December 18, 2025
By Aayush Mittal, Robert Miś, and Freya (Xiaoxuan) Zhang
This article originally appeared on Enterprise Times on December 18, 2025.
Cryptocurrencies are digital assets generally secured by blockchain and cryptography, and they differ from traditional fiat money. Major cryptocurrencies such as Bitcoin and Ethereum lack government or commodity backing, leading to significant price volatility. This instability limits their reliability as a store of value or a consistent medium of exchange for daily transactions.
Stablecoins were introduced to address this volatility. These digital assets are designed to maintain a stable value by pegging to a reference asset, such as the US dollar, other fiat currencies, commodities like gold, or a diversified basket of assets. Issuers maintain stability through mechanisms such as holding reserves, using programmatic logic, implementing hedging instruments, or combining these methods.
Despite their intended stability, stablecoins face unique risks, including technical failures, reserve management challenges, operational vulnerabilities, and liquidity constraints. The collapse of TerraUSD in May 2022 demonstrates that stablecoins are not immune to failure.
Regulatory authorities worldwide are developing frameworks in response. These efforts focus on reserve backing, redemption rights, and anti-money laundering compliance. Jurisdictions vary in their progress; some have enacted legislation, others are drafting regulations, and some have only indicated their future plans.
This article analyzes stablecoin’s design and risks, reviews recent regulatory initiatives, and evaluates their broader implications for market participants.
Stablecoins employ various mechanisms to achieve price stability, which generally fall into three primary categories:
Although designed for price stability, stablecoins are exposed to a variety of risks arising from technical design, economic factors, and the evolving global regulatory environment.
Stablecoins, like other cryptocurrencies, depend on blockchain technology and smart contracts. While complex algorithms enable their operation, they also introduce technical and operational risks. Coding or design errors may result in unexpected failures or system outages.
Stablecoins also depend on external sources, known as price oracles, to obtain price data and maintain their peg. Failures or inaccuracies in these oracles can adversely affect stablecoin pricing and operations.
Stablecoins achieve stability through underlying reserves or algorithmic mechanisms. Insufficient reserves or poor reserve management can compromise price stability. Additionally, limited transparency in reserve reporting may erode market confidence, potentially triggering redemption requests and increasing the risk of a liquidity crisis, where issuers cannot meet redemption demands.
Even fully collateralized stablecoins may encounter liquidity constraints during periods of market stress, leading to delays or restrictions on redemption. Accelerated redemption can compel issuers to liquidate assets under adverse conditions, exacerbating the risk of a liquidity crisis.
The mechanisms used to maintain a stablecoin’s peg may introduce additional vulnerabilities. During adverse market conditions like extreme volatility or market downturns, algorithmic models dependent on market incentives can amplify economic risks to the stablecoins. Fiat- or asset-backed stablecoins are also susceptible to price deviations resulting from disruptions in traditional financial markets, including holding and transaction costs in reserve management. Stablecoins employing derivatives or hedging instruments face associated risks and may need to reassess the effectiveness of these strategies.
The regulatory environment for stablecoins is evolving. However, there are jurisdictional differences that may result in uncertainty. Variations in crypto asset classification, reserve requirements, and consumer protection obligations influence issuer operations and market access. As regulatory oversight matures, issuers are likely to encounter more stringent requirements for disclosure, audit, and governance.
Stablecoins may facilitate illicit activities such as sanctions evasion, terrorist financing, ransomware payments, and money laundering. According to FATF’s 2024 and 2025 updates, many jurisdictions have not fully implemented the “Travel Rule” or maintain inconsistent oversight of virtual asset service providers. The misuse of stablecoins presents compliance risks for issuers, investors, and crypto exchanges.
In July 2025, the United States enacted the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act. This legislation introduced provisions including par redemption rights, requirements for high-quality liquid reserves, segregation and disclosure obligations, and extended Bank Secrecy Act compliance to stablecoin issuers.
In April 2025, the Securities and Exchange Commission clarified that a well-structured, dollar-backed payment stablecoin intended for payments does not constitute an investment contract and therefore is not classified as a security. This clarification assists issuers, investors, and users in understanding registration requirements, ongoing compliance, and the applicability of SEC regulations. Concurrently, major financial institutions are exploring stablecoin initiatives. Reports indicate that banks are piloting new models, and analysts expect sustained demand for short-term Treasury bills in issuer reserve strategies.
In its 2025 Budget, the Canadian federal government announced plans to introduce legislation establishing a national framework for Canadian dollar-backed stablecoins. The proposed legislation will require issuers to maintain asset reserves, implement risk management policies, and safeguard personal information. Additionally, amendments to existing laws will regulate electronic payment service providers utilizing cash-backed stablecoins for payments.
In Europe, regulations for asset-referenced tokens and e-money tokens became effective in mid-2024, with further obligations for service providers implemented later that year. Supervisory authorities have also issued guidance for issuers and national regulators.
Singapore finalized a single currency stablecoin framework in 2023, mandating par redemption, high-quality reserves, comprehensive disclosure, and custody safeguards for issuers.
Japan amended the Payment Services Act in 2023, restricting the issuance of certain stablecoin categories to banks, trust companies, and licensed funds transfer businesses. Licenses are now being granted under this regulatory framework.
Hong Kong’s Stablecoins Ordinance became effective on August 1, 2025, making the issuance of fiat-referenced coins a regulated activity requiring a license. The Hong Kong Monetary Authority has initiated the licensing process and released additional details.
Stablecoins have progressed beyond the experimental stage and now constitute a part of digital payment infrastructure. As adoption increases and operational efficiency improves, regulatory frameworks are providing greater clarity regarding rules and oversight. In the United States, the GENIUS Act aims to establish a federal framework for USD-denominated stablecoins. Similarly, Canada, Europe, and several Asian countries are developing policy frameworks and amending existing laws to regulate stablecoins.
Concurrently, the challenges and risks associated with stablecoins are becoming more apparent. Market participants are required to address evolving regulatory requirements, manage operational and financial risks, and other issues such as valuation and contractual disputes in a dynamic environment.
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