Stablecoins, simply defined as cryptocurrencies pegged to a fiat currency, usually the US dollar, are one of the fastest-growing areas of the crypto ecosystem. They are considered a "safe haven" by investors due to their price stability.
The fundamental principle of stablecoins is that each coin is backed by a reserve asset. While this structure is highly logical in theory, it remains questionable in practice. The biggest question is the nature and transparency of the reserves. In other words, how liquid, accessible, and auditable is the underlying asset behind a stablecoin?
Some major stablecoin issuers have previously announced that they hold various securities, short-term commercial paper, and unsecured debt instruments in their reserves, in addition to cash. If these reserve assets cannot be quickly converted into cash in a sudden redemption request, the stablecoin's peg value could be broken, and investors may be unable to convert their $1 stablecoin into $1. This could lead to a chain reaction of loss of confidence and large-scale volatility.
Another threat is the deviation of a stablecoin from its pegged value, known as "depegging." This typically occurs as a result of insufficient reserves, panic selling, or structural flaws in algorithmic models. Some stablecoins, which attempt to maintain stability through mathematical algorithms rather than reserves, can quickly unravel if the system encounters unforeseen circumstances. In 2022, an algorithmic stablecoin lost almost all of its value in a matter of days, causing losses for thousands of investors.
The stablecoin market has reached a size of approximately $270 billion. Now, not only USD-pegged stablecoins but also stablecoins pegged to other currencies, such as the Euro (EUR), are traded in the market. Examples such as Euro Coin (EURC) and Stasis Euro (EURS) are contributing to the diversification of the global stablecoin market. EUR stablecoins, with lower volumes compared to the USD, can become more vulnerable to liquidity risk. This requires additional caution from users. Tether (USDT) leads the industry with approximately $162 billion, followed by Circle's USDC with $65 billion. These two stablecoins dominate a large portion of the market.
The risks associated with stablecoins have the potential to have significant consequences not only for individual investors but also for the financial system. The fact that these assets are seen as alternatives to traditional banking could lead to a erosion of bank deposits and disrupt liquidity balances. If stablecoin issuers hold long-term, low-liquid assets in their reserves, this could also impact traditional financial markets during periods requiring rapid cash flow.
The legal status of stablecoins, whether they are securities, payment instruments, or digital deposits, is still a matter of debate in many countries. Uncertainty poses risks for both issuers and users. Difficulties in implementing basic compliance processes such as anti-money laundering (AML) and know-your-customer (KYC) also exacerbate these risks. In decentralized models, the lack of user identity verification creates a vulnerability for illegal transactions, and legal jurisdictions are often unclear. This uncertainty also complicates investor protection in the event of a potential crisis.
In the European Union, the MiCA (Markets in Crypto-Assets) regulation clarified rules for stablecoin issuers regarding reserve transparency, auditing obligations, and investor protection. The GENIUS Act, the first US cryptocurrency law, allows only financial institutions with specific licenses to issue stablecoins. The law's impact was immediately felt with Western Union's announcements regarding stablecoin integration.
JPMorgan, Citigroup, and Wells Fargo have also begun evaluating their own stablecoin projects. The proliferation of stablecoins presents a new challenge to financial stability. Regular audits of reserves by independent institutions, open disclosure to the public, and clear disclosure of risk profiles are crucial not only for investor protection but also for the integrity of the system.
