This Bulletin takes stock of the current state of the stablecoin market and assesses the key policy challenges surrounding the circulation of stablecoins in public blockchains. Although stablecoins bear some resemblance to conventional financial products (such as MMFs, or money market exchange-traded funds), they present a unique set of challenges given their borderless and pseudonymous nature. In this regard, the principle of “same risks, same regulation” faces inherent limitations: since “same risks” does not apply, the prescription “same regulation” has only limited bite. The policy response will need more tailored approaches that target the nature and specific features of stablecoins.
Stablecoin growth: taking stock
Stablecoins have experienced rapid growth in recent years and remain predominantly centred around the US dollar. The number of stablecoins in active use has soared from around 60 in mid-2024 to over 170 today. Equally striking is the sharp increase in market capitalisation, which has grown from $125 billion less than two years ago to around $255 billion today. While this is equivalent to around 1.5% of US bank deposits, it amounts to about 4% of the assets held by government money market funds (GMMFs) in the United States. Despite the proliferation in the number of stablecoins, the market remains highly concentrated, with around 90% of market capitalisation accounted for by just two issuers. The market is also overwhelmingly dominated by the US dollar as the reference asset. To date, almost 70% of active stablecoins by count, and almost 99% by market value, are denominated in dollars.
Policy challenges
- Illicit activities and AML/CFT risks: Stablecoins circulate freely across borders on public blockchains, often into self-hosted wallets, which makes KYC compliance difficult. This creates opportunities for criminal and terrorist organizations, while enforcement largely falls on public authorities who cannot realistically monitor billions of pseudonymous transactions.
- Threats to monetary sovereignty: The growing cross-border use of stablecoins, with trading volumes exceeding $400 billion, undermines domestic monetary policy and weakens FX regulations or capital controls. Adoption is especially strong in countries facing high inflation or exchange rate volatility, where stablecoins act as a dollar substitute.
- Market impact of stablecoin reserves: Major stablecoins invest heavily in short-term U.S. Treasuries, with purchases rivaling those of large countries and global MMFs. Inflows can lower Treasury yields, while outflows have an even stronger impact by forcing liquidations, raising concerns about fire sales and highlighting the need for liquidity risk management.
- Sensitivity to interest rates: Stablecoin demand falls during periods of monetary tightening, as investors prefer higher-yielding alternatives. In contrast, MMF assets grow when rates rise. Looking ahead, tokenised MMF shares could further erode stablecoins’ appeal by offering blockchain-based settlement with market interest payments.
Policy approaches
Stablecoins resemble traditional financial instruments like MMFs or e-money but differ in operating globally on permissionless blockchains, raising challenges for regulation confined within national borders. Their promise of dollar redemption highlights the question of who can backstop them if issuers fail, echoing historical failures of similar promises. A bespoke regulatory framework is therefore needed—building on lessons from traditional finance while adapting to blockchain-specific features, leveraging transparency for AML enforcement, and potentially imposing stricter safeguards. Given their cross-border nature, effective oversight will also require international cooperation while upholding technological neutrality to avoid regulatory imbalances.
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