Original Author: Lawyer Jie Hui
2025 will become a watershed in the development of stablecoins, with global regulatory frameworks accelerating implementation and continuous improvement, as the once 'gray area' is brought under clear regulatory categories. This market, valued at over $250 billion, is experiencing the painful transformation from unchecked growth to compliance.
Core definition, classification, and importance of stablecoins
(1) Core definition of stablecoins
Stablecoin is a special type of cryptocurrency with the core goal of maintaining value stability (as opposed to cryptocurrencies like Bitcoin and Ethereum that pursue price growth), achieving value anchoring through pegging or relying on algorithms with fiat currencies, commodities, and crypto assets, providing a value benchmark for the highly volatile digital asset market.
Stablecoins essentially serve as a 'bridge asset' 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 supporting trillions of dollars in circulation within the crypto ecosystem each month.
(2) Types of stablecoins.
According to different anchoring mechanisms, stablecoins are mainly divided into three categories:
1. Fiat-collateralized stablecoins: These are 1:1 pegged to fiat currencies (such as the U.S. dollar), with reserve assets mainly consisting of cash, short-term government bonds, and other low-risk assets. Typical representatives include USDT (issued by Tether) and USDC (issued by Circle), with core risks related to the authenticity and transparency of reserve assets.
2. Cryptocurrency collateralized stablecoins: These are over-collateralized with other crypto assets (with collateralization rates typically exceeding 150%), automatically adjusting collateralization rates through smart contracts to maintain stability. A typical representative is DAI (issued by MakerDAO), with core risks stemming from the liquidation risk triggered by a price crash of collateral assets.
3. Algorithmic stablecoins: These have no physical collateral and rely on algorithms to adjust supply and demand (such as minting new coins-destroying old coins) to maintain price stability. A typical case is the UST that collapsed in 2022, with core risks lying in the 'death spiral' (a vicious cycle: price drops lead to panic, panic triggers sell-offs, sell-offs further drive down price until the system collapses).
(3) The importance of stablecoins.
The importance of stablecoins is specifically reflected in the following four core functions:
1. The original and most basic functions of stablecoins are as a 'medium of exchange,' 'unit of value,' 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 scale), rather than the highly volatile Bitcoin or Ethereum. This provides investors with a clear standard of value measurement, avoiding the confusion of using volatile assets to measure volatile assets.
When the market experiences severe fluctuations or uncertainties, traders can quickly exchange high-risk assets like Bitcoin and Ethereum into stablecoins (such as USDT, USDC) to avoid risks, lock in profits, or temporarily exit without completely withdrawing funds from the crypto ecosystem (converting back to fiat currency can be time-consuming and costly). This greatly enhances capital efficiency and market liquidity.
2. Stablecoins demonstrate low cost, 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 can take days and incur high fees), stablecoin transfers can be completed in minutes at very low fees, unaffected by business days or time zones.
Moreover, stablecoins provide access to the global financial system for billions of people without bank accounts but with internet access; all they need is 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 their base assets. For example, in lending protocols like Aave and Compound, users deposit large amounts of stablecoins like USDC and DAI to earn returns or lend stablecoins for other investment operations, with their interest rate markets largely built around stablecoins. In MakerDAO, the DAI stablecoin is the core output of the entire protocol, allowing users to generate DAI by over-collateralizing other crypto assets, thereby converting volatile assets into stable assets. In decentralized exchanges (DEX) such as Uniswap and Curve, stablecoin trading pairs (like USDT/USDC) often exceed $1 billion in daily trading volume, forming the basis of all trading activities.
4. Stablecoins are the 'catalyst' for the digital transformation of traditional finance (TradFi).
The preferred tool for traditional financial institutions and large enterprises exploring blockchain applications is stablecoins. Stablecoins are the lowest-risk and most familiar entry point for them into the crypto market. The current most promising direction is RWA (Real World Asset Tokenization), where stablecoins serve as the core settlement tool, driving traditional assets like stocks, government bonds, and corporate bonds to be 'tokenized' and traded on the blockchain, creating new investment opportunities.
Talking about stablecoins necessarily involves compliance.
In May 2022, the algorithmic stablecoin UST and its sister token Luna spiraled down within days, evaporating over $40 billion in market value in an instant. This disaster is not an isolated incident; it is like a boulder thrown into the crypto lake, with the ripples profoundly revealing the cracks beneath the surface of stablecoin prosperity: it exposed the fatal flaws of algorithmic mechanisms, triggered market doubts about the adequacy of stablecoin reserves, and rang the highest alarm for global regulatory agencies.
Stablecoins are far more than just a 'non-volatile cryptocurrency.' 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 makes compliance, transparency, and robust operation not just an industry issue, but a global issue related to the stability of the entire financial system, which is also the fundamental reason why global regulatory agencies are now placing high importance on them.
Top stablecoins (such as USDT and USDC, which together account for over 85% of the global market) have reached a scale and interweaving with traditional financial systems that exhibit 'systemic importance,' with risks potentially transmitting to traditional finance, approaching the critical point of 'too big to fail.' This determines that compliance is not an 'option' but a 'prerequisite for survival,' for three core reasons:
1. Preventing the transmission of systemic risks.
The collapse of a major stablecoin (such as USDT) will no longer be limited to the crypto market. Due to its widespread holdings by many traditional hedge funds, public companies, and payment companies, its failure could trigger a massive liquidation of on-chain DeFi protocols like a domino effect and quickly spread through institutional investors to traditional financial markets such as stocks and bonds, potentially triggering a global liquidity crisis. Compliant reserve asset audits and redemption guarantees are the first line of defense against this domino falling.
2. Interrupt illegal financial activities.
The global nature, quasi-anonymity (on-chain addresses can be traced, but user identities are not directly linked), and peer-to-peer transfer characteristics of stablecoins make them easily used for money laundering, terrorism financing, and evading sanctions. In 2023, the global scale of illegal transactions involving stablecoins reached $12 billion, with over 60% flowing to cross-border sanctioned areas. Without strict KYC (Know Your Customer), KYT (Know Your Transaction), and compliance requirements for sanction screening, this efficient financial highway will become a perfect tool for criminals, prompting severe regulatory crackdowns from sovereign nations.
3. Maintaining monetary sovereignty and financial stability.
The widespread use of dollar-pegged stablecoins in emerging markets (such as over 20% of cross-border trade in Argentina and Turkey settled with USDT) effectively executes a form of 'shadow dollarization' (where citizens voluntarily use the dollar instead of their unstable local currency for savings and transactions), undermining the monetary sovereignty and effectiveness of monetary policy in other countries. For the U.S. itself, if unregulated stablecoins are widely used for payments, their potential depeg risk may threaten domestic financial stability. Therefore, compliance is no longer an industry option but a necessary requirement for maintaining national financial security.
Talking about stablecoins necessarily involves compliance because their 'infrastructure' attribute determines that they can no longer enjoy the 'gray area' dividends of early cryptocurrencies. Compliance is no longer a shackle hindering their development but rather a license for admission and a trust anchor for whether they can be accepted by the mainstream financial system and survive sustainably. The wave of global regulation is not aimed at stifling innovation but rather at trying to rein in this runaway horse before it's too late, guiding it toward a transparent, robust, and responsible future.
The primary compliance risks facing stablecoins.
(1) Legal classification risk — compliance costs surge due to regulatory interpretation differences.
Different jurisdictions have different definitions of stablecoins:
1. U.S. regulators are still debating whether stablecoins should be classified as securities, commodities, or monetary transmission instruments. For instance, the SEC (Securities and Exchange Commission) tends to classify asset-backed stablecoins issued by specific projects as securities, while the CFTC (Commodity Futures Trading Commission) believes they may fall under commodities. The OCC (Office of the Comptroller of the Currency) allows banks to issue 'payment stablecoins'. This multi-regulatory approach forces issuers to meet multiple compliance requirements.
2. The EU's MiCA legislation divides stablecoins into 'e-money tokens' (pegged to a single fiat currency, such as USDC) and 'asset-referenced tokens' (pegged to multiple types of assets), with the former needing to meet e-money regulatory requirements, and the latter needing to submit additional risk reserve plans.
3. Hong Kong (Stablecoin Regulation) regards stablecoins as a payment tool that requires strict regulation (focusing on stablecoins as value storage and payment mediums), rather than securities or other types of assets.
This qualitative uncertainty, along with the possibility that regulatory bodies (such as the SEC and CFTC in the U.S. or EU regulators) may suddenly introduce a set of strict new regulations and deem existing models non-compliant, will lead to significant compliance complexity and costs for stablecoin issuance.
(2) Reserve asset risk — opacity can easily lead to a bank run crisis.
The authenticity, adequacy, and transparency of reserve assets are the core challenges facing stablecoins, and the industry still faces 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 over 60% of its reserves were in short-term government bonds, but still faced scrutiny due to its audit frequency (once per quarter) being lower than USDC's (once per month). Currently, Tether has also changed to publish its reserve report at least monthly and usually provides daily updates on reserve data.
2. Non-compliant assets. Some small stablecoins invest reserve assets in high-risk areas (such as stocks, crypto assets). In 2023, a certain stablecoin triggered a depeg due to a 30% drop in reserve assets.
3. Insufficient disclosure. Only 30% of stablecoin issuers publicly disclose the specific custodians and details of reserve assets (2024 Crypto Industry Report), making it difficult for investors to verify the authenticity of assets.
According to new regulations such as those in the U.S. (GENIUS Act) and Hong Kong (Stablecoin Regulation), reserve assets must be 100% cash, short-term government bonds, and other high-liquid assets, with daily audits, and issuers must meet strict capital, liquidity, and disclosure requirements.
Lack of transparency or insufficient reserve assets can directly trigger a bank run, leading to a depeg. Issuers will face hefty fines from regulators, operational suspension orders, or even criminal charges.
(3) Anti-money laundering and counter-terrorism financing (AML/CFT) risks — a major area for regulatory penalties.
Anti-money laundering (AML) and counter-terrorism financing (CFT) are key focuses of regulatory attention. The price stability and global accessibility of stablecoins make them attractive tools for money laundering and sanction evasion.
Unlike volatile cryptocurrencies, stablecoins allow bad actors to maintain asset value while transferring funds. Regulators now require strict KYC (Know Your Customer), KYT (Know Your Transaction), and reporting of suspicious transactions (such as frequent small transfers aggregation, large cross-border transfers, and other suspicious activities) procedures. Violating 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 investors' rights: market manipulation and false statements. Huge stablecoins may be used to manipulate the prices of Bitcoin or other crypto assets.
False advertising or insufficient disclosure regarding reserve assets and algorithmic mechanisms can also mislead investors. Regulatory requirements are now stricter, aimed at ensuring that investors do not suffer losses due to insufficient information.
(5) Systemic risk — potential threats to financial stability.
Systemic risk is the primary concern of financial authorities. DeFi protocols hold billions in stablecoins, and even if a major issuer encounters problems, it could trigger a series of liquidations across the entire ecosystem. Imagine a domino effect: a major stablecoin collapses, lending protocols that use it as collateral begin to collapse, and users who staked its tokens suffer severe losses. Soon, the shockwaves will spread to traditional financial institutions that have already started integrating crypto technology, and this chain reaction could be devastating.
(6) Sanction compliance risks — challenges of globalization.
Stablecoin issuance faces sanction compliance requirements from multiple countries and regions, with core challenges including:
1. Differences in sanctions lists. There is overlap but not complete consistency between 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. For example, an entity may be sanctioned by OFAC but not by the EU, necessitating targeted screening rules.
2. On-chain address screening. Smart contract addresses can also be listed on sanctions lists. For example: 'Some issuers use on-chain address blacklisting systems (such as Circle's USDC freezing assets of OFAC-sanctioned addresses), and smart contracts are equipped with built-in sanction screening modules to prevent stablecoins from flowing into sanctioned addresses and achieve real-time compliance.
3. Contradictions of decentralization. Some decentralized stablecoins find it difficult to enforce the freezing of sanctioned address assets, facing the challenge of balancing compliance and decentralization.
The complexity of global compliance requires satisfying the differing sanctions lists and requirements of 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 (the practice of exploiting differences and loopholes in regulatory rules between different countries or regions to conduct business in the least regulated, lowest-cost areas to evade strict regulation) is a real problem in the stablecoin market. Project teams may choose to register in lightly regulated areas, while their users are spread across the globe.
This creates a 'hellish' compliance dilemma: it requires compliance with different laws in hundreds of jurisdictions, making operational difficulty extremely high. The inconsistency and even conflict of regulatory policies among different countries leave issuers at a loss.
Global regulatory trends.
Major global jurisdictions are actively taking action and have incorporated stablecoins into their regulatory frameworks:
(1) U.S. regulatory framework.
The U.S. has adopted a multi-regulatory framework (SEC, CFTC, OCC, Treasury), and the (GENIUS Act) allows non-bank entities (NBEs) and subsidiaries of insured depository institutions (IDIs) to serve as issuers. This 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, this 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 Asset Market Act) (MiCA) has established a comprehensive and strict regulatory framework for stablecoins, including licensing requirements, reserve asset requirements, and rights of holders.
MiCA classifies stablecoins into two categories: 'e-money tokens' and 'asset-referenced tokens,' imposing different regulatory requirements on both to ensure that regulation matches the level of risk.
(3) China's dual regulation.
China has adopted a unique dual regulatory approach to stablecoins: banning issuance and trading on the mainland while implementing a complete regulatory system in Hong Kong.
The Hong Kong (Stablecoin Regulation) will be officially implemented in August 2025, requiring 100% reserve asset segregation, with reserve assets needing to be cash, US dollar or Hong Kong dollar government bonds, or other high-liquid 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 cautious regulatory approach aims to make Hong Kong a global center for digital asset innovation.
(4) Trends in regulatory oversight by international organizations — promoting global unified regulatory standards.
The Financial Stability Board (FSB) and the Bank for International Settlements (BIS) are developing global 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: 'reserve asset adequacy, redemption mechanism transparency, anti-money laundering compliance, and systemic risk prevention.'
The Basel Committee on Banking Supervision (BCBS) latest revised the standards for (prudent handling of crypto asset risk exposures) in 2024, which will officially be implemented on January 1, 2025, proposing a stricter and prudent global unified framework for risk management of banks holding crypto assets (including stablecoins), aimed at addressing the risks posed by crypto assets while maintaining financial stability.
Compliance path: Action guide for issuers and investors.
(1) Issuers: Build a multidimensional 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 control.
1. Actively embrace regulation. Prioritize applying for licenses in clearly regulated areas (such as the U.S., EU, Hong Kong), and regularly communicate with regulatory agencies to avoid compliance surprises.
2. Standardize the management of reserve assets. Strictly allocate reserve assets according to regulatory requirements (such as 100% cash + short-term government bonds), select top custodians (such as HSBC in Hong Kong), and have qualified accounting firms regularly issue audit reports on reserve assets, publicly disclose details of reserve assets (including custody account information and asset type ratios).
3. Strengthen the technological compliance system. Invest resources in building first-class AML/KYC and sanctions screening systems, such as leading issuers using a combination of 'on-chain transaction tracking + offline identity verification' models (e.g., USDC requires large users to complete facial recognition + address traceability). At the same time, integrate third-party compliance tools like Chainalysis to achieve KYT screening for cross-chain transactions. Regarding cybersecurity risks, measures need to be taken to prevent network attacks that could lead to asset theft, loss of private keys, blockchain network failures, smart contract code vulnerabilities, and network forks, among others.
4. Improve risk prevention and control. Regularly conduct stress tests (such as simulating a scenario where 10% of users redeem simultaneously), ensure reserve asset liquidity can meet 100% redemption needs within 30 days, establish a risk reserve (at least 2% of the issuance scale) to respond to sudden depeg risks, and formulate emergency plans (such as a limited redemption mechanism in case of insufficient reserve assets).
(2) Investors: Establish a risk screening framework.
Investors should conduct comprehensive due diligence, gaining a deep understanding of the issuer's qualifications, licenses, reserve asset composition, audit history, and compliance status before researching any stablecoin project. Preference for compliant targets is key to reducing risk, and investors should prioritize stablecoins like USDC that are backed by highly liquid assets and are more transparent, rather than those lacking transparency.
Most importantly, investors must recognize the risks and understand that 'stability' is relative and not risk-free. Even fully collateralized stablecoins face counterparty risk, regulatory risk, and technological risk.
Future outlook: Trends and challenges in the development of stablecoins.
(1) Trends in the development of stablecoins.
Global regulation is reshaping the landscape of stablecoins, but true stability anchors do not come merely from legal compliance, but also from technological transparency and market confidence. Under compliance-driven conditions, stablecoins will exhibit the following trends:
1. Industry differentiation intensifies, compliance becomes core competitiveness.
For stablecoin projects, compliance is no longer optional but a reflection of core competitiveness. Projects that can actively embrace regulation, achieve utmost transparency, and build a robust compliance system (such as Circle, the issuer of USDC) will gain institutional trust and market share.
Conversely, those projects that attempt to linger in the gray area, have opaque reserves, and are ambiguous in compliance will continue to face regulatory scrutiny and sudden risks, with their survival space being constantly squeezed.
The wave of global regulation is pushing stablecoins from the 'Western wilderness' era into a new phase characterized by institutionalization, transparency, and high compliance.
2. Regulatory trends are moving towards global unified regulatory standards.
Global regulatory oversight of stablecoins still has key gaps, but core standards are globally unified. Regardless of regional differences, the three major requirements of reserve asset adequacy (100% high-liquid asset backing), redemption mechanism transparency (clear T+1 or T+0 redemption processes), and comprehensive AML/CFT compliance (KYC/KYT covering all users) have become the universal standards for global regulation. For example, while the U.S. (GENIUS Act), EU MiCA, and Hong Kong (Stablecoin Regulation) have differences in licensing application processes and penalty standards, all strictly require these three points to avoid regulatory arbitrage by issuers exploiting regional policy loopholes.
3. The application scenarios of stablecoins extend to the real economy.
As the tokenization of traditional real-world assets like stocks, bonds, and real estate (RWA) accelerates, stablecoins will become the preferred settlement tool for RWA transactions due to their value stability and compliance transparency. Stablecoins serve as tools for cross-border payments, achieving cost reduction and efficiency enhancement. Currently, emerging markets like Southeast Asia and Latin America have become core scenarios for cross-border payments with stablecoins, and will extend to areas like corporate cross-border trade, supply chain finance, and wage distribution in the future.
4. Conservative asset reserves.
Regulatory requirements for reserve assets must be cash, short-term government bonds, and other high-quality liquid assets. This will force issuers to abandon high-risk investment strategies in favor of more transparent and safer models.
(2) Challenges of stablecoins.
Despite improvements, stablecoins driven by compliance still face huge challenges:
1. Lack of connection in redemption mechanisms. Most current regulations focus on primary market redemptions (direct redemptions by the issuer), but the stable mechanism in secondary markets (exchange markets) is still lacking, requiring clarification of response rules when the secondary market experiences a depeg.
2. Lack of unified technical standards. Technical standards concerning smart contract security, cross-chain transaction compliance, and data privacy protection have not yet been globally unified, which may lead to technical compliance barriers.
3. Challenges to financial sovereignty. Large-scale stablecoins could affect the effectiveness of a country's monetary policy transmission and financial sovereignty. If stablecoins are deeply linked to the main financial system, their failure may trigger broader financial turmoil.
Conclusion.
The future is here; compliance is no longer optional but the cornerstone of survival. Whether for issuers or investors, only by actively embracing regulation, strengthening risk control, and enhancing transparency can they hold their ground 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 path 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.
