Stablecoins: What banks, payment companies need to know

Tiffany Hagler-Geard/Bloomberg

The popularity of cryptocurrency and the expectation of new regulations are pushing stablecoins into the spotlight, potentially creating new markets for the digital asset.

Stablecoins are designed to be less volatile than other forms of cryptocurrency and as such are seen as the most likely digital asset to be used for payments. But stablecoins are complex and may not necessarily be a good fit for all types of payments.

That places pressure on banks and payment companies to match the right stablecoin with the right user, taking economic risk, compliance with existing and potential new regulations, and the appetite for an added payment option into consideration. Where to offer stablecoins is also a matter to consider.

"When we talk about standard consumer payments in the U.S., then you really don't need a stablecoin because there are loads of other mechanisms available," said Martha Bennett, vice president and principal analyst for Forrester. "But where that is different is for cross-border payments, or other types of transactions where you still have lots of friction, where payments take a long time to process." 

What are stablecoins?

The definition of stablecoin varies, but it mostly refers to a cryptocurrency with a value that is linked to another currency or financial instrument. The link is often to U.S. dollars, euros or pounds, which do not have dramatic valuation swings.

Ideally, a stablecoin has a 1:1 backing between the stablecoin's value and the value of the supporting reserves. For this reason, payment companies have invested in stablecoins or stablecoin technology; and Visa and Mastercard have expressed an interest in supporting stablecoin payments. 

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But it's rare that a stablecoin is backed entirely by a traditional currency, according to Bennett. 

"When you see terms like 'fiat-backed,' people think the stablecoin has dollars behind it but that's not the case," she said. The reserves that back stablecoins can be Treasury bills or other assets that are ideally liquid and relatively safe though that has been the subject of controversy in the past and is still part of efforts to regulate stablecoins, she said. 

In general, the more traditional currency that is in the stablecoin reserves, the less risk for the user. "The actual cash element in these stablecoins can be quite small," Bennett said. That means it's vital to know the mix of these reserves, which ensure that users can redeem the stablecoins in the event of a bankruptcy of the issuer, she said. 

How do stablecoins work?

Stablecoins such as Tether, USDC and PayPal's PYUSD are designed to change valuation more or less in tandem with the more "stable" backing assets, thus the name.

Bitcoin's valuation, for example, looks like a seismograph during an earthquake, often shifting hundreds or thousands of dollars in a single day — creating a risk that the amount someone pays and the amount someone receives may be dramatically different. 

The U.S. dollar index, by comparison, is much more boring. It's unlikely that a dollar-based payment that takes three business days to settle will have a vastly different value at the end of that period.

That has made bitcoin and other cryptocurrencies more amenable to traders who use stablecoins as a less-risky way to balance a larger portfolio.

There are different kinds of stablecoins.

Fiat-collateralized stablecoins, which are most stablecoins and the type most likely to be used for payments, are managed by independent consultants.

Commodity-backed stablecoins use gold, silver or other commodities as reserves. An example of a commodity-backed stablecoin is Tether Gold.

Other stablecoins are backed by other cryptocurrencies but are overcollateralized to manage the crypto's volatility. And algorithmic stablecoins may not have reserve assets but instead use a computer program to manage the coin's value. 

How do you get stablecoins?

Companies, such as cryptocurrency firm Circle, payments firm PayPal and others issue stablecoins that can be purchased through the issuer or on a cryptocurrency exchange.

Users set up an account, similar to buying other cryptocurrency, and store the stablecoins in a digital wallet tied to that account. 

Payment firms such as PayPal and its P2P transfer app Venmo also support buying, selling and holding cryptocurrencies such as stablecoins, and Block has a cryptocurrency unit called TBD that offers related services. Block's Cash App also supports crypto transactions.

Why use stablecoins for payments?

Stablecoins are good for retail payments for a few reasons, according to Enrico Camerinelli, a strategic advisor for Datos Insights. Like other digital assets, which are often referred to as "tokenized" (meaning they are digitized on a distributed ledger such as a blockchain) stablecoins have faster settlement times.

"Tokenized assets allow for immediate transaction clearing, minimizing delays and inefficiencies in financial exchanges," Camerinelli said. 

Stablecoins have lower counterparty risk, since digital asset transactions reduce dependency on intermediaries, providing companies with enhanced control over their liquidity management, according to Camerinelli. 

Another benefit is lower operational costs. 

"By minimizing the need for human oversight, automation technologies and smart contracts (an automated system that 'triggers' a payment when certain conditions are met) offer substantial improvements in operational efficiency," Camerinelli said. 

Where stablecoins can be used for payments

The market capitalization of stablecoins, which first appeared about a decade ago, has steadily risen over the past few years, and in 2025 is north of $200 billion. That's still a tiny portion of the overall global payments market, which is on pace to pass $3.1 trillion in 2025. 

Since mainstream currencies are ubiquitous, stablecoins are more likely to be used for international payments or remittances, where the local currency may be less volatile.

"There may not be access to lower cost transfer methods in some of these areas," Bennett said, noting there is a learning curve that the payments industry needs to address for payments to gain ground. "Right now you need to know how the financial system works to use stablecoins. People shouldn't have to know about what's going on in the background." 

Other uses for stablecoins should also continue to grow, Camerinelli said. 

"Financial institutions, central banks and fintech players are rapidly developing tokenized asset classes that could redefine capital markets. Mainstream adoption for retail payments requires full interoperability of systems and standards that are essential to prevent fragmentation and ensure that emerging markets can successfully interconnect with each other," he said.

The rules

Stablecoin issuers are counting on new regulations that tighten how stablecoins are structured, and how issues such as run risk are addressed.   

Congress is considering the Guiding and Establishing a National Innovation for U.S. Stablecoins, or the GENIUS Act, a bipartisan bill that would create a regulatory framework for payment stablecoins. 

The GENIUS Act is part of a broader legislative effort to forge a U.S. legal framework for stablecoins, following a similar trend toward regulatory support in the European Union.

In Europe, the Markets in Crypto-Assets regulations launched on Dec. 30, though an earlier part of MiCA that requires stablecoin issuers to hold at least 60% of their reserve assets in European banks went into effect June 30. MiCA, which also includes consumer protection and tightens disclosure rules, provides a regulatory baseline for stablecoin payments. 

Stablecoin issuers such as Circle have expressed hope that the Trump administration's pro-crypto posture will lead the U.S. to adopt stablecoin laws similar to MiCA.

Private companies largely issue stablecoins, with the largest being USDC and Tether. USDC is based in the U.S. and publishes reserves, while Tether is based outside the U.S. and does not make its reserves readily available for audit, said Gerald Gallagher, general counsel for Sei Labs.  

"Previously, banks have not been able to issue stablecoins in the U.S. We have different entities engaging with different regulators, and the OCC, the de facto banking regulator in the U.S., is making a push to provide more clarity so that financial institutions can work with these innovative products without confusion over who they're reporting to, and how," Gallagher said.