On Tuesday night, my friends and I chatted about the value of cryptocurrencies. The intense conversation made me think a lot, and I almost missed my last train home.

I love this sort of conversation, which could expose my knowledge blind spot and give me room to improve.

I told my friends that stablecoin would be the bridge that connects the blockchain and non-blockchain worlds and would embrace the adoption of usage.

My friend asked: “Do you think stablecoin is risk-free?”

I blurted out subconsciously: “Of course it is, it isn’t volatile.”

But right at that moment after I said that, I know.

Before I tell you why, let’s talk briefly about what a stablecoin is.

Stablecoins are cryptocurrencies designed to maintain a stable value by pegging their price to an external asset (usually a fiat currency like the US dollar).

A stablecoin trades at or near $1 (for USD-pegged coins) at all times, which makes them “stable”.

This stability makes stablecoins far more practical than volatile coins like Bitcoin for everyday transactions and as a medium of exchange.

The traders/investors could park the values on-chain without exposure to too much risk of wild price swings. It also enables quick cross-border remittances and provides a stable unit of account for decentralized finance (DeFi) applications.

In summary, stablecoins aim to combine fiat stability with crypto's flexibility, making them foundational infrastructure in the digital asset market.

Several stablecoins have become dominant in the market. They have different issuers and different mechanisms to maintain their pegs.

USDT, issued by Tether, is the largest stablecoin by market capitalization and is widely used on virtually every crypto exchange. It pegs to $1 by being backed by fiat reserves and cash-equivalent assets. Tether’s reserves include cash, short-term treasury bills, and other investments. The company keeps the price at $1 by issuing or redeeming USDT tokens.

USDT’s adoption is massive (reportedly over 75% of all stablecoin value by 2024)​, reflecting user confidence in its liquidity. However, Tether has faced scrutiny and FUD over the years regarding its reserve transparency. It lacked full audits and in 2021 was fined $41 million by the CFTC (Commodity Futures Trading Commission) for past misrepresentations that USDT was “fully” backed at all times.

USDC is issued by Circle and Coinbase (partnership under Centre consortium). It is now the second-largest stablecoin after USDT and is often considered the “safer” or more regulated alternative. It is 100% fiat-collateralized, with every USDC token backed by $1 in cash or short-term U.S. government bonds held by U.S.-regulated financial institutions. Circle provides monthly reserve attestations and has sought to comply with U.S. regulations (it’s treated as a regulated payment token). USDC’s value stability is kept through direct redemption: users can always redeem 1 USDC for $1 from the issuer, which arbitrages any small market price deviations. USDC is widely used in crypto trading and DeFi and saw its supply grow into tens of billions of dollars. Adoption spans both crypto-native firms and traditional companies (for example, Visa has used USDC for settlement over Ethereum in pilot programs).

However, USDC is not 100% risk-proof. In March 2023, Circle revealed that $3.3 billion of USDC’s reserves were stuck in the failed Silicon Valley Bank, causing USDC to depeg to about $0.87 at one point. Circle pledged to cover any shortfall, and the coin restored its peg within days, but the incident highlighted that even fiat-backed stablecoins depend on the stability of partner banks.

DAI is the largest decentralized stablecoin issued by MakerDAO. You might ask: Isn’t USDT the largest? The keyword here is decentralized stablecoin.

DAI differs from the above coins because it does not have a single company holding fiat reserves. Instead, it is crypto-collateralized: users generate DAI by depositing cryptocurrencies into smart contracts on the Ethereum blockchain. The rule is, these deposits (collateral) must exceed the value of DAI issued - typically, a minimum of 150% of the DAI’s value in collateral is required. This over-collateralized strategy provides a buffer to maintain the peg. If the collateral value (as in the cryptos that are backing falls too much, the system automatically liquidates it to cover the DAI, keeping DAI fully backed. Initially, DAI only accepted ETH as collateral, but now it’s multi-collateral - users can lock in various assets (ETH, BTC, and even other stablecoins like USDC).

DAI’s peg mechanism is governed by smart contracts and community governance, where interest and savings rates are adjusted to influence DAI’s supply and demand. I will discuss blockchain smart contracts in the future (you don’t have to worry about these terms for now). DAI has remained remarkably stable since its 2017 launch.

Key risks for DAI include extreme market crashes (if multiple collateral assets tank simultaneously, maintaining the peg will be challenging) and its growing reliance on centralized collateral (a large portion of DAI is now backed by USDC and real-world assets, which introduces some counterparty risk).

That said, DAI represents a great technical alternative to fiat-backed stablecoins, using algorithms and incentives in lieu of a custodian.

RLUSD is a newer entrant, launched in December 2024 by fintech firm Ripple (developer of XRPL, or more well-known by its cryptocurrency, XRP). It is a USD-pegged stablecoin fully backed by a segregated reserve of cash and cash equivalents (like bank deposits and U.S. treasury bonds) and is redeemable 1:1 for U.S. dollars.

RLUSD is notable for being one of the first stablecoins with explicit regulatory approval at launch - the New York Department of Financial Services green-lit RLUSD under an NY Trust Company license. This means Ripple’s stablecoin operates under rigorous oversight, which sets it apart from older stablecoins launched without regulatory blessing. RLUSD is issued natively on the XRP Ledger and Ethereum blockchains, enabling compatibility with traditional crypto exchanges and DeFi platforms from day one.

Ripple’s goal with RLUSD is to leverage its experience in cross-border payments: the stablecoin is positioned for use in business remittances, payment providers, and trading – essentially providing a “stable, transparent, trusted” USD token for institutions and individuals. I can foresee more interest in RLUSD, as regulatory compliance is a critical component for adoption.

I can’t seem to skip this dramatic failure in 2022 while discussing the risk of stablecoin.

UST (TerraUSD) was an algorithmic stablecoin on the Terra blockchain, meant to be pegged 1:1 with the U.S. dollar through a sister cryptocurrency called LUNA. Unlike USDC or USDT, UST had no hard dollar reserves; instead, the protocol attempted to hold the peg through a mint-and-burn arbitrage mechanism. In simple terms, 1 UST could be exchanged for $1 worth of LUNA, and vice versa. If UST dipped below $1, arbitragers would buy cheap UST and swap it for $1 of LUNA (profit), contracting UST supply and pushing the price back up. Conversely, if UST went above $1, traders could burn LUNA for new UST (increasing supply) until the price normalized. This was the theory - and for a while, it worked, especially as Terra’s ecosystem grew.

By early 2022, UST became the fourth-largest stablecoin with an $18 billion market cap, and LUNA’s price skyrocketed as the system attracted users. A big draw was the Terra Anchor protocol, a lending platform that offered 20% APY on UST deposits – an eye-popping yield in a low-interest world. Billions of UST flowed into Anchor for those returns. This created a dangerous dynamic where most UST was locked in pursuit of yield, not organic demand for transactions.

The stability of UST became heavily dependent on Anchor’s unsustainable interest rate - essentially a subsidy to attract users, funded by Terra’s reserves and venture capital. Observers warned this was a ticking time bomb: if the yield reserve ran low or if big holders lost confidence, many UST could be withdrawn and sold at once.

UST began to lose its $1 peg over a weekend, dropping to 0.98, then 0.95. A combination of factors caused this:

As UST slipped, arbitragers did mint huge amounts of LUNA by redeeming the falling UST - but this flooded the market with LUNA, crashing LUNA’s price and undermining the value backing UST.

A vicious cycle kicked in: UST’s mechanism required ever more LUNA to be minted to try to defend the peg, and LUNA’s price kept plunging, which only necessitated printing more. Confidence evaporated.

Within days, UST plummeted from $1 to mere pennies. On May 9, 2022, UST fell to around $0.35, despite all efforts to save the peg. LUNA, which a week prior was around $80, catastrophically fell to fractions of a cent as trillions of LUNA were minted in an attempt to absorb UST redemptions.

Essentially, the algorithmic stabilization mechanism entered a death spiral from which it could not recover. UST and LUNA became virtually worthless, evaporating tens of billions in value.

Investors holding UST (which they thought was as safe as a dollar) suddenly saw their savings wiped out. About $42 billion of UST and LUNA market value was destroyed, and the shockwaves extended to the broader crypto market, triggering panic selling. It’s estimated that around $400 billion in crypto market value was lost in the aftermath as confidence in crypto faltered. Terra’s collapse also set off a cascade of failures in crypto companies that were exposed to it, and it contributed to the 2022 crypto bear market. It was one of the largest failures in crypto history, often compared to a bank run or a Ponzi collapse in terms of scale and suddenness.

Terra’s design was fatally flawed. It relied on continual market confidence and growth to prop up the stablecoin’s value - a kind of circular logic where UST was valuable because LUNA had value, and LUNA had value because people believed in UST. Once that belief faltered, there were no tangible assets to catch UST’s fall. The enticing 20% yield was essentially buying popularity, but it wasn’t sustainable or backed by real profit – when that yield reserve became strained, big investors rushed for the exit, causing a run. The algorithmic model proved unable to handle a crisis, especially one sparked by a liquidity crunch and fear. In summary, UST demonstrated the inherent fragility of algorithmic stablecoins. If the feedback mechanism fails, there is nothing to stop a total collapse.

Terra’s crash was a wake-up call for regulators. Officials immediately cited UST’s failure as evidence that stablecoins could pose systemic risks. U.S. Treasury Secretary Janet Yellen famously told Congress in May 2022 that the Terra episode illustrated that crypto regulation could not wait.

In the United States, stablecoin regulation is a hot topic, although comprehensive federal laws remain pending. Lawmakers and regulators have proposed treating stablecoin issuers similarly to banks - requiring 100% reserve backing, strict liquidity standards, regular audits, and clear redemption rights. Draft bills like the proposed Stablecoin TRUST Act are expected to shape the market by 2025. Meanwhile, agencies such as the SEC and CFTC have taken enforcement actions, scrutinizing unregistered securities and penalizing misrepresentations (as seen with Tether’s 2021 fine). Lacking a unified federal framework, some companies have sought state-level oversight through mechanisms like New York’s BitLicense and Trust Charter.

Across the Atlantic, the European Union has been proactive with its Markets in Crypto-Assets (MiCA) regulation. Enacted in mid‑2023 and effective by late 2024, MiCA classifies stablecoins as e‑money tokens, mandating strict reserve requirements, detailed disclosures, and volume caps to mitigate systemic risks. By effectively banning interest‑bearing or algorithmic stablecoins that are not fully backed, MiCA forces issuers to meet high transparency standards, prompting exchanges such as Binance to delist non‑compliant tokens.

In the United Kingdom, new rules under the Financial Services and Markets Act 2023 have incorporated stablecoins into the existing financial oversight framework. Referred to as “Digital Settlement Assets,” these tokens must meet standards akin to traditional payment systems. The Bank of England and the Financial Conduct Authority are set to oversee issuers, ensuring prudential requirements, safeguarding reserves, and enforcing redemption rights while excluding algorithmic stablecoins from payment use.

Other regions are also advancing regulation. Hong Kong plans to require licensing and full backing for stablecoin issuers by 2024. Singapore’s e‑money regulations and central bank guidelines already cover stablecoins, while Japan has enacted a 2023 law banning non‑bank‑issued tokens, restricting issuance to licensed financial institutions. Meanwhile, recommendations from the Financial Stability Board are also influencing global standards for stablecoin oversight.

Facing these regulatory pressures, the industry is stepping up, with major issuers now publishing regular attestation reports and new projects launching with built‑in compliance, while some explore obtaining bank charters for direct Federal Reserve access.

The regulatory improvements aim to strike a balance: preventing harm and instability without smothering innovation. We have already seen positive effects - the market is more aware of what backs each stablecoin, and blatantly unsound designs struggle to gain traction now. Consumers are more protected when they choose regulated stablecoins that have clear redemption guarantees. From a market stability perspective, the goal of regulators is to ensure that a meltdown like Terra’s doesn’t spill over. If a major stablecoin failed now, authorities have frameworks (or will soon have) to step in, coordinate redemptions, or in the future perhaps even have deposit insurance-like protections if stablecoins integrate into banking.

Another notable development is that central banks are researching Central Bank Digital Currencies (CBDCs), which are digital fiat that could serve some of the same functions as stablecoins. For instance, a U.S. digital dollar or digital euro could theoretically reduce the private stablecoin usage. However, CBDC plans are slow and face their own hurdles, thus regulators are focusing on making stablecoins safer in the meantime.

In conclusion, the world of stablecoins in 2025 is far more regulated and scrutinized than it was just a few years ago. Major economies have either implemented or are finalizing rules that require stablecoin issuers to be transparent, adequately capitalized, and responsible. While this raises the barrier to entry (small or under-the-radar projects may not survive the compliance costs), it is leading to a more robust ecosystem where users can have greater confidence in the “stable” coins they hold. The combination of market lessons and proactive regulation is reshaping stablecoins from wild west instruments into something that more closely resembles digital cash that coexists with traditional money. The stablecoin sector is maturing: the days of unchecked growth and opaque operations are fading, and a new era of accountable, safer stablecoins is emerging, which ultimately could pave the way for even broader adoption in finance and everyday life.

That’s it for today’s post. Cheers.

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