19 Sep, 2025
Stablecoins: From Crypto Payment Tool to Regulated Financial Infrastructure
Amid the deepening penetration of digital finance into the global trade system, cryptocurrencies such as Bitcoin and Ethereum have attracted widespread attention. However, due to their extreme price volatility, they remain unsuitable for mainstream payment functions. By contrast, stablecoins — represented by Tether (USDT) and USD Coin (USDC) — maintain parity with fiat currencies through a pegging mechanism. This allows them to retain the efficiency and low transaction cost of blockchain-based payments while avoiding the high volatility of traditional cryptocurrencies, making them a focal point of financial innovation.In recent years, regulatory frameworks introduced in the U.S., European Union, and Hong Kong have provided a compliance foundation for the development of stablecoins. These measures are gradually earning global investor confidence and paving the way for stablecoins to integrate into mainstream financial systems.As of now, the global market capitalization of stablecoins has exceeded USD 280 billion, with widespread use in transaction settlement, cross-border payments, and asset tokenization. Their rise is reshaping the digital finance ecosystem while also raising new demands for risk management. The adoption of stablecoins ultimately relies on market trust — derived both from the transparency and verifiability of blockchain technology and from the credibility of their underlying reserves and regulatory safeguards. Thus, understanding the technical underpinnings and trust mechanisms of stablecoins is essential to capturing opportunities in digital finance while managing potential risks.Characteristics and Current Landscape of StablecoinsStablecoins are blockchain-issued digital assets designed to maintain price stability through pegging mechanisms. Initially serving as intermediaries for cryptocurrency trading, they have since expanded into decentralized finance (DeFi), underpinning activities such as lending and collateralization. With near-instant settlement speeds, low transaction costs, and cross-border portability, stablecoins are increasingly used in cross-border payments and international trade.The evolution of stablecoins reflects a journey from experimentation to regulation:2014: Tether launched USDT, pioneering the 1:1 fiat-collateralized model and rapidly becoming the core stability instrument of the crypto ecosystem.2017: MakerDAO introduced DAI, the first decentralized overcollateralized stablecoin backed by crypto assets and managed through smart contracts.2020: The DeFi boom drove surging demand for stablecoins, providing stability in highly volatile crypto markets.2022: The collapse of algorithmic stablecoin UST exposed systemic weaknesses, drawing global regulatory scrutiny.2025: The U.S. GENIUS Act and Hong Kong’s Stablecoin Ordinance established compliance frameworks, ushering stablecoins into a “regulated development” stage.The market today shows two defining features:1️⃣ Concentration among top issuers: As of August 2025, the stablecoin market capitalization surpassed USD 280 billion. USDT holds about 60% market share, followed by USDC, underscoring strong trust in fiat-backed models.2️⃣ Reliance on major blockchain ecosystems: Ethereum, Tron, and Solana host the majority of stablecoin activity, with Ethereum alone supporting over USD 137 billion in stablecoin capitalization. With traditional financial institutions entering and regulatory frameworks strengthening, stablecoins are increasingly expanding into cross-border payment and real-world asset (RWA) tokenization.Technical Foundations of StablecoinsThe stability and secure operation of stablecoins are underpinned by blockchain infrastructure and smart contracts. While technical implementations differ, their core logic remains: reliable collateral, transparent mechanisms, and secure transactions.1️⃣ Types of Stablecoins and Technical ModelsOff-chain collateralized: Backed by fiat currencies or off-chain assets such as short-term bonds or gold. Key processes include custody, audit verification, and redemption mechanisms. Examples: USDT, USDC.On-chain collateralized: Backed by overcollateralized crypto assets such as ETH. Example: DAI, where smart contracts automatically liquidate collateral if collateral ratios fall below thresholds.Algorithmic: Supply is algorithmically adjusted to maintain price parity. Token supply expands when above the peg and contracts (via buybacks or bond issuance) when below.2️⃣ Blockchain as a Trust InfrastructureDistributed ledgers, cryptographic hashing, and consensus mechanisms ensure data immutability and transparency. Stablecoins issued and managed via smart contracts benefit from blockchain’s openness and multi-node participation, providing a technological trust foundation.3️⃣ Smart Contracts for Automated ManagementSmart contracts automate issuance, transfer, and burning of stablecoins to align supply with collateral.Off-chain models focus on issuance, redemption, and audit trails.On-chain models focus on collateral management and risk control.Algorithmic models adjust supply dynamically to maintain price stability. Their transparency and decentralized execution mitigate human risk and strengthen user trust.The Trust Logic of StablecoinsAt the heart of stablecoins lies trust — the belief that tokens can be redeemed at their pegged fiat value.1️⃣ Pegging and Reserve MechanismsOff-chain collateralized stablecoins depend on reserve adequacy, liquidity, and transparent audits.On-chain collateralized models rely on overcollateralization and automated liquidation.Algorithmic models, lacking real collateral, rely solely on supply-demand dynamics and market arbitrage, exposing structural weaknesses.2️⃣ Technical VerifiabilityBlockchain transparency ensures critical data are publicly visible, reducing reliance on issuer claims.Open-source smart contracts enable global developer auditing, with governance mechanisms (e.g., MakerDAO’s updates to liquidation parameters) allowing ongoing improvements.Compliance rules can also be embedded directly into contracts, enabling real-time regulatory oversight.3️⃣ Regulatory SafeguardsIf technology and reserves provide internal trust, regulation provides external reinforcement.Robust legal frameworks enhance user confidence by ensuring accountability and preventing malpractice such as over-issuance or reserve misuse.Jurisdictions worldwide are moving to integrate stablecoins into regulated finance. U.S. (GENIUS Act), EU (MiCA), and Hong Kong (Stablecoin Ordinance, effective August 1, 2025) have introduced stringent requirements for licensing, reserve management, user protections, and disclosure. These frameworks enshrine the principle of “same activity, same risk, same regulation,” supporting the transition of stablecoins from experimental instruments to regulated financial tools.Challenges and OutlookDespite rapid progress, stablecoins face challenges across regulation, stability, and governance:1️⃣ Regulatory Technology: Decentralized transactions are difficult to monitor comprehensively, and the absence of global regulatory infrastructure creates risks of misuse in illicit activities.2️⃣ Price Stability: Fiat-backed stablecoins depend on reserve transparency; opacity risks de-pegging and triggering market panic.3️⃣ Governance: Cross-border operations clash with fragmented national regulations, with limited mechanisms for international coordination.Looking ahead, stablecoin supply may expand into the multi-trillion-dollar scale, penetrating areas such as supply chain finance and real estate tokenization, thereby evolving into core financial infrastructure. Maturing regulation and accelerating technological innovation will enhance scalability while preserving privacy protections.Strategic priorities for addressing challenges include:1️⃣ Regulatory Technology: Invest in global supervisory infrastructure for blockchain ecosystems, leveraging big data and AI to support compliant innovation. Develop standardized smart contract frameworks and deploy AI-driven auditing tools for automated vulnerability detection, embedding regulatory rules into contracts to reduce systemic risks.2️⃣ Anchoring and Reserve Management: Establish real-time reserve proof systems and mandate third-party independent audits, ensuring transparent disclosure of asset composition and operational data to reinforce user confidence and ecosystem trust.3️⃣ Governance and International Cooperation: Promote cross-border regulatory collaboration to harmonize compliance processes, lowering barriers to global adoption. Meanwhile, enhance public financial literacy and awareness of digital finance risks to curb fraud and misconduct.