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November 28, 2025 | 14:01
Stable(coin) Talk for Unstable Times
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Stable(coin) Talk for Unstable Times |
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Consumers, policymakers, and economists are increasingly focused on stablecoins—digital tokens designed to deliver some benefits of cryptocurrency without the extreme volatility, such as bitcoin’s recent 30% plunge. Stablecoins have been part of the crypto universe for more than a decade, but they may now be poised for broader mainstream adoption. In Canada, the U.S., and elsewhere, policymakers have introduced legislation to regulate stablecoin issuers, aiming to protect token holders and enhance credibility. In this note, we cover the basics, summarize recent policy developments, and consider the potential macroeconomic implications of stablecoins. Stablecoins 101As the name suggests, stablecoins are cryptocurrencies designed to maintain a fixed value relative to a reference asset. Today, most stablecoins aim to trade at Historically, stablecoins have served as a lower-risk asset for crypto traders moving in and out of riskier positions or making on-chain payments. Emerging regulation, however, could pave the way for broader use in everyday transactions. In economies with high inflation or weak banking systems, the appeal of stablecoins is clear—especially if they are regulated by credible jurisdictions. Even in well-functioning economies, consumers and businesses may be drawn to their generally low (though not zero) transaction costs, fast settlement, and 24/7 global access to holdings. Cross-border transactions are also a promising application, potentially offering a faster, lower-cost alternative to today’s correspondent banking network. |
The market capitalization of all stablecoins now exceeds Most stablecoins maintain their pegs through collateralization. Issuers create tokens by accepting central bank currency, holding reserves in low-risk assets, and allowing token holders to redeem coins for currency at any time. This issuance and redemption process keeps tokens trading close to their peg in secondary markets. By contrast, a small subset of stablecoins—around 0.2% of the market—use algorithms to adjust supply and have repeatedly proven vulnerable to runs, most notably the collapse of Terra in 2022, which wiped out billions in investor holdings. Over the past few years, the largest collateralized stablecoins have shown a strong, though not perfect, record of stability against the U.S. dollar (Chart 2). Tether has occasionally dipped below |
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For crypto purists seeking a fully decentralized payment and custody system, stablecoins are merely a steppingstone toward a fiat-free world. Yet, even in a world where central bank currencies remain dominant, stablecoins could become a more common transaction medium—even in countries with credible monetary systems. Already, many popular payment processors allow vendors to accept stablecoin payments. Policy DevelopmentsPolicymakers and regulators have largely given cryptocurrencies a cold reception, but they are warming to stablecoins. This shift reflects the fact that issuing stablecoins closely resembles banking—a sector heavily regulated to protect depositors and preserve financial stability. In the United States, the GENIUS Act—signed into law on July 18, 2025—marks a major step toward legitimacy for U.S.-based stablecoin issuers. It creates a joint federal–state supervision regime and requires issuers to maintain a one-for-one backing with U.S. dollars or other low-risk assets, such as short-term Treasuries, insured deposits, and money market funds. The Act also prohibits paying interest on stablecoins, which would otherwise classify them as securities under U.S. law. The GENIUS Act also includes strong consumer protections: holders will have priority over other creditors in bankruptcy, and one-for-one redemption at par is mandatory. Issuers must publish monthly reserve statements verified by independent auditors and comply with anti-money laundering, sanctions, and know-your-customer rules. The law will take effect January 18, 2027, or 120 days after the final regulations are published. Canada is following suit with its Canadian Stablecoin Act, introduced as part of the Budget Implementation Act on November 18, 2025. Like the U.S. framework, it restricts stablecoins to those tied to a single fiat currency, but it isn’t explicit about which currency it must be. Other key differences include centralized oversight by the Bank of Canada and reserve and redemption requirements that will be set by regulation. The Act will take effect by order of the Governor in Council once the Budget Implementation Act becomes law. |
Policy ImplicationsThese legislative developments are a step forward, but gaps remain. Even low-risk assets can be vulnerable to runs, as seen during the Global Financial Crisis with prime money market funds. The recent downgrade by S&P of Tether’s stability rating to “weak” underscores that current stablecoin issuers remain out of step with the proposed regulations. S&P pointed to Tether’s holdings of high-risk assets including Bitcoin, gold, loans, and corporate bonds. Even if future stablecoins meet more stringent requirements, regulators may need to impose additional capital buffers to reduce systemic risk. One concern is concentration risk: if reserves are held in uninsured bank deposits—as highlighted by the Silicon Valley Bank failure in 2023—cascading risks could emerge during stress periods. While both the GENIUS Act and Canada’s proposed legislation aim to align stablecoins with anti-money laundering and counter-terrorism financing standards, the technology required to achieve those goals remain unclear. Final regulations should specify the detection methods issuers must implement to curb illicit activity. Policymakers must also weigh the resource intensity of blockchain transactions against traditional systems. With electricity demand already rising due to data centers, AI, and electric vehicles, the energy footprint of stablecoins may be hard to justify. Other fintech firms already process over Macroeconomic ImplicationsThe macroeconomic impact of wider stablecoin adoption is unlikely to be earth-shattering. Fintech innovation is not new—over the past few decades, consumers and businesses have gained an ever-expanding range of payment options, from credit cards to online services and peer-to-peer mobile apps. Still, stablecoins could have incremental effects on investment flows and interest rates if they divert funds away from the banking system. One of the financial system’s core roles is to channel household savings into productive investment. For transactions, households need assets that are stable in value and available on demand. Traditionally, banks have fulfilled this role by issuing risk-free demand deposits and lending out the resulting funds for longer-term uses. Banks manage the mismatch between short-term deposits and long-term loans—which, when done well, supports economic growth. By contrast, regulated stablecoin issuers will face strict limits on how they deploy reserves, which must be held in low-risk, highly liquid assets to protect token holders. Some reserves may sit in bank deposits, integrating with the existing system. However, at least some of these funds will likely flow into short-term government and corporate debt securities (perhaps indirectly via money market funds). This shift could have three main effects on financial markets:
If stablecoin issuers prioritize government securities, they could also crowd out private investment—though likely only marginally. Already, stablecoin issuers have become major buyers of U.S. Treasury bills, rivaling large national jurisdictions and global money market funds (Chart 3). Indeed, recent BIS research suggests that a |
None of this bodes well for productivity-enhancing private investment, but the overall impact should be modest. U.S. non-financial corporations hold nearly Some central bankers are concerned that stablecoins could undermine central bank money and monetary policy. In our view, regulated stablecoins that operate on top of central bank money would reinforce its importance. Monetary policy transmission has historically functioned well despite the presence of another return-free transaction asset: cash. |
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Bottom Line: Innovation brings risk, but with proper regulation, stablecoins should complement—not supplant—central bank money and traditional banking. |