Stablecoin surge: Here’s why reserve-backed cryptocurrencies are on the rise

As digital currencies continue to reshape the financial landscape, stablecoins are increasingly bridging the divide between traditional banking systems and the world of cryptocurrencies.

But what exactly are stablecoins and why are they becoming more popular?

A stablecoin is a type of cryptocurrency that is pegged to a specific reserve asset. By being linked to an underlying asset, stablecoins can maintain a steadier value, making them a more reliable medium of exchange than other volatile cryptocurrencies.

Most stablecoins are linked to fiat currencies such as the US dollar or the euro, or to a commodity like gold. Stablecoins can also be pegged to other cryptocurrencies or employ complex algorithms to control supply and demand.

“Stablecoins are issued with a promise to keep a value that is stable relative to an external anchor,” noted a World Economic Forum white paper on digital currencies.

Stablecoins first emerged in 2014. Over the years, some stablecoins have faced liquidity and stability challenges, while others have steadily grown.

The use of stablecoins has increased in recent years with the average supply of stablecoins in circulation increasing roughly 28% year-over-year. Total transfer volume, meanwhile, hit $27.6 trillion last year, surpassing the combined volume of Visa and Mastercard transactions in 2024.

Today, Tether (USDT) is by far the largest stablecoin. Released in 2014, USDT is pegged to the US dollar and is available on several major blockchains like Ethereum, Solana and Tron. The stablecoin dominates the sector with a market capitalization of over $143 billion. There are, however, concerns associated with USDT due to misleading statements regarding the stablecoin's underlying assets.

The next largest stablecoin is USD Coin (USDC), which was created by Circle and has a market capitalization of more than $58 billion.

The significant gap in global market capitalization between USDT and USDC can in part be explained by the stablecoins' differing geographic adoption. Most of the trade volume in USDT is conducted in Asia and Europe, while USDC sees most of its trade activity in North America.

In addition to USDT and USDC, there are several other stablecoins in circulation. USDP, for example, is issued by Paxos, a Web3-native company, and PYUSD is issued by PayPal, a traditional payment provider.

Since stablecoins are pegged to reserve assets, they tend to maintain a constant value and do not experience the severe price fluctuations seen amongst other types of cryptocurrencies. This trait makes stablecoins ideal for payments, savings and remittances.

Most stablecoins are pegged to the US dollar since it is the world’s reserve currency. There are, however, several stablecoins linked to other currencies; for example, EURC is pegged to the euro, GYEN is pegged to the Japanese yen and XCHF is pegged to the Swiss franc.

More financial institutions are entering the stablecoin market, too.

Just last month, Standard Chartered Bank announced it was partnering with cryptocurrency companies to launch a stablecoin that will be pegged to the Hong Kong dollar. Several other banks and financial technology companies such as PayPal, Bank of America and Stripe have also launched stablecoins or indicated they intend to enter the market.

Proponents maintain that stablecoins can enable quicker and more affordable international payments, and can be used to bring financial services to the over 1 billion people worldwide who lack access to traditional banking.

In recent years, both Tether and Circle have touted the role their stablecoins have played in serving unbanked and underbanked populations.

Stablecoins have become an integral asset class of cryptocurrencies. However, they face various integration hurdles such as regulatory scrutiny, consumer protection concerns and transparency issues.

In recent years, governments have been developing and implementing regulatory frameworks on the use of stablecoins and cryptocurrencies at large. Experts note that while patchwork and contradictory regulations can hinder the market, clear and uniform rules can help expand the use of stablecoins. As a 2023 World Economic Forum white paper noted, “more regulatory clarity can potentially open the doorway to additional stablecoin issuers.”

In the United States, momentum around the integration of stablecoins has increased in recent weeks as the government advances legislation to regulate US dollar-based stablecoins. Proponents argue that the bill would legitimise the asset class and help preserve the dominance of the US dollar in financial systems; opponents, however, have raised concerns about long term stability and a lack of consumer protections.

Transparency remains a key issue for stablecoins, too. Questions around the reserves backing stablecoins have led to increased scrutiny, with regulators pushing for clearer disclosure requirements. Tether, for example, has faced criticism for its opaque reserve practices, leading to a $41 million fine from the US Commodity Futures Trading Commission in 2021.

Moreover, like all cryptocurrencies, stablecoins can be used for illicit activities such as money laundering, sanctions evasion and fraud. Strengthening compliance measures and improving transparency will be crucial in addressing these concerns, experts say.

Despite these challenges, as blockchain technology advances and financial institutions continue to embrace digital assets, stablecoins are poised to play an increasingly significant role in global financial systems.