Stablecoin 101: A Beginner’s Guide
By Terence Tse and Dražen Kapusta
Stablecoins are rapidly becoming a core component of modern financial systems, offering speed, stability, and accessibility across global transactions. Terence Tse and Dražen Kapusta explain how these blockchain-based assets differ from speculative cryptocurrencies and highlight their potential to reshape cross-border payments while raising urgent regulatory, operational, and systemic considerations for future integration.
Stablecoins have recently transitioned from being a subset of cryptocurrencies to a mainstream financial instrument, with the potential to reshape how money is moved and managed. What was once primarily a tool for cryptocurrency traders and investors is now seen as playing an integral part in the daily lives of many corporations. We are under no illusion that cryptocurrencies are full of get-rich-quick schemes—exemplified by meme coins like $TRUMP, which has made the president’s holdings worth $1.9 billion.
What was once primarily a tool for cryptocurrency traders and investors is now seen as playing an integral part in the daily lives of many corporations.
However, stablecoins represent a fundamentally different and potentially transformative technology. Unlike speculative cryptocurrencies, stablecoins are usually backed by liquid dollar assets such as short-term treasuries and bank deposits, making them genuinely useful financial instruments that have already gained traction in countries like Turkey and Nigeria, where trust in government and currency stability is low. By bringing these currently unregulated tools into a proper regulatory framework through measures like the recent Genius Act in the US, which would require issuer registration and clear reserve requirements, could open up stablecoins’ significant potential to revolutionise payments.
This tremendous opportunity is reflected in Standard Chartered’s projection that stablecoin issuance could surge from around $260 billion to $2 trillion by 2028[1], having grown from just $10 billion just five years ago.[2] Large financial entities are now embracing them, with payment giants such as Stripe[3] and Visa[4] deepening their investments. Even Uber is considering using stablecoins for cross-border payments to reduce currency costs.[5] Stablecoin issuer Circle soars 168% in NYSE debut after pricing IPO above expected range, capturing investor sentiment.[6] Stablecoins are no longer merely an intriguing sideshow on the periphery of the global financial landscape.
What are Stablecoins?
A stablecoin is essentially a form of cryptocurrency designed to maintain a stable value, typically by pegging its worth one-for-one to a sovereign currency like the US dollar. Unlike more volatile cryptocurrencies such as Bitcoin, stablecoins aim to function like traditional cash, offering predictability in often fluctuating crypto markets. Consider them as digital vouchers for a conventional currency, such as the US dollar or the euro.
Imagine you have a €1 note in your pocket. A stablecoin is like a digital version of that same €1 note, but instead of existing physically, it exists on the internet and can be transferred digitally. When you hold a stablecoin pegged to the euro, the issuer behind it promises that they have a real euro, or an equivalent value in other highly liquid assets, in reserve for every digital voucher you own. This promise means you should always be able to exchange your stablecoin back for a physical euro at face value.
This digital voucher can subsequently be transferred over the internet outside of the traditional banking system, making transactions potentially faster and cheaper than conventional methods. Therefore, the key characteristic is that stablecoins provide the stability of fiat currency combined with the efficiency and programmability of blockchain technology. Stablecoins also encompass the significant attributes of currency: they serve as a unit of account, a store of value, and a medium of exchange.
How Stablecoins are Backed
The fundamental principle behind stablecoins is that they are backed one-for-one with reserves of equal value to the currency they are pegged to. Issuers create a digital token for every unit of traditional currency they receive and commit to holding corresponding assets in reserve. These reserves are crucial for maintaining the stablecoin’s fixed value and enabling holders to redeem their tokens at any time. To ensure this, typically, these backing assets are chosen for their high liquidity and low risk.
Issuers create a digital token for every unit of traditional currency they receive and commit to holding corresponding assets in reserve.
Fiat-collateralised stablecoins, such as Circle’s USDC, specifically maintain reserves of US securities and traditional currencies to back each token, providing a high level of stability and regulatory compliance. The Bank for International Settlements (BIS) estimated that stablecoin issuers purchased $40 billion of US Treasury bills last year to back their tokens, a level comparable to the most significant US government money market funds.[7]
Crypto-collateralised stablecoins represent a decentralised approach to maintaining price stability by using other cryptocurrencies as backing assets. These systems require users to deposit significantly more value in cryptocurrency than the stablecoins they receive, typically requiring a collateralisation ratio of 150% or higher to buffer against the inherent volatility of crypto markets. Smart contracts automatically monitor collateral values and trigger liquidation events when the backing falls below predetermined thresholds, selling off collateral to maintain the peg. DAI, issued by MakerDAO, exemplifies this model by allowing users to lock up Ethereum to mint stablecoins while maintaining decentralised governance over the protocol’s parameters.
Commodity-collateralised stablecoins bridge traditional physical assets with digital currency systems by backing each token with a specific quantity of real-world commodities, such as precious metals. These stablecoins offer holders the ability to redeem their digital tokens for physical assets, providing a tangible store of value that has historically appreciated during economic uncertainty. The model requires trusted custodians to securely store and verify the physical commodities, creating a hybrid system that combines blockchain efficiency with traditional asset backing. Pax Gold and CACHE demonstrate this approach by representing fractional ownership of gold bars stored in certified vaults, enabling investors to trade precious metals digitally while maintaining physical asset claims.
Algorithmic stablecoins strive to maintain price stability through automated monetary policy rather than asset backing, utilising smart contracts to adjust token supply dynamically based on market conditions and demand signals. These systems typically employ intricate mechanisms to promote arbitrage trading that keep prices close to their target peg. While theoretically elegant in their decentralised approach, algorithmic stablecoins have proven particularly vulnerable to market stress and confidence crises, as illustrated by the spectacular collapse of TerraUSD (UST) in 2022 when it was the fourth-largest stablecoin with an $18 billion market capitalisation.[8] The model’s dependence on market psychology and algorithmic responses rather than tangible reserves renders these stablecoins inherently more experimental and risky compared to their collateralised counterparts.
Pros and Cons of Stablecoins
Stablecoins offer a compelling set of advantages when compared to traditional money in the existing banking system setup. They include:
- Enhanced Speed and Efficiency: Stablecoins can significantly accelerate payment settlements. Cross-border transactions, which can take days through traditional correspondent banking networks and often involve high charges and occasional errors, can be settled in mere seconds or minutes with stablecoins. This drastically improves cash conversion cycles for businesses.
- Cost Reduction: By bypassing traditional intermediaries like correspondent banks and payment processors, stablecoins significantly lower transaction fees, currency conversion costs, and foreign exchange spreads. Traditional cross-border payments often incur fees ranging from £25 to £50 per transaction. They can take one to three business days to settle, due to the involvement of multiple intermediaries and currency conversions. In contrast, stablecoin transfers—such as sending USDC over the Solana blockchain—typically cost less than £0.01 in network fees and settle in seconds.[9]
- Access to Stable Currencies: For individuals and businesses in countries afflicted by high inflation, weak or volatile currencies, unstable banks, or capital controls, stablecoins offer ready access to a proxy for US dollars. This allows them to hedge risk and protect against economic downturns. After all, to many citizens around the world, the dollar remains the most sought-after currency globally.
- Financial Inclusion and Accessibility: Stablecoins facilitate financial transactions outside the traditional banking system, which is particularly beneficial for underserved populations or in regions with limited banking infrastructure or corrupt financial systems.
- Programmable Money: Their blockchain foundation enables “programmable money” capabilities, allowing for automated compliance, instant settlement, and complex conditional payments through smart contracts. This can automate treasury operations and reduce manual errors.
However, they also present significant risks and regulatory challenges that need to be carefully managed. Some of the risks involved are:
- Regulatory Uncertainty and Grey Area: Stablecoins currently exist in a “grey area,” somewhere between a payment network, a bank deposit, and a security. The market remains little-regulated, and the emerging regulatory frameworks have been criticised as too “light-touch,” with omissions in consumer protections and proper compliance checks.
- Risk of De-peg and Collapse: Although designed to maintain a fixed value, stablecoins can and sometimes do deviate from their peg by more than a couple of per cent. Historically, some stablecoin models have proven vulnerable to market stress and extreme fraud, resulting in failures.
- Lack of Transparency and Audits: Despite attestations of reserves, many issuers have failed to provide complete audits, raising concerns about the proper backing of tokens. This opacity complicates efforts to model their potential impacts on financial stability.
- Illicit Activity Concerns: Stablecoins remain the primary cryptocurrency for illicit transactions. A report reveals that stablecoins accounted for 63% of the $51 billion in criminal activity associated with cryptocurrencies in 2024.[10]
- Systemic Risk to Traditional Banking: The US Treasury has warned that around $6.6 trillion in deposits in US commercial banks could be “at risk” of migrating to stablecoins.[11] This could potentially force banks to raise interest rates to retain deposits or increase their wholesale funding, and large outflows could “meaningfully influence” the transmission of monetary policy.
- Credit and Operational Risk of Issuers: Stablecoins are not cash; they reflect the credit risk of the issuing company and its ability to manage operational risks. Centralised issuers commingling assets together in a single account can also create significant operational risk for banks if mistakes occur.
The future will likely witness traditional banking and digital assets converging, with stablecoins driving a more efficient yet regulated global financial system.
Stablecoins are transforming global finance from niche crypto tools into essential infrastructure for international payments and corporate treasury management. They offer superior speed, cost efficiency, and accessibility for cross-border transactions, particularly in volatile economies. However, their widespread adoption necessitates navigating complex regulatory frameworks, security challenges, and systemic risks. The future will likely witness traditional banking and digital assets converging, with stablecoins driving a more efficient yet regulated global financial system.
About the Authors
Terence Tse is co-founder of the AI Native Foundation, a co-founder and Executive Director of Nexus FrontierTech, as well as a co-founder of The Chart ThinkTank.
Dražen Kapusta is the Principal and Founder of COTRUGLI Business School. A serial tech entrepreneur, he is also the Principal of HashNET, an R&D company that powers projects combining AI and Blockchain, ranging from stablecoin and DePin to product passport systems. The most notable HashNET project is 8ra.com, the largest open-sourced project in EU history, which aims to build EU Sovereignty. Dražen created CO-LAB, a collaborative hub of more than 2,700 PhD and MBA alumni tackling SDG-aligned projects, and chairs the COTRUGLI Business Museum, the world’s first museum dedicated to the global history of business. His current initiatives include the HAI5 teaching methodology, HAI5 Decision Theatre, and Industry 5.0 test bed that fuses AI, blockchain, and human-centric design, as well as the Vanguard Leadership methodology for developing future-ready executives.
References
[1] https://www.coindesk.com/markets/2025/04/15/stablecoin-market-could-grow-to-usd2t-by-end-2028-standard-chartered
[2] https://castleisland.vc/wp-content/uploads/2025/06/artemis-stablecoin-payments-from-the-ground-up-2025.pdf
[3] https://stripe.com/gb/newsroom/news/sessions-2025
[4] https://www.paymentsdive.com/news/visa-pursues-stablecoins-for-cross-border-payments/747250/
[5] https://www.pymnts.com/cryptocurrency/2025/uber-considers-using-stablecoins-for-cross-border-money-transfers/
[6] https://www.cnbc.com/2025/06/05/stablecoin-issuer-circle-soars-in-nyse-debut-after-pricing-ipo-above-expected-range.html
[7] https://www.bis.org/publ/work1270.htm
[8] https://blockapps.net/blog/exploring-the-risks-and-failures-of-algorithmic-stablecoins-in-the-crypto-market/
[9] https://www.helius.dev/blog/stablecoin-payments
[10] https://www.chainalysis.com/blog/2025-crypto-crime-report-introduction/
[11] https://www.ft.com/content/b69f304c-798e-4dc3-9f17-6f7a7c8d3ac0
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