralized exchanges (DEX) like Uniswap and Curve, stablecoin trading pairs (like USDT/USDC) often have daily trading volumes exceeding $1 billion, forming the basis of all trading activities.

4. Stablecoins are the 'catalyst' for the digital transformation of traditional finance (TradFi).

Traditional financial institutions and large enterprises' preferred tools for exploring blockchain applications are stablecoins. Stablecoins serve as the least risky and most familiar entry point for them into the crypto market. Currently, the most promising direction is RWA (tokenization of real-world assets), where stablecoins are the core settlement tools driving the tokenization of traditional assets such as stocks, government bonds, and corporate bonds, creating new investment opportunities.

When discussing stablecoins, compliance must be addressed.

In May 2022, the algorithmic stablecoin UST and its sister token Luna experienced a spiral collapse within days, evaporating over $40 billion in market value instantly. This disaster is not an isolated incident; it is like a giant boulder thrown into the crypto lake, the ripples it creates profoundly reveal the cracks beneath the prosperous facade of stablecoins: it exposed the fatal flaws of the algorithmic mechanism, raised doubts about the adequacy of stablecoin reserve assets, and sounded the highest alarm for global regulators.

Stablecoins are far more than just 'non-volatile cryptocurrencies.' They are the infrastructure of the crypto economy, a new paradigm for global payments, and a strategic bridge connecting two parallel financial worlds. Their importance means that their compliance, transparency, and robust operation are no longer merely industry issues but global issues that pertain to the stability of the entire financial system, which is the fundamental reason why global regulators are now placing such high importance on them.

The scale of leading stablecoins (such as USDT, USDC, which account for over 85% of the global market) and their intertwining with the traditional financial system have reached 'systemic importance', with risks potentially transmitting to traditional finance, approaching the 'too big to fail' critical point. This determines that compliance is not an 'optional' but a 'prerequisite for survival', for three core reasons:

1. Preventing the transmission of systemic risks.

The collapse of a major stablecoin (like USDT) will no longer be confined to the crypto market. Due to its holdings by numerous traditional hedge funds, public companies, and payment companies, its failure could trigger a massive liquidation of on-chain DeFi protocols like a domino effect, quickly spreading to the traditional financial markets of stocks and bonds through institutional investors, possibly triggering a global liquidity crisis. Compliance with reserve asset audits and redemption guarantees is the first line of defense to prevent this domino from falling.

2. Blocking illegal financial activities.

The global nature, quasi-anonymity (on-chain addresses can be traced, but user identities are not directly associated), and peer-to-peer transmission characteristics of stablecoins make them highly susceptible to being used for money laundering, terrorism financing, and evading sanctions. In 2023, the global illegal transaction volume involving stablecoins reached $12 billion, with over 60% flowing to cross-border sanctioned regions. Without strict KYC (Know Your Customer), KYT (Know Your Transaction), and sanctions screening compliance requirements, this efficient financial highway will become a perfect tool for criminals, triggering severe regulatory crackdowns by sovereign nations.

3. Maintain monetary sovereignty and financial stability.

The widespread use of USD stablecoins in emerging markets (such as over 20% of cross-border trade in Argentina and Turkey being settled in USDT) means that when USD stablecoins issued by private companies are widely adopted in overseas markets, it effectively executes a form of 'shadow dollarization' (wherein citizens spontaneously use the dollar to replace their unstable local currency for savings and transactions), eroding the monetary sovereignty and effectiveness of monetary policy of other countries. For the U.S. itself, if unregulated stablecoins are widely used for payments, the potential risk of a bank run may threaten domestic financial stability. Therefore, compliance is no longer an option for the industry but a necessary requirement for maintaining national financial security.

Discussing stablecoins must involve compliance, as their 'infrastructure' attribute determines that they can no longer enjoy the 'gray area' benefits of early cryptocurrencies. Compliance is no longer a constraint on their development but rather a permit for their acceptance by the mainstream financial system and a trust anchor for their continued survival. The global wave of regulation is not intended to stifle innovation but to attempt to rein in this runaway horse before it's too late, guiding it toward a transparent, robust, and responsible future.

The main compliance risks faced by stablecoins.

(1) Legal qualification risk - differences in regulatory recognition lead to increased compliance costs.

Different jurisdictions have varying definitions of stablecoins:

1. U.S. regulators are still debating whether stablecoins should be classified as securities, commodities, or currency transmission tools. For example, the SEC tends to classify asset-backed stablecoins issued for specific projects as securities, while the CFTC believes they may fall under commodities, and the OCC allows banks to issue 'payment stablecoins'. The multi-regulatory landscape requires issuers to comply with multiple sets of regulations.

2. The EU MiCA Act classifies stablecoins into 'e-money tokens' (anchored to a single fiat currency, such as USDC) and 'asset-referenced tokens' (anchored to multiple asset types), with the former needing to meet e-money regulatory requirements and the latter requiring additional risk reserve proposals.

3. Hong Kong (Stablecoin Regulations) views stablecoins as a payment tool that requires strict regulation (focusing on stablecoins as value storage and payment medium), rather than securities or other types of assets.

This qualitative uncertainty, as well as the possibility of regulatory bodies (such as the U.S. SEC, CFTC, or EU regulators) suddenly imposing a set of strict new regulations and deeming existing models non-compliant, will lead to significant compliance complexity and costs for stablecoin issuers.

(2) Reserve asset risks - lack of transparency can trigger a run.

The authenticity, adequacy, and transparency of reserve assets are core challenges faced by stablecoins, and the industry currently confronts three major issues:

1. Insufficient reserve assets. In 2019, it was revealed that Tether (USDT) was only 74% backed by real assets, despite the company’s long-standing claims of full collateralization. As of Q3 2024, Tether disclosed that short-term government bonds accounted for over 60% of its reserves but faced scrutiny for its audit frequency (once per quarter), which is lower than that of USDC (once per month). So far, Tether has switched to releasing its reserve reports at least monthly and usually provides daily updates on its reserve data.

2. Non-compliant assets. Some smaller stablecoins have invested reserve assets in high-risk areas (such as stocks and crypto assets), and in 2023, a certain stablecoin triggered a de-pegging due to a 30% drop in reserve assets.

3. Inadequate disclosure. Only 30% of stablecoin issuers publicly disclose the specific custodians and details of their reserve assets (2024 cryptocurrency industry report), making it difficult for investors to verify asset authenticity.

According to new regulations such as the U.S. (GENIUS Act) and Hong Kong (Stablecoin Regulations), reserve assets must be 100% cash, short-term government bonds, or other high liquidity assets, and must be audited daily, with issuers required to meet strict capital, liquidity, and disclosure requirements.

Opaque or insufficient reserve assets can directly trigger a run, leading to de-pegging. Issuers may face hefty fines from regulatory agencies, operating suspensions, or even criminal charges.

(3) Anti-money laundering and counter-terrorism financing (AML/CFT) risks - a hotspot for regulatory penalties.

Anti-money laundering (AML) and counter-terrorism financing (CFT) are the focus of regulatory attention. The price stability and global accessibility of stablecoins make them attractive tools for money laundering and evading sanctions.

Unlike volatile cryptocurrencies, stablecoins allow bad actors to retain asset value while transferring funds. Regulators now require strict KYC (Know Your Customer), KYT (Know Your Transaction), and reporting of suspicious transactions (suspicious behaviors such as frequent small transfers, large cross-border transfers, etc.), and violations of AML/CFT regulations will incur the harshest penalties and severely damage reputations.

(4) Market integrity risks - weak points in investor protection.

The stablecoin market faces two core integrity risks that directly harm investor rights: market manipulation and false statements. Huge stablecoins may be used to manipulate the prices of Bitcoin or other crypto assets.

False claims or insufficient disclosures about reserve assets and algorithmic mechanisms can also mislead investors. Regulatory requirements are now stricter, aiming to ensure that investors do not suffer losses due to insufficient information.

(5) Systemic risks - potential threats to financial stability.

Systemic risk is the primary concern for financial authorities. DeFi protocols hold billions in stablecoins; even if one major issuer encounters problems, it may trigger a series of liquidations throughout the ecosystem. Imagine the domino effect: if a major stablecoin collapses, lending protocols that use it as collateral begin to fail, and users staking its tokens suffer significant losses. The shockwave will quickly spread to traditional financial institutions that have started integrating crypto technology, and this chain reaction could be devastating.

(6) Sanction compliance risks - the challenges of global operations.

Stablecoin issuance faces compliance requirements from multiple countries and regions, with core challenges including:

1. Differences in sanctions lists. The sanctions lists of OFAC (U.S. Department of the Treasury's Office of Foreign Assets Control), the EU Council, and the UN Security Council overlap but are not completely consistent. For example, a certain entity may be sanctioned by OFAC but not by the EU, requiring targeted screening rules.

2. On-chain address screening. Smart contract addresses may also be included on sanctions lists. For example: 'Some issuers use on-chain address blacklist systems (such as Circle's USDC freezing assets on OFAC-sanctioned addresses), and built-in sanction screening modules within smart contracts to prevent stablecoins from entering sanctioned addresses, achieving real-time compliance.

3. Decentralization conflicts. Some decentralized stablecoins face challenges in enforcing the freezing of sanctioned address assets, encountering difficulties in balancing compliance and decentralization.

The complexity of global compliance requires satisfying different sanctions lists and requirements from multiple countries simultaneously, forcing stablecoin issuers to find a balance between technological innovation and compliance obligations, which also means increased operational costs and compliance difficulties.

(7) Cross-border and jurisdictional risks - the end of regulatory arbitrage.

Regulatory arbitrage (taking advantage of the differences and loopholes between regulatory rules of different countries or regions to conduct business where regulation is most lenient and costs are lowest, thus avoiding strict regulation) is a real issue in the stablecoin market. Project parties may choose to register in regions with looser regulations, but their users are spread across the globe.

This creates a 'hellish' compliance dilemma: requiring adherence to the different laws of hundreds of jurisdictions, which is extremely challenging. The inconsistency and even conflict of regulatory policies between different countries leave issuers at a loss.

Major jurisdictions worldwide are taking proactive steps to incorporate stablecoins into regulatory frameworks:

(1) The U.S. regulatory framework.

The U.S. has adopted a multi-regulatory framework (SEC, CFTC, OCC, Treasury), with the (GENIUS Act) allowing non-bank entities (NBEs) and insured depository institutions (IDIs) subsidiaries to serve as issuers. The Act emphasizes the redemption process, requiring issuers to establish clear redemption policies and procedures to ensure that stablecoin holders can redeem in a timely manner. However, the Act does not mandate that stablecoins maintain par value in the secondary market, where most transactions occur.

(2) The EU's MiCA framework.

The EU (Crypto Assets Market Law) (MiCA) establishes a comprehensive and strict regulatory framework for stablecoins, including licensing requirements, reserve asset requirements, and holder rights.

MiCA classifies stablecoins into two categories: 'e-money tokens' and 'asset-referenced tokens', implementing different regulatory requirements for both, aiming to ensure regulatory compliance matches the risk level.

(3) China’s dual regulatory approach.

China has adopted a unique dual regulatory approach: banning the issuance and trading of stablecoins on the mainland while implementing a comprehensive regulatory system in Hong Kong.

Hong Kong (Stablecoin Regulations) will officially be implemented in August 2025, requiring 100% reserve assets to be isolated, and reserve assets must be cash, U.S. dollars, or Hong Kong dollar government bonds and other high liquidity assets.

The Hong Kong Securities and Futures Commission also requires custody by licensed banks in Hong Kong, daily audits, and assurance of the ability to redeem the next day. This prudent regulatory approach aims to make Hong Kong a global center for digital asset innovation.

(4) Trends in international organization regulation - promoting global unified regulatory standards.

The Financial Stability Board (FSB) and the Bank for International Settlements (BIS) are formulating globally unified regulatory recommendations for stablecoins, aimed at preventing regulatory arbitrage and ensuring global financial stability. In July 2023, the FSB released the (Global Regulatory Framework for Crypto Asset Activities), requiring stablecoin issuers to meet four core requirements of 'sufficient reserve assets, transparent redemption mechanisms, anti-money laundering compliance, systemic risk prevention.'

The Basel Committee on Banking Supervision (BCBS) has revised the standards for (Prudential Treatment of Crypto Asset Exposures) in 2024, which will be officially implemented on January 1, 2025, proposing a stricter and more prudent global unified framework for risk management of banks holding crypto assets (including stablecoins), aiming to address the risks brought by crypto assets while maintaining financial stability.

Compliance path: a guide for issuers and investors.

(1) Issuers: Building a comprehensive compliance system.

Stablecoin issuance faces multidimensional challenges and needs to build a comprehensive compliance system from four dimensions: embracing regulation, reserve asset management, technological compliance, and risk prevention.

1. Actively embrace regulation. Prioritize applying for licenses in clearly regulated regions (such as the U.S., EU, Hong Kong), and regularly communicate with regulatory agencies to avoid compliance surprises.

2. Regulating reserve asset management. Strictly configure reserve assets according to regulatory requirements (such as 100% cash + short-term government bonds), select leading custodians (such as HSBC in Hong Kong), and have qualified accounting firms periodically provide audit reports on reserve assets, publicly disclose details of reserve assets (including custodial account information, asset type proportions).

3. Strengthening the technological compliance system. Invest resources to build top-notch AML/KYC and sanctions screening systems; for example, leading issuers often adopt a combined model of 'on-chain transaction tracking + offline identity verification' (such as USDC requiring large users to complete facial recognition + address tracing). At the same time, integrate third-party compliance tools like Chainalysis to implement KYT screening for cross-chain transactions. In terms of cybersecurity risks, it is necessary to guard against network attacks that could result in asset theft, loss of private keys, blockchain network failures, smart contract code vulnerabilities, network forks, etc.

4. Improve risk prevention. Regularly conduct stress tests (e.g., simulating a 10% concentration redemption scenario), ensuring that reserve asset liquidity meets 100% redemption demand within 30 days, establishing a risk reserve (not less than 2% of the issuance scale) to address unexpected de-pegging risks, and formulating emergency plans (such as a limit redemption mechanism in case of insufficient reserve assets).

(2) Investors: Establishing a risk screening framework.

Investors should conduct comprehensive due diligence, deeply understanding the issuer's qualifications, licensing, reserve asset composition, audit history, and compliance status before researching any stablecoin project. Preferring compliant targets is key to reducing risks; investors should prioritize stablecoins like USDC that are backed by highly liquid assets and are more transparent over those that lack transparency.

Most importantly, investors must recognize the risks and understand that 'stability' is relative and not risk-free. Even fully collateralized stablecoins face counterparty risks, regulatory risks, and technology risks.

Global regulation is reshaping the landscape of stablecoins, but the true anchor of stability comes not just from legal compliance but also from technological transparency and market confidence. Compliance-driven stablecoins will exhibit the following trends:

1. Industry differentiation intensifies, and compliance becomes a core competitive advantage.

For stablecoin projects, compliance is no longer an option but a reflection of core competitiveness. Projects that can actively embrace regulation, achieve extreme transparency, and build a strong compliance system (such as Circle, the issuer of USDC) will gain institutional trust and market share.

Conversely, those attempting to linger in the gray area with opaque reserves and vague compliance will continue to face regulatory scrutiny and sudden risks, and their survival space will be increasingly squeezed.

The global wave of regulation is pushing stablecoins from the 'wild west' era into a new phase characterized by institutionalization, transparency, and high compliance.

2. Regulatory trends are moving towards global unified regulatory standards.

There are still key gaps in global stablecoin regulation, but core standards are globally unified. Regardless of regional differences, the three major requirements of sufficient reserve asset (100% high liquidity asset collateral), transparency of redemption mechanisms (clear T+1 or T+0 redemption processes), and full compliance with AML/CFT (KYC/KYT covering all users) have become universal standards for global regulation. For example: although the U.S. (GENIUS Act), EU MiCA, and Hong Kong (Stablecoin Regulations) have differences in licensing application processes and penalty standards, they all strictly require these three points, preventing issuers from exploiting regulatory arbitrage through regional policy loopholes.

3. The application scenarios of stablecoins extend to the real economy.

With the acceleration of tokenization of traditional real-world assets (RWA) such as stocks, bonds, and real estate, stablecoins, due to their value stability and compliance transparency, will become the preferred settlement tools for RWA transactions. Stablecoins as tools for cross-border payments have achieved cost reduction and efficiency improvements. Currently, emerging markets such as Southeast Asia and Latin America have become core scenarios for cross-border payments using stablecoins, and in the future, they will extend to areas like corporate cross-border trade, supply chain finance, and payroll.

4. Conservative asset reserves.

Regulatory requirements state that reserve assets must be cash, short-term government bonds, or other high-quality liquid assets. This will force issuers to abandon high-risk investment strategies and shift towards more transparent and safer models.

(2) The challenges of stablecoins.

Despite the improving landscape, compliance-driven stablecoins still face significant challenges.

1. Lack of connection in redemption mechanisms. Current regulation mostly focuses on primary market redemptions (issuer directly redeeming), but the stable mechanism in the secondary market (exchange market) is still lacking, requiring clear rules for responses when de-pegging occurs in the secondary market.

2. Lack of unified technical standards. Standards for smart contract security, cross-chain transaction compliance, data privacy protection, and other technical aspects have not yet been globally standardized, which may lead to technical compliance barriers.

3. Challenges to financial sovereignty. Large-scale stablecoins may impact the efficiency of a nation's monetary policy transmission and financial sovereignty. If stablecoins are deeply linked to the main financial system, their failure may trigger wider financial turmoil.

Conclusion.

The future is here; compliance is no longer an option but a cornerstone of survival. Whether issuers or investors, only by actively embracing regulation, strengthening risk control, and enhancing transparency can they stand firm in this transformation. The ultimate goal of stablecoins has never been to replace fiat currency but to become a stable and efficient light in the financial infrastructure of the digital age.

This road is destined to be long and full of challenges, but it is precisely these challenges that drive stablecoins toward a more mature, inclusive, and sustainable future. What we are witnessing is not only a technological evolution but also an evolution of financial civilization.

Original Author: Lawyer Jie Hui.