Stablecoins Explained: A Comprehensive FAQ Guide to Digital Currency Stability

Stablecoins have emerged as a crucial bridge between traditional finance and the cryptocurrency ecosystem. With the stablecoin market reaching nearly US$300 billion in capitalization and expected to grow substantially in the coming years, these digital assets are becoming more integral to global finance. 

We address the most frequently asked questions regarding stablecoins and their potential implications in the evolving financial landscape. As digital assets designed to maintain a stable value through pegging to reserve assets—primarily fiat currencies—stablecoins are gaining traction as a transformative force in payment systems, particularly for cross-border transactions.

With the recent enactment of the GENIUS Act, which establishes a regulatory framework for stablecoin issuers in the United States, understanding stablecoins has never been more critical. This FAQ will provide readers with a clear understanding of what stablecoins are, the different types available, and the advantages and risks associated with their use.

Stablecoins are noteworthy for their ability to offer faster, cheaper, and more accessible payment solutions compared to traditional banking systems. They play a crucial role in promoting financial inclusion, especially in regions with high inflation or limited banking access. We provide insights into the implications of stablecoin adoption for monetary policy, financial stability, and the future of digital payments.

Let's begin with the fundamental question that forms the foundation of stablecoin understanding: 

There are four main categories of stablecoins. Each category of stablecoins has specific benefits:

1. Fiat-backed Stablecoins: These are backed 1:1 by reserves of fiat currencies, mainly the US dollar. Each stablecoin issued corresponds to an equivalent amount held in the designated currency.
2. Cryptocurrency-backed Stablecoins: These are backed by digital assets and are often over-collateralized to account for price volatility.
3. Algorithmic Stablecoins: These maintain value by using a smart contract mechanism that dynamically adjusts supply based on market demand to try to maintain the price close to its peg.
4. Commodity-backed Stablecoins: These are backed by physical assets like gold, oil, or real estate.

The total market capitalization of stablecoins is close to US$300 billion, up from just US$5 billion at the beginning of 2020 and around US$200 billion in early 2025.

While stablecoins account for just 7% of the overall cryptocurrency market capitalization, they are increasingly dominant in cryptocurrency transactions. Estimates of future growth vary considerably, but there is a broad consensus that demand for stablecoins will continue to rise substantially in the coming years owing to various factors, including recent changes in US legislation and expected strong demand from relatively unbanked, remittance-heavy economies.

Stablecoins present several advantages:

• Faster and cheaper transactions: They facilitate quicker and less expensive transactions compared to traditional bank transfers, especially for cross-border payments.

• Access without a bank account: Users can access payment systems without needing a traditional bank account.

• Protection against currency devaluation: Stablecoins can help protect users from currency devaluation if they are pegged to a more stable currency. 

• Payment confidentiality.

The Guiding and Establishing National Innovation for US Stablecoins Act (GENIUS Act), signed into law in July 2025, provides a regulatory framework for stablecoin issuers in the US. It mandates that stablecoins be backed by reserves and prohibits interest payments on them. This act is significant as it establishes clear guidelines for stablecoin issuers, enhancing consumer protection and promoting the use of US dollar-backed stablecoins.

Most stablecoins—around 99% of the total market capitalization—are already denominated in US dollars, and the GENIUS Act is expected to reinforce this dominance. 

Yes. The reserve assets stipulated under the GENIUS Act are likely to concentrate demand in shorter-maturity US Treasurys, particularly Treasury bills, potentially distorting the yield curve and weakening the US Federal Reserve’s control over short-term interest rates.

Stablecoin issuers’ existing holdings of US Treasurys are already significant. Estimates from the US Department of the Treasury suggest that holdings of Treasury bills by stablecoin issuers could rise eightfold between 2024 and 2028, from around US$120 billion to US$1 trillion. This has the potential to put significant downward pressure on yields.

A combination of the expected strong growth of US dollar-denominated stablecoins and the reserve requirements in the GENIUS Act is likely to diminish the risk of funding pressures for the US Treasury despite the US running persistent large federal fiscal deficits, with debt issuance likely to be increasingly skewed toward shorter maturities.

Stablecoins have the potential to transform cross-border payments by reducing costs and settlement times compared to traditional systems like SWIFT. They are increasingly used for remittances, offering a more affordable alternative to conventional banking channels. For instance, stablecoins already account for a significant share of remittances between the US and Mexico.

While stablecoins offer numerous benefits, they also come with risks:

• Cybersecurity vulnerabilities: Stablecoins can be susceptible to cyberattacks.

• Erosion of monetary policy autonomy: The widespread use of stablecoins could undermine central banks' control over monetary policy.

• Potential for financial instability: If confidence in a stablecoin falters, it could lead to mass withdrawals, similar to bank runs. 

• Money laundering and tax evasion.

Stablecoin adoption is expected to grow in regions with high inflation, currency instability, and limited banking access, such as Nigeria, Argentina, and Venezuela. In these areas, stablecoins can serve as a safe haven for individuals facing economic uncertainty.

The stablecoin market is likely to continue evolving, with potential growth driven by regulatory clarity and increased adoption by major financial institutions. The GENIUS Act is expected to reinforce the dominance of US dollar-backed stablecoins. Additionally, the issuance of digital deposits by major banks may blur the lines between traditional banking and stablecoin usage, further integrating them into the financial system.

Stablecoin/digital deposit offerings by large European banks would also appear a logical development, although this might be curtailed by accelerated rollout of an ECB-sponsored digital currency to offer a euro-based alternative to US dollar-based digital currency.

We expect initiatives to permit payment of interest on digital bank deposits, especially for those issued by large and well-supervised banking institutions.

Stablecoins represent a significant innovation in the financial landscape, offering a blend of stability, speed, and accessibility. As regulatory frameworks like the GENIUS Act come into play, the future of stablecoins looks promising, with the potential to reshape how we conduct transactions globally.

This article was published by S&P Global Market Intelligence and not by S&P Global Ratings, which is a separately managed division of S&P Global.