Stablecoins had once seemed like yesterday’s news. Now they’re a Washington obsession.
Stablecoins are a special flavor of cryptocurrency. Unlike Bitcoin or countless wildly traded memecoins, whose values rise and fall based on market moods, the most popular versions of these digital tokens are supposed to always be worth $1 each. They greased the wheels of the pandemic-era crypto boom by giving traders a digital substitute for cash. Advocates touted them as the future of money. After the collapse of the FTX crypto exchange in 2022, however, they fell off many people’s radar, along with the rest of crypto.
Flash-forward to 2025. Stablecoins are the focus of major legislation in Congress—the first salvo in a crypto-industry-backed effort to write new rules for digital assets. Circle Internet Group Inc., the issuer of the top US-based stablecoin, in early June raised over $1 billion in an initial public offering. Mainstream firms such as Visa Inc. and PayPal Holdings Inc. are elbowing in. “The vibe shift has been gargantuan,” says Yesha Yadav, a professor at Vanderbilt Law School who studies financial regulation.
Part of the shift is related to the election of President Donald Trump along with Republican majorities in Congress. The crypto industry poured millions of dollars into Trump’s campaign, and he vowed to appoint industry-friendly regulators. The president’s family is even in the stablecoin business, with World Liberty Financial, majority owned by a Trump family company, issuing its own token with a market value of more than $2 billion. Backlash over the Trump ventures and potential conflicts of interest briefly stalled the Senate stablecoin bill known as the Genius Act before it advanced on a procedural vote. A similar bill is working its way through the House.
The potential consequences of bringing stablecoins into the mainstream reach beyond crypto. Stablecoins could be the blueprint for payments in the 21st century, or they could open up new cracks in the financial system, depending on whom you ask.
Forget about blockchains, cryptography and the other tech around stablecoins, and think of them as financial institutions. A stablecoin isn’t a bank—for one thing, it doesn’t offer deposit-insurance protection—but it typically works a lot like one. The company that runs it takes in dollars, or another currency the token’s value is pegged to, and invests it to earn interest. The company issues a token for every dollar it takes in. Those tokens can be traded and swapped by people who want to use them like money or be cashed in for $1.
Coins typically don’t pay interest to their holders, so the company profits from being able to pocket that return itself. And rising interest rates have made it possible for stablecoin issuers to earn more than 4% on low-risk assets such as Treasury bills. The low risk is important: The reserves backing a stablecoin need to be liquid enough that the issuer can pay back holders if they redeem them.
Because of those reserves, a stablecoin’s value isn’t supposed to go up or down. Key words: supposed to. Stablecoins can break their peg to $1. During the crisis that brought down Silicon Valley Bank in March 2023, a coin run by Circle known as USDC got caught up in the panic. A portion of the reserves for USDC was in an account at the failing bank, and nervous traders briefly pulled the coin’s market price below 90¢ as they rushed to sell. Circle promised to stand behind its token and redeem it at full value, and the storm passed when federal regulators guaranteed all deposits at SVB. Circle, in a regulatory filing, says it’s always met redemption requests at exactly $1 per USDC. Users hold $61 billion worth of USDC, with its reserves mostly in short-term US Treasuries and related cash-like assets.
Now bring crypto technology back into the picture. Stablecoin proponents see a world where the tokens zip digital money across time zones and oceans, cutting out middlemen and lowering fees. They could provide financial services to people who don’t have banks. “We see these as the next technology to drive down the cost of payments and drive up speed,” says Jose Fernandez da Ponte, PayPal’s senior vice president and general manager for blockchain, crypto and digital currencies. PayPal introduced its own stablecoin in 2023.
Yet the main use of stablecoins so far has been in crypto markets: to purchase and trade other coins or as collateral for leveraged bets. They’ve also caught heat for their role in the dark economy. Tether USDT, the largest stablecoin with $150 billion in circulation, is popular with crime syndicates in cyber fraud, illegal gambling and money laundering operations, according to a 2024 United Nations Office on Drugs and Crime report. Tether Holdings SA, based in El Salvador, has said that it complies with know-your-customer rules and works with law enforcement to stop illicit use.
Tether has also faced questions in the past about the transparency of its reserves. In 2021 it paid US regulators $41 million to settle civil allegations that it lied in claiming its digital tokens were fully backed by cash. Tether neither admitted nor denied wrongdoing and has said the fine was related to issues it’s resolved.
The draft bills in Congress aim to set rules for stablecoins and allay concerns about what could go wrong. They would require issuers to invest in low-risk assets like short-term Treasuries and make issuers subject to oversight by federal or, in some cases, state regulators. Issuers would have to adhere to anti-money-laundering, sanctions and know-your-customer laws. Stablecoins wouldn’t have Federal Deposit Insurance Corp. guarantees.
A regulatory framework is essential for safety and growth in the market, says Christian Catalini, founder of the MIT Cryptoeconomics Lab. “All those things are missing from the picture” says Catalini, who once worked with Facebook (now Meta Platforms Inc.) to develop a stablecoin-like token. “Stablecoins are a bit like the first cars running on the bumpy roads that were meant for horses,” he says. “You’re not seeing their full potential.”
Tether doesn’t serve US customers and has said it’ll focus on non-US markets if new laws pass. To do business in the US, it might have to change how it operates or set up a US-based product. Its reserves include, along with cash-like assets, investments such as secured loans and Bitcoin. Yet Tether and other overseas coins may still be traded in the US on so-called decentralized exchanges, say critics including Democratic Senator Elizabeth Warren.
Regulators in charge of the safety of the US financial system are watching. A loss of confidence in any asset, whether a bank account or a money market fund, can trigger a run to redeem. That’s true for digital tokens too, say researchers at the Financial Stability Oversight Council. “This run risk is amplified by issues related to both market concentration and market opacity,” researchers wrote at yearend.
Crypto skeptics bring up these warnings as lawmakers duke out the details. Even a small deviation from a $1 price could trigger a problem. “In the race for yield, those reserves will be mismanaged, and there will be runs on stablecoins,” says Corey Frayer, director of investor protection at the Consumer Federation of America and former crypto policy adviser to Biden-era US Securities and Exchange Commission Chair Gary Gensler. “And even though they are private, and even though they don’t pay into the deposit fund, they will be bailed out like any other too-big-to-fail financial institution,” he says.
Stablecoins are a tiny slice of the financial system—about $234 billion, according to the Treasury. (The nation’s largest bank, JPMorgan Chase & Co., has assets of $4 trillion.) But the Treasury predicted in an April report that they could grow to $2 trillion by 2028. Circle and Tether together hold more Treasuries than some individual nations, including Germany, Saudi Arabia and South Korea, according to Bain & Co. Treasury Secretary Scott Bessent has even touted stablecoins as a source of demand for Treasuries and by extension the dollar.
But tying stablecoins—and with them the volatile crypto market—into traditional finance can cut both ways. A swift liquidation of Treasury bills by one stablecoin in a time of stress could have ripple effects on other stablecoin issuers and money-market funds holding bills, noted a May report by JPMorgan analysts.
Timothy Massad, former chairman of the US Commodity Futures Trading Commission and director of the Digital Assets Policy Project at Harvard Kennedy School, says stablecoins present big opportunities. But he also warns about risks. “The stablecoin market perhaps may not be big enough today to pose a financial stability risk, but contagion is more of a psychological phenomenon,” he says. “In a certain environment, contagion could grow and spread very quickly.” —With Steven T. Dennis
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