With passage of the GENIUS Act in July 2025, there has been much debate about the benefits and risks of stablecoins. GENIUS established a legal framework for the operation of stablecoins in the United States, with basic requirements for their use and consumer protection. It is expected that stablecoins will be fully approved as a payment device in early 2027.
Stablecoins are a tokenized, private-based money (or cryptocurrency) that are bought and sold in digital form on a computer blockchain. They were initially created to facilitate the trading of other crypto assets, which are subject to major changes in value. Stablecoins are designed to maintain a stable value by being pegged on a 1:1 basis to a major fiat currency. Initially created in 2014, there are currently more than 300 stablecoins in active use (mainly pegged to the US dollar), with a market value of around US$300 billion. Tether (USDT) is the largest and most widely used stablecoin, followed by USD Coin (USDC).
Some financial experts have been extremely optimistic about the potential growth in stablecoin activity, now that there exists a legal framework for their creation and use; some estimates are as high as US$2 trillion by the end of the decade. This optimism is based on the expected widespread use of stablecoins in managing payments for commercial and financial transactions on a 24/7 basis. They essentially allow for the near instantaneous settlement of payment obligations outside the banking system at very low cost. They are particularly popular for international remittance flows, which normally can require up to 5 days to complete at an average cost of 6 percent of the value of the transfer.
Up to now, stablecoin usage has often been associated with concerns around illicit financial activity and sanctions evasion, particularly given their dollar-based structure. They have also been widely used in developing countries with high inflation (e.g., Argentina) as a means of managing payments and safeguarding financial savings.
Under the GENIUS Act, both bank and non-bank entities will be allowed to issue stablecoins. They will have strict requirements for the quality of reserve assets they are required to hold to back their issue (mainly U.S. Treasury bills), subject to regular audit procedures. They will also be subject to existing bank requirements for checking customer qualifications and the prevention of illicit transactions. Despite these safeguards, a number of concerns have been raised about their operations.
A major question is whether stablecoins as private money operating outside the traditional banking system, with all its protections, can maintain the “singleness” of money, whereby a dollar’s worth of stablecoin will always be equal to that value. Experience to date suggests that this is not the case. Both USDT and USDC have been subject to brief periods of time when their values have fallen below their pegged value, and they were unable to meet all demand for redemption. While the GENIUS Act prescribes the type of assets that stablecoins are required to hold as reserves, it does not require immediate redemption to meet a customer’s request. Without the deposit protection and access to Federal Reserve resources that banks enjoy, stablecoins are more easily prone to consumer panic if any doubt arises about the timing or amount of dollars that stablecoin holders can obtain on demand.
Another concern raised about dollar-based stablecoins is that they could promote a more widespread “dollarization” of foreign economies with weak monetary systems, once they become legalized and more widely in use. Even in the EU, some concern about this issue has been raised, notwithstanding the euro’s important role as an international reserve asset. More generally, stablecoins can be used to evade capital controls, and are likely to give rise to greater capital flow volatility.
The US government has been a strong promoter of dollar-based stablecoins as a means of strengthening the role of the dollar as a global currency and fostering greater demand for U.S. Treasury debt. The basis for the latter objective is not so evident, as the demand for Treasury assets arising from wider use of stablecoins may only be satisfied by the transfer of Treasury assets currently held by banks and money market funds, if customers reduce their holdings in these institutions to meet their demand for stablecoins.
An additional issue to be resolved is what role stablecoins will play in a broader landscape of tokenized monetary assets, involving central bank digital currencies (CBDCs) and tokenized bank deposits and money-market funds, all of which have strong institutional backing. In this environment, it is not so clear what advantages stablecoins will offer, especially if they do not maintain some of the same governmental support, for example, that commercial banks enjoy.
The issues discussed above clearly raise questions about the long-run benefit and viability of stablecoins.
Featured Author:
Anthony Elson was a senior IMF official for many years, and is the author of “The Global Currency Power of the US Dollar: Problems and Prospects.”
All views expressed by members are their own and not reflective of the views of the Bretton Woods Committee.