Original Author: Lawyer Jie Hui
The year 2025 will be a watershed for the development of stablecoins, as global regulatory frameworks accelerate implementation and continuous improvement, with the once "gray area" being clearly defined under regulation. This market, valued at over $250 billion, is undergoing the painful transformation from wild growth to compliance.
Core Definition, Classification, and Importance of Stablecoins
(1) Core Definition of Stablecoins
Stablecoins are a special type of cryptocurrency, with the core goal of maintaining value stability (as opposed to cryptocurrencies like Bitcoin and Ethereum that pursue price growth). They achieve value anchoring through pegging to fiat currencies, commodities, or other cryptocurrencies, or relying on algorithms, providing a value benchmark for the highly volatile digital asset market.
Stablecoins essentially serve as a "bridge asset" connecting the traditional financial world with the crypto digital world. They inherit the technological advantages of cryptocurrencies (such as global reach, 24/7 operation, programmability, and peer-to-peer transmission) while possessing the value stability of traditional fiat currencies, currently supporting trillions of dollars in circulation within the crypto ecosystem each month.
(2) Types of Stablecoins
Based on different anchoring mechanisms, stablecoins are mainly divided into three categories:
1. Fiat-Collateralized Stablecoins: Pegged 1:1 to fiat currencies (such as the US dollar), with reserve assets typically being cash, short-term government bonds, and other low-risk assets. Typical representatives include USDT (issued by Tether) and USDC (issued by Circle), with core risks related to the authenticity and transparency of reserve assets.
2. Crypto-Collateralized Stablecoins: Over-collateralized by other cryptocurrencies (collateralization rates usually exceed 150%), maintaining stability through smart contracts that automatically adjust collateral rates. A typical representative is DAI (issued by MakerDAO), with core risks stemming from the liquidation risk triggered by a sharp drop in the price of collateral assets.
3. Algorithmic Stablecoins: Without physical collateral, they rely on algorithms to adjust supply and demand (such as minting new coins and destroying old ones) to maintain price stability. A typical case is UST, which collapsed in 2022, with core risks related to the "death spiral" that occurs when the algorithmic mechanism fails (a vicious cycle: price drops lead to panic, panic triggers sell-offs, and sell-offs further drive down prices until the system collapses).
(3) Importance of Stablecoins
The importance of stablecoins is specifically reflected in the following four core functions:
1. The most original and basic function of stablecoins is as a "medium of exchange," "measure of value," and "safe haven" in the cryptocurrency ecosystem.
In cryptocurrency trading, the vast majority of trading pairs (such as BTC/USDT, ETH/USDC) use stablecoins as the unit of account (measure of value), rather than the highly volatile Bitcoin or Ethereum. This provides investors with a clear standard for measuring value, avoiding the confusion of measuring volatile assets with other volatile assets.
When the market experiences severe fluctuations or uncertainty, traders can quickly exchange their holdings of high-risk assets like Bitcoin and Ethereum for stablecoins (such as USDT or USDC) to hedge risks, lock in profits, or temporarily exit the market, without needing to completely withdraw funds from the crypto ecosystem (exchanging back to fiat currency is often time-consuming and expensive). This greatly enhances capital efficiency and market liquidity.
2. Stablecoins demonstrate low cost, fast speed, and strong financial inclusivity in global payments and remittances.
Stablecoins leverage blockchain technology to bring revolutionary changes to cross-border payments and remittances. Compared to traditional bank wire transfers (which can take days and incur high fees), stablecoin transfers can be completed in minutes with very low fees, unaffected by business days and time zones.
Moreover, stablecoins provide access to the global financial system for hundreds of millions of people without bank accounts but with internet access; all they need is a digital wallet to receive and hold value-stable assets.
3. Stablecoins are the lifeblood of decentralized finance (DeFi).
Without stablecoins, the prosperity and development of DeFi would be unimaginable. Almost all lending, trading, and derivatives protocols use stablecoins as the underlying asset. For example, in lending protocols like Aave and Compound, users deposit large amounts of stablecoins like USDC and DAI to earn yields or borrow stablecoins for other investment operations, with interest rate markets largely built around stablecoins. In MakerDAO, the DAI stablecoin is the core output of the entire protocol, where users generate DAI by over-collateralizing other crypto assets, thus converting volatile assets into stable assets. In decentralized exchanges (DEX) like Uniswap and Curve, stablecoin trading pairs (such as USDT/USDC) often see daily trading volumes exceeding $1 billion, forming the basis of all trading activities.
4. Stablecoins are the "catalyst" for the digital transformation of traditional finance (TradFi).
The preferred tool for traditional financial institutions and large enterprises exploring blockchain applications is stablecoins. They represent the lowest-risk and most familiar entry point into the crypto market. Currently, in the most promising direction of RWA (real-world asset tokenization), stablecoins serve as the core settlement tool, driving the tokenization of traditional assets like stocks, government bonds, and corporate bonds, creating new investment opportunities.
Compliance Must Be Discussed When Talking About Stablecoins
In May 2022, the algorithmic stablecoin UST and its sister token Luna spiraled downwards within days, resulting in the evaporation of over $40 billion in market value. This disaster was not an isolated incident; it was like a boulder thrown into the crypto lake, with the ripples profoundly revealing the cracks beneath the prosperous facade of stablecoins: it exposed the fatal flaws of algorithmic mechanisms, raised market doubts about the sufficiency of stablecoin reserve assets, and sounded the highest alarm for global regulatory agencies.
Stablecoins are far more than just "non-volatile cryptocurrencies." They are the infrastructure of the crypto economy, a new paradigm for global payments, and a strategic bridge connecting two parallel financial worlds. Their importance means that their compliance, transparency, and robust operation are no longer merely industry issues but a global concern related to the stability of the entire financial system, which is the fundamental reason why global regulatory agencies are now placing high importance on them.
The scale of leading stablecoins (such as USDT and USDC, which together account for over 85% of the global market) and their intertwining with the traditional financial system have reached a level of "systemic importance," with risks potentially transmitting to traditional finance, approaching the critical point of "Too Big to Fail." This determines that compliance is not an "option," but a "prerequisite for survival," for three core reasons:
1. Preventing the Transmission of Systemic Risk
The collapse of a major stablecoin (such as USDT) will no longer be confined to the crypto market. Due to its holdings by numerous traditional hedge funds, publicly traded companies, and payment companies, its failure could trigger large-scale liquidations of on-chain DeFi protocols like a domino effect, rapidly spreading through institutional investors to traditional financial markets such as stocks and bonds, potentially triggering a global liquidity crisis. Compliance with reserve asset audits and redemption guarantees is the first line of defense to prevent this domino from falling.
2. Blocking Illegal Financial Activities
The global nature, quasi-anonymity (on-chain addresses are traceable, but user identities are not directly linked), and peer-to-peer transmission characteristics of stablecoins make them highly susceptible to use in money laundering, terrorist financing, and evading sanctions. In 2023, the scale of illegal transactions involving stablecoins reached $12 billion globally, with over 60% flowing to cross-border sanctioned regions. Without strict compliance requirements for KYC (Know Your Customer), KYT (Know Your Transaction), and sanctions screening, this efficient financial highway could become a perfect tool for criminals, leading to severe regulatory crackdowns by sovereign nations.
3. Maintaining Monetary Sovereignty and Financial Stability
The widespread use of dollar stablecoins in emerging markets (such as over 20% of cross-border trade in Argentina and Turkey being settled in USDT) means that when dollar stablecoins issued by private companies are widely adopted in overseas markets, it effectively executes a form of "shadow dollarization" (where citizens in a country spontaneously use dollars to replace their unstable local currency for savings and transactions), eroding the monetary sovereignty and effectiveness of monetary policy in other countries. For the United States itself, if unregulated stablecoins are widely used for payments, their potential run risk could threaten domestic financial stability. Therefore, compliance is no longer an industry option but a necessary requirement for maintaining national financial security.
Discussing compliance when talking about stablecoins is essential because their "infrastructure" nature determines that they can no longer enjoy the "gray area" benefits of early cryptocurrencies. Compliance is no longer a shackle to their development but a license for entry and a trust anchor for whether they can be accepted by the mainstream financial system and continue to survive. The wave of global regulation is not aimed at stifling innovation but is attempting to rein in this runaway horse before it is too late, guiding it towards a transparent, robust, and responsible future.
Main Compliance Risks Facing Stablecoins
(1) Legal Qualification Risk—Regulatory Recognition Differences Leading to Increased Compliance Costs
There are differences in how stablecoins are recognized across different jurisdictions:
U.S. regulatory agencies are still debating whether stablecoins should be classified as securities, commodities, or money transmission tools. For example, the SEC (U.S. Securities and Exchange Commission) tends to classify asset-collateralized stablecoins issued based on specific projects as securities, while the CFTC (U.S. Commodity Futures Trading Commission) believes they may fall under commodities, and the OCC (U.S. Office of the Comptroller of the Currency) allows banks to issue "payment stablecoins." This multi-headed regulation leads issuers to meet multiple sets of compliance requirements simultaneously.
The EU's MiCA legislation classifies stablecoins into "e-money tokens" (pegged to a single fiat currency, such as USDC) and "asset-referenced tokens" (pegged to multiple types of assets). The former must meet e-money regulatory requirements, while the latter must additionally submit a risk reserve plan.
Hong Kong's "Stablecoin Ordinance" views stablecoins as a payment tool that requires strict regulation (focusing on stablecoins as a medium of value storage and payment), rather than as securities or other types of assets.
This uncertainty in qualification, along with the possibility that regulatory agencies (such as the SEC, CFTC in the U.S., or EU regulatory bodies) may suddenly introduce a set of strict new regulations and deem existing models non-compliant, will lead to significant compliance complexity and costs for stablecoin issuers.
(2) Reserve Asset Risk—Lack of Transparency Leading to Run Risks
The authenticity, sufficiency, and transparency of reserve assets are core challenges facing stablecoins, with the industry currently facing three major issues:
1. Insufficient Reserve Assets. In 2019, it was revealed that Tether (USDT) was only 74% backed by real assets, despite the company's long-standing claims of full collateralization. As of Q3 2024, Tether disclosed that over 60% of its reserves were in short-term government bonds, but it still faced scrutiny due to its audit frequency (once per quarter) being lower than that of USDC (once per month). As of now, Tether has changed to publish its reserve reports at least monthly and typically provides daily updates on reserve data.
2. Non-Compliant Assets. Some smaller stablecoins invest their reserve assets in high-risk areas (such as stocks and crypto assets). In 2023, a stablecoin triggered a de-pegging due to a 30% drop in its reserve assets.
3. Inadequate Disclosure. Only 30% of stablecoin issuers publicly disclose the specific custodians and details of their reserve assets (2024 crypto industry report), making it difficult for investors to verify the authenticity of the assets.
According to new regulations such as the U.S. "GENIUS Act" and Hong Kong's "Stablecoin Ordinance," reserve assets must be 100% cash, short-term government bonds, or other highly liquid assets, and must be audited daily, with issuers required to meet strict capital, liquidity, and disclosure requirements.
The lack of transparency or insufficient reserve assets can directly trigger a run, leading to de-pegging. Issuers will face hefty fines from regulatory agencies, operational suspensions, or even criminal charges.
(3) Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) Risks—A Hotspot for Regulatory Penalties
Anti-money laundering (AML) and counter-terrorism financing (CFT) are key areas of regulatory focus. The price stability and global accessibility of stablecoins make them attractive tools for money laundering and evading sanctions.
Unlike volatile cryptocurrencies, stablecoins allow bad actors to maintain asset value while transferring funds. Regulators now require strict KYC (Know Your Customer), KYT (Know Your Transaction), and reporting of suspicious transactions (such as frequent small transfers aggregating or large cross-border transfers) procedures. Violating AML/CFT regulations will incur the harshest penalties and severely damage reputations.
(4) Market Integrity Risks—Weak Points in Investor Protection
The stablecoin market faces two core integrity risks that directly harm investor rights: market manipulation and false statements. Large stablecoins may be used to manipulate the prices of Bitcoin or other crypto assets.
False advertising regarding reserve assets or insufficient disclosure of algorithmic mechanisms can also mislead investors. Regulatory requirements are now stricter, aimed at ensuring that investors do not suffer losses due to insufficient information.
(5) Systemic Risks—Potential Threats to Financial Stability
Systemic risk is a primary concern for financial authorities. DeFi protocols hold billions in stablecoins, and even if a major issuer encounters problems, it could trigger a series of liquidations throughout the ecosystem. Imagine a domino effect: a major stablecoin collapses, lending protocols using it as collateral begin to fail, and users staking their tokens suffer severe losses. Soon, the shockwaves will spread to traditional financial institutions that have begun integrating crypto technology, and this chain reaction could be devastating.
(6) Sanctions Compliance Risks—Challenges of Global Operations
Stablecoin issuers face sanctions compliance requirements from multiple countries and regions, with core challenges including:
1. Differences in Sanction Lists. The sanction lists of OFAC (U.S. Department of the Treasury's Office of Foreign Assets Control), the EU Council, and the UN Security Council overlap but are not entirely consistent. For example, an entity may be sanctioned by OFAC but not by the EU, necessitating targeted screening rules.
2. On-Chain Address Screening. Smart contract addresses may also be included on sanction lists. For instance, "some issuers use on-chain address blacklist systems (such as Circle's USDC freezing assets of OFAC-sanctioned addresses) and built-in sanction screening modules in smart contracts to prevent stablecoins from flowing into sanctioned addresses, achieving real-time compliance."
3. Decentralization Conflicts. Some decentralized stablecoins find it difficult to enforce the freezing of assets at sanctioned addresses, facing challenges in balancing compliance and decentralization.
The complexity of global compliance requires meeting the different sanction lists and requirements of multiple countries simultaneously. Stablecoin issuers must find a balance between technological innovation and compliance obligations, which also means increased operational costs and compliance difficulties.
Global Regulatory Trends
Major global jurisdictions are actively taking action to incorporate stablecoins into regulatory frameworks:
(1) U.S. Regulatory Framework
The U.S. has adopted a multi-headed regulatory structure (SEC, CFTC, OCC, Treasury), with the GENIUS Act allowing non-bank entities (NBEs) and insured depository institution (IDI) subsidiaries to act as issuers. The act emphasizes the redemption process, requiring issuers to establish clear redemption policies and procedures to ensure stablecoin holders can redeem in a timely manner. However, the act does not mandate that stablecoins maintain par value in the secondary market, where most trading occurs.
(2) EU's MiCA Framework
The EU's Markets in Crypto-Assets Regulation (MiCA) establishes a comprehensive and strict regulatory framework for stablecoins, including licensing requirements, reserve asset requirements, and holder rights.
MiCA categorizes stablecoins into two types: "e-money tokens" and "asset-referenced tokens," implementing different regulatory requirements for each to ensure that regulation matches the level of risk.
(3) China's Dual Regulation
China has adopted a unique dual regulatory approach: banning the issuance and trading of stablecoins on the mainland while implementing a comprehensive regulatory system in Hong Kong.
The Hong Kong Stablecoin Ordinance officially came into effect in August 2025, requiring 100% reserve asset segregation, with reserve assets needing to be cash, U.S. dollars, or Hong Kong dollar government bonds, among other high-liquidity assets.
The Hong Kong Securities and Futures Commission also requires custody by licensed banks in Hong Kong, daily audits, and assurance of next-day redemption capability. This prudent regulatory approach aims to make Hong Kong a global center for digital asset innovation.
(4) International Organization Regulatory Trends—Promoting Global Unified Regulatory Standards
Organizations such as the Financial Stability Board (FSB) and the Bank for International Settlements (BIS) are developing global unified regulatory recommendations for stablecoins, aimed at preventing regulatory arbitrage and ensuring global financial stability. In July 2023, the FSB released the "Global Regulatory Framework for Crypto Asset Activities," requiring stablecoin issuers to meet four core requirements: "sufficiency of reserve assets, transparency of redemption mechanisms, AML compliance, and prevention of systemic risks."
The Basel Committee on Banking Supervision (BCBS) revised the "Prudential Treatment of Crypto Asset Exposures" standards in 2024, which will officially take effect on January 1, 2025, proposing a stricter and more prudent global unified framework for risk management of banks holding crypto assets (including stablecoins), aimed at addressing the risks posed by crypto assets while maintaining financial stability.
Compliance Path: Action Guide for Issuers and Investors
(1) Issuers: Build a Comprehensive Compliance System
Stablecoin issuers face multidimensional challenges and need to build a comprehensive compliance system from four dimensions: embracing regulation, reserve asset management, technical compliance, and risk prevention.
1. Actively Embrace Regulation. Prioritize applying for licenses in regions with clear regulations (such as the U.S., EU, and Hong Kong), and regularly communicate with regulatory agencies to avoid compliance surprises.
2. Standardize Reserve Asset Management. Strictly allocate reserve assets according to regulatory requirements (such as 100% cash + short-term government bonds), choose leading custodians (such as HSBC in Hong Kong), and have qualified accounting firms regularly issue reserve asset audit reports, publicly disclosing reserve asset details (including custodian account information and asset type proportions).
3. Strengthen Technical Compliance Systems. Invest resources to build top-notch AML/KYC and sanction screening systems. For example, leading issuers often adopt a combination of "on-chain transaction tracking + offline identity verification" (such as USDC requiring large users to complete facial recognition + address tracing). Additionally, integrate third-party compliance tools like Chainalysis to achieve KYT screening for cross-chain transactions. In terms of cybersecurity risks, measures should be taken to prevent cyberattacks that could lead to asset theft, loss of private keys, blockchain network failures, smart contract code vulnerabilities, and network forks.
4. Improve Risk Prevention. Regularly conduct stress tests (such as simulating a scenario where 10% of users redeem simultaneously), ensuring that reserve asset liquidity meets 100% redemption demand within 30 days, and establish a risk reserve (no less than 2% of the issuance scale) to address sudden de-pegging risks, along with formulating emergency plans (such as a limit redemption mechanism when reserve assets are insufficient).
(2) Investors: Establish a Risk Screening Framework
Investors should conduct comprehensive due diligence, thoroughly understanding the issuer's qualifications, license, reserve asset composition, audit history, and compliance status before researching any stablecoin project. Preferring compliant targets is key to reducing risk; investors should prioritize stablecoins like USDC that are backed by high-liquidity assets and are more transparent, rather than those lacking transparency.
Most importantly, investors must recognize the risks and understand that "stability" is relative and not risk-free. Even fully collateralized stablecoins face counterparty risk, regulatory risk, and technological risk.
Future Outlook: Trends and Challenges in Stablecoin Development
(1) Trends in Stablecoin Development
Global regulation is reshaping the landscape of stablecoins, but true stability anchors come not only from legal compliance but also from technological transparency and market confidence. Under compliance-driven conditions, stablecoins will exhibit the following trends:
1. Increased Industry Differentiation, with Compliance as a Core Competitiveness
For stablecoin projects, compliance is no longer optional but a reflection of core competitiveness. Projects that can actively embrace regulation, achieve extreme transparency, and build strong compliance systems (such as Circle, the issuer of USDC) will gain institutional trust and market share.
Conversely, those attempting to linger in the gray area, with opaque reserves and ambiguous compliance, will continue to face regulatory scrutiny and sudden risks, with their survival space being increasingly squeezed.
The wave of global regulation is pushing stablecoins from the "Wild West" era into a new phase characterized by institutionalization, transparency, and high compliance.
2. Regulatory Trends Moving Toward Global Unified Standards
There are still key gaps in global stablecoin regulation, but core standards are becoming unified globally. Regardless of regional differences, the three major requirements—sufficiency of reserve assets (100% high-liquidity asset backing), transparency of redemption mechanisms (clear T+1 or T+0 redemption processes), and full AML/CFT compliance (KYC/KYT covering all users)—have become universal standards for global regulation. For example, while the U.S. GENIUS Act, the EU MiCA, and Hong Kong's Stablecoin Ordinance differ in licensing application processes and penalty standards, they all strictly require these three points, preventing issuers from exploiting regulatory arbitrage through regional policy loopholes.
3. Stablecoin Application Scenarios Extending to the Real Economy
As the tokenization of traditional real-world assets (RWA) such as stocks, bonds, and real estate accelerates, stablecoins will become the preferred settlement tool for RWA transactions due to their value stability and compliance transparency. Stablecoins, as tools for cross-border payments, have achieved cost reduction and efficiency enhancement. Currently, emerging markets in Southeast Asia and Latin America have become core scenarios for stablecoin cross-border payments, and in the future, they will extend to areas such as corporate cross-border trade, supply chain finance, and wage payments.
4. Conservative Asset Reserves
Regulatory requirements mandate that reserve assets must be cash, short-term government bonds, or other high-quality liquid assets. This will force issuers to abandon high-risk investment strategies in favor of more transparent and safer models.
(2) Challenges Facing Stablecoins
Despite the positive trends, compliance-driven stablecoins still face significant challenges:
1. Lack of Connection in Redemption Mechanisms. Currently, most regulations focus on primary market redemptions (direct redemptions by issuers), but the stability mechanisms in the secondary market (exchange market) are still lacking, necessitating clear response rules for de-pegging in the secondary market.
2. Unstandardized Technical Standards. Technical standards for smart contract security, cross-chain transaction compliance, and data privacy protection have not yet been globally unified, which may lead to technical compliance barriers.
3. Challenges to Financial Sovereignty. Large-scale stablecoins may affect the transmission efficiency of national monetary policy and financial sovereignty. If stablecoins are deeply connected to major financial systems, their failure could trigger broader financial turmoil.
Conclusion
The future is here; compliance is no longer an option but the cornerstone of survival. Whether issuers or investors, only by actively embracing regulation, strengthening risk control, and enhancing transparency can they remain undefeated in this transformation. The ultimate goal of stablecoins has never been to replace fiat currencies but to become a stable and efficient light in the financial infrastructure of the digital age.
This path is destined to be long and full of challenges, but it is precisely these challenges that drive stablecoins toward a more mature, inclusive, and sustainable future. What we are witnessing is not just an evolution of technology but an evolution of financial civilization.
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