Stablecoins: Stable but not silent

31st October 2025 

Key takeaways

Stablecoins are reshaping digital finance, offering stability, utility, and innovation but also posing risks. Used for trading, lending, remittances, and value storage, especially in high-inflation economies.

Their rapid growth is driven by strong market positions, first-mover advantage and strong technological investments. Revenue model based on yield from reserves and transaction fees.

Banks are entering the space, offering safer alternatives like tokenized deposits. Regulatory gaps and global inconsistencies create challenges, especially around financial stability and supervision.

Coordinated international regulation is essential to prevent fragmentation and ensure safe innovation. Stablecoins will not replace official currencies but can enhance cross-border payments if well-managed. DLT and tokenisation are key technologies for financial innovation.

Success would depend on smart regulation, responsible innovation and global coordination.

Introduction

This article explores the current state of the stablecoin market, the drivers behind its growth, the role of banks, and the regulatory and supervisory challenges ahead. It aims to provide an accessible overview for financial supervisors and policymakers navigating this fast-moving space.

Originally designed to offer price stability in the volatile world of cryptocurrencies, they have evolved into powerful tools for payments, remittances, and even financial innovation. 

What are Stablecoins and why should we care? 

Stablecoins are digital tokens designed to maintain a stable value relative to a reference asset, usually a fiat currency like the US dollar or euro. They emerged as a solution to the wild price swings of cryptocurrencies like Bitcoin, and quickly found use as a bridge between traditional finance and the crypto world. Data shows that stablecoin path is linked to the trading volume of unbacked crypto assets as the former is used as means of exchange and liquidity in the crypto world. Additionally, they are used in many activities from international remittances to storing value in unstable economies. But with great utility comes great complexity and risk. 

Since their inception in 2014, stablecoins have grown rapidly. By October 2025, their market capitalization reached around $250 billion USD, with USD-pegged coins like Tether (USDT) and USD Coin (USDC) dominating the space. Euro-pegged stablecoins remain marginal, making up only about 1% of the market. Stablecoins are used for trading, lending, cross-border payments, and even as a store of value in high-inflation countries. However, they’re also linked to illicit activities, including money laundering and sanction evasion. 

The main reasons why stablecoins, digital currencies pegged to traditional money like the US dollar, have grown so much are: 

1. Issuers started with strong market positions, and huge upfront tech investments which helped them attract more users quickly as of a first mover advantage.
2. They faced very few regulations, allowing them to expand without many limits.

In the future, this second advantage might decrease as more countries begin applying international rules for stablecoins. Still, since the U.S. government supports crypto, stablecoins based on the U.S. dollar will likely remain popular.

Issuing stablecoins is a lucrative business. Most revenue comes from the yield on reserves backing the tokens to maintaining the stability of the assets. Tether and Circle, the two largest issuers, have built powerful networks that benefit from first-mover advantages and network effects. But profitability varies. Circle, for example, spent over half of its revenue on distribution network in 2024. 

Regulatory arbitrage has also played a role, with issuers operating from jurisdictions with lenient oversight. This raises concerns about financial stability and competition. In the near future, and unless specific actions are taken to encourage competition, the two biggest stablecoin issuers may continue to dominate the market.

Looking ahead, stablecoin growth will be driven by inherited market power, regulatory gaps, and integration with decentralized finance (DeFi). Issuers are finding new revenue streams from transaction fees to yield-sharing products. But competition is heating up. Traditional players are exploring blockchain-based solutions, and finally, banks are making progress in turning regular deposits into digital tokens. This could reduce the use of stablecoins for international payments, like cross border money.

Banks have a strong advantage here because: i) These digital deposits are very similar to what customers already use; ii) They can earn interest and iii) they are protected by deposit insurance schemes, which adds a layer of safety. 

Some stablecoins also offer investment-like features, such as earning interest or being linked to things like stock indexes or gold. However, earning interest through stablecoins is not allowed in places like the EU and the US. In Hong Kong, stablecoins can be used for investment, but in the US, the rules only allow them to be used for payments.

Even though stablecoins are a type of private digital money, they’re not real currency. The Bank for International Settlements (BIS) recently said that stablecoins are missing three key qualities that make money reliable:

1. Singleness: You should always be able to exchange one euro-backed stablecoin for one actual euro or another euro-backed stablecoin. Only official currencies backed by central banks can guarantee this.
2. Elasticity: Real money can grow through lending and credit. Stablecoins cannot do this because each one must be backed by reserves, which limits flexibility.
3. Integrity: Money should be safe and protected from illegal use. Stablecoins are often used in shady ways and don’t have the same protections as traditional financial systems.

Because of these issues, the BIS concludes that stablecoins cannot replace official currencies in a sustainable way. But that does not mean they are useless. If well-regulated and properly managed, stablecoins could help improve international payments, making things easier for both individuals and businesses.

Banks & Stablecoins: Rivals, Roommates… or the Next Dream Team? 

Banks have largely stayed on the sidelines, but that is changing. 

Until now, non-bank companies have led the stablecoin market and they were willing to take legal and reputational risks in a mostly unregulated space. But once clear rules are introduced, banks have an edge. In places like the EU, US, Japan, and Hong Kong, banks already have special access to the stablecoin business.

Euro-denominated stablecoins can be issued by authorized banks and electronic money institutions, offering potential for innovation and strengthening the international role of the euro.

Banks have a large base of trusted customers who could benefit from using stablecoins for cheaper and faster payments, especially for cross border transfers. In the EU, domestic payments are already fast and efficient, so the real opportunity lies in international transfers. The upcoming digital euro will also add more options and competition for everyday users.

If the process of turning real-world assets (like securities) into digital tokens grows, stablecoins could be used as the cash side of those trades, all recorded on the same digital system. This could allow for instant settlement, cutting down on delays, errors, and costs.

Banks are not limited to issuing stablecoins. They can play a broader and more strategic role in supporting the stablecoin infrastructure by:

• Holding deposits from stablecoin issuers (as required by EU rules),
• Providing services like repos (short-term loans),
• Safeguarding the assets that back stablecoins,
• Helping with redemptions (when users want to exchange stablecoins for regular money).

Banks can also offer tokenised deposits. While similar to stablecoins in form they come with interest payments and deposit protection, which makes them more attractive to customers. 

Given the technological and risk management similarities for both, stablecoins and tokenised deposits, banks can offer both without much extra cost. In the end, tokenised deposits could become a key product, with stablecoins as a useful add-on.

In jurisdictions with clear regulations, banks enjoy a competitive advantage. They are well-positioned to issue stablecoins, hold reserves, and offer payment services. Tokenized deposits can offer similar benefits with added protections. 

Ultimately, banks are among the strongest advocates for a unified and transparent global regulatory approach to stablecoins. Their involvement is essential to building trust and stability in the evolving digital financial landscape.

Regulatory and supervisory challenges

Stablecoins blur the lines between banking, payments, and crypto. Supervisors face tough questions: Who oversees these issuers? What risks do they pose to financial stability? 

In Europe, significant issuances by credit institutions fall under CRD requirements, but electronic money institutions are supervised differently. Globally, the lack of harmonized regulation creates opportunities for regulatory arbitrage. The EU's MiCA regulation establishes strict requirements for stablecoin issuers (reserves, redemption rights, authorization). The US Genius Act, for example, gives American issuers a competitive advantage, potentially undermining international standards.

Banks are regulated to make sure they operate safely and protect the financial system. As long as they engage in crypto-related activities with responsible and sound risk management, whether by offering services or working with issuers, regulators may not need to intervene extensively.

Global standards like the FSB Crypto Framework and BCBS 545 are designed to apply consistent rules across technologies. These frameworks focus on risk, rather than on the underlying technology itself. Since crypto assets can be risky or lack real value, BCBS 545 adds extra protections. These include common-sense rules: banks must notify regulators about their crypto plans and activities; show they have assessed the associated risks and explain how those risks are being managed.

However, progress in applying these rules has been slow. The U.S. wants to revise BCBS 545 to make it more friendly to the market. They see crypto, especially stablecoins, as a way to boost the global role of the dollar. This could lead to a “race to the bottom,” where countries compete by offering looser rules to attract crypto business.

While places like the UK, Canada, Hong Kong, and Singapore still plan to follow BCBS 545 by 2026, there is a chance that some financial centers might relax their rules to stay competitive especially if tokenisation (turning real assets into digital ones) becomes more common.

One interesting example is Hong Kong, where the government is working with banks to support tokenisation of traditional financial assets. This kind of public-private partnership could help banks innovate while staying safe.

What should supervisors watch for? 

Supervisors must gain a clear understanding of how banks interact with stablecoins whether through issuance, custody, or deposit-taking to properly assess the associated risks. 

Today the main risk for banks is not stablecoin growth but the potential interlinkages between the volatile crypto assets with stablecoins acting as transmission channel to the traditional financial sector

On the more traditional side of banking, the integration of digital assets introduces significant complexity to business planning and operations. Market dynamics become harder to predict, and banks must be agile in adapting to rapid changes. This requires leadership and teams with specialized knowledge of crypto markets, as well as robust systems to manage and monitor emerging risks

Crypto assets introduce new dimensions of risk, particularly in the area of credit. Under the EU’s Markets in Crypto Assets Regulation (MiCAR), electronic money tokens (EMTs) are not subject to specific credit risk rules, whereas asset-referenced tokens (ARTs) must comply with stricter requirements. In addition to credit risk, banks must contend with familiar challenges such as technological vulnerabilities, legal issues, financial crime, and liquidity management.

Because EMTs and ARTs can be redeemed at any time, banks must be prepared to handle sudden and large scale withdrawals. This risk is heightened when short-term liabilities are backed by long-term assets. Fortunately, EU regulations on instant payments already encourage banks to strengthen their liquidity management practices. So, key risks include liquidity mismatches, operational vulnerabilities, and reputational damage. 

Even banks not directly involved in issuances, may be exposed through interconnected activities. For instance, banks that hold deposits from stablecoin issuers (required by MiCAR) or offer custody services, can be exposed to several types of risks. This raises the question of whether regulations might inadvertently increase risk and warrant further review.

A concentration of deposits from stablecoin issuers may then pose a threat to both the bank and the issuer. In times of market stress, if issuers rapidly withdraw funds, this could amplify liquidity risk in the receiving bank or vice versa if the bank is involved in a crisis. Moreover, these banks are also exposed to financial crime and reputational risk, as they must rigorously monitor transactions to prevent money laundering and terrorist financing. Operational risks also loom large in custody services, particularly those stemming from technological failures or cybersecurity breaches. 

Tools like stress testing, capital planning, and enhanced data collection are essential.

Supervision of stablecoin issuers: A European and global perspective

In Europe, when banks issue stablecoins in large amounts, they must follow strict rules under the Capital Requirements Directive (CRD). This includes having a plan for how to recover and repay funds if something goes wrong. As a result, these banks are automatically supervised by financial regulators.

But there is a fragmented landscape. For electronic money institutions (EMIs), large stablecoin issuances fall under the supervision of the European Banking Authority (EBA), working together with national authorities. While this setup follows legal requirements, it is worth asking whether it is the best approach from an economic point of view, or a less fragmented view should be pursued.

Because stablecoins are global by design, it’s crucial to have international coordination on how they’re regulated and supervised. Stablecoins could spread instability from the broader crypto market. Without coordination, there’s a risk that companies will move their operations to countries with the weakest rules This could lead to all activity concentrating in just a few jurisdictions, which may threaten financial stability. If tokenisation of financial assets grows, financial hubs may relax rules to stay competitive. The U.S. is pushing for looser rules, which could weaken global standards and encourage regulatory competition. 

To avoid this, regulators around the world need to work together to create consistent rules and oversight. This will help ensure that stablecoins are safe, well-managed, and beneficial to the global financial system.

Conclusion. Banks & digital money, a balancing act

Tokenized deposits and Digital Money stablecoins are not the only game in town. Public initiatives like the digital euro and wholesale central bank money could offer safer alternatives and increase competition. Private solutions like tokenized deposits may provide similar functionality with better safeguards. Regulation needs to catch up to clarify these models and support cross-border instant payments. 

Crypto assets can bring fresh ideas, faster processes, and more variety to Europe’s financial system. But they also come with big regulatory and oversight challenges. The real game-changer is not the assets themselves, but the technology behind them, DLT (Distributed Ledger Technology).

One of the most promising applications of DLT is tokenising real-world assets and bank deposits. This could make financial transactions faster, cheaper, and more efficient. Still, some use cases may stay limited, especially within the EU where payments are already fast and highly efficient.

Right now, banks in the euro area have low direct exposure to crypto, but interest is growing. Some institutions may fully embrace it, while others may proceed cautiously. There’s no one-size-fits-all strategy but to move forward safely, we need more dialogue between banks, regulators, and technology providers. 

Stablecoins are here to stay, but their future depends on smart regulation, responsible innovation, and coordinated supervision. Banks must weigh the risks and opportunities carefully, and supervisors need to stay ahead of the curve. Supervisory coordination across jurisdictions is also critical to avoid a race to the bottom and a fragmented approach.

Whether you are building the infrastructure or just using the system, understanding stablecoins is essential for navigating the evolving world of digital finance. 

To comment, please go to the discussion forum