The Stablecoin Surge: A Systemic Threat?

In a financial system historically defined by state-backed currencies, central banks, and commercial lenders, stablecoins have emerged as an alternative. These digital tokens, pegged one-to-one to fiat currencies like the US dollar or euro, promise the immediacy of internet-era transactions without relying on the traditional banking system. At first glance, they appear sleek, efficient, and globally accessible. But the rise of stablecoins carries deeper implications for the global monetary order.

What Are Stablecoins?

At their core, stablecoins are cryptocurrencies designed to maintain a fixed value against a fiat currency. Their issuers claim to hold reserve assets like U.S. Treasury bills or money market instruments to back each token issued.

Stablecoins were initially created to facilitate trading on cryptocurrency exchanges. Instead of converting crypto assets back into dollars via a bank, often a slow and regulated process, traders could swap Bitcoin or Ethereum for tokens like Tether or USD Coin and continue transacting within the crypto ecosystem. Today, over 80 percent of all crypto transactions involve stablecoins.

The Allure: Speed, Anonymity, and Escape from Fragile Systems

For many in the Global South, stablecoins are more than speculative tools, they are lifelines. In countries suffering from hyperinflation, capital controls, or political instability, stablecoins offer a way to preserve purchasing power and bypass dysfunctional domestic banking systems.

Sending dollars via a stablecoin on a blockchain can take seconds and cost pennies.

It’s little wonder, then, that stablecoin usage is exploding. Visa reports that transaction volumes reached $752 billion in May 2025, up from $409 billion a year earlier. The number of wallets sending and receiving stablecoin payments regularly hit 46 million, up from 27 million in May 2024.

Systemic Risk

Stablecoins operate in a regulatory gray zone. They function like bank deposits, users hand over real dollars and expect to redeem them on demand, but unlike banks, stablecoin issuers do not lend money or hold capital buffers. Nor are they insured by public authorities. This makes them fragile in times of stress.

If users lose faith and rush to redeem their tokens, issuers may be forced to liquidate massive reserves of government debt. The Bank for International Settlements (BIS) recently warned that a $3.5 billion stablecoin outflow could raise short-term U.S. Treasury yields by 0.08 percentage points in just 10 days, a scale comparable to a minor central bank tightening.

Fitch Ratings has noted that if a major stablecoin fails, it could "upset the underlying markets" by dumping dollar-denominated assets. With stablecoin operators now holding more short-term U.S. debt than China, the stakes are enormous.

A far bigger threat looms for traditional banks. The U.S. Treasury recently warned that as much as $6.6 trillion in U.S. bank deposits could be at risk of migrating to stablecoins if they continue to grow in scale and popularity. This would force banks to offer higher interest rates to retain deposits, or rely more heavily on volatile wholesale funding markets. Either scenario introduces financial fragility.

Illicit Finance and the Criminal Underworld

Anonymity, while lauded by some as a privacy safeguard, has also made stablecoins a preferred tool for criminals. The United Nations Office on Drugs and Crime (UNODC) in its 2024 report flagged the Tether coin as the “preferred choice” for Asian crime syndicates.

Chainalysis estimates that stablecoins accounted for 63% of the $51 billion in crypto-related crime last year, with use cases ranging from drug trafficking to money laundering.

Unlike banks or licensed payment institutions, decentralized finance (DeFi) platforms using stablecoins perform no anti-money laundering checks. This unregulated frontier poses a real and present danger, not just to consumers, but to financial stability and national security.

Regulatory Crossroads: What Happens Next?

Stablecoins are not classified as securities by U.S. regulators if they are fully redeemable and do not pay interest to holders. But this exemption has limits. Should stablecoin issuers begin offering interest, thereby resembling bank accounts or money market funds, they would come under heavy regulatory scrutiny. That’s why proposals are being floated to ban such interest-bearing stablecoins outright.

Policymakers are beginning to take notice. The BIS, the U.S. Treasury, and major credit rating agencies have all issued warnings. Yet, the regulatory response remains fragmented. Without clear rules, the rapid growth of stablecoins could eventually spark a crisis, especially if one of the major tokens depegs, loses trust, or collapses.

The Bigger Picture: A Parallel Monetary System?

If projections by Standard Chartered hold, stablecoins could reach $2 trillion in circulation by 2028, an eightfold increase from their current level. That would make stablecoins one of the most significant forms of privately issued money in modern history. For context, the total size of the U.S. Treasury market is $29 trillion. If stablecoin issuers continue to accumulate short-term Treasuries at current rates, their market power may soon rival that of sovereign states.

This isn’t just a matter of payment efficiency or financial innovation. It’s about who controls money in the digital age.

Do we want private, unregulated firms with opaque balance sheets and no democratic accountability to run parallel monetary systems?

Should the promise of stablecoins, cheaper transactions, broader access, cross-border liquidity, be integrated into the regulated financial system through central bank digital currencies (CBDCs) or properly supervised private issuers?

Conclusion

Stablecoins have already changed the way millions transact, save, and invest. But, innovation cannot be allowed to outpace regulation. As their influence grows, so too does the potential for unintended consequences.

It’s time for policymakers to treat stablecoins not as quirky experiments in the crypto lab, but as powerful monetary instruments that demand clear rules, strict oversight, and international coordination. The alternative is to risk letting financial innovation destabilize the very order it seeks to improve.