Stablecoins and the Future of Digital Payments

Introduction

A stablecoin is a digital token engineered to hold a constant value against a reference asset, usually the US dollar. Most cryptocurrency arguments are about price, and stablecoins are the exception, because a stablecoin that moves in price has failed at the one thing it was built to do.

That modesty is precisely why stablecoins became consequential. A token engineered to be boring is a token that can be used to pay for something, and payment is the use case that cryptocurrency spent more than a decade promising and rarely delivering. Somewhere in that shift, stablecoins stopped being a trading convenience for moving between exchanges and started attracting the attention of banking regulators, finance ministries and the Bank for International Settlements.

The United States now has a statutory framework for them. The proposed implementing rules run to hundreds of pages. And the central bankers' central bank has published a detailed argument that these instruments still are not money. All three things are true at once, which is what makes the subject worth understanding properly.

Historical Background

Stablecoins began as a trading utility within cryptocurrency markets, used to move value between exchanges without returning to traditional bank accounts. Over time they became a payments instrument, and then, with the passage of the GENIUS Act in 2025, a supervised financial activity in the United States with capital requirements and a rulebook. The Office of the Comptroller of the Currency (OCC) followed in early 2026 with proposed implementing rules, and enforcement timelines run into 2027.

That progression, from utility to instrument to regulated activity, is close to what the sector asked for, and it has come with the constraints that supervision always brings.

How Do Stablecoins Hold Their Value?

A stablecoin is a claim. When an issuer creates one token, it undertakes to hold assets of equivalent value in reserve, and to give the holder that value back on request. The token circulates on a blockchain and can be transferred like any other, but the thing anchoring it to a dollar is not the blockchain; it is the reserve and the redemption promise.

This distinguishes a stablecoin from other crypto assets, whose price is set purely by what someone will pay. It also distinguishes one from a bank deposit, which is a claim on a bank that carries deposit insurance and access to central bank facilities. A stablecoin holder has neither of those protections, a point US regulators have made explicitly.

Why pegs slip

If the arrangement works, one token trades at one dollar. In practice tokens deviate, and the reasons are instructive: redemption may be open only to large institutional counterparties, not ordinary holders, it may take days, and the reserve composition may be uncertain. Each of these introduces a gap between the theoretical value and what a buyer will actually pay in a secondary market.

The academic literature frames this as a run problem. In a 2026 peer-reviewed analysis, Zane Mullins argued that where an issuer holds only cash equivalents, redemption risk arises mainly if a run is large enough to force hurried asset sales at a loss. The reserve's quality, in other words, matters more than its headline size.

The distinction that gets lost

There is an important separation between a payment stablecoin, designed to be spent, and a yield-bearing token, designed to pay a return. The US framework regulates the former and bars issuers from paying interest on it. Products that pass through returns from tokenised government debt are a related but legally distinct category, and conflating the two is the most common error in coverage of this sector.

How Are Stablecoins Regulated in the United States?

Under the GENIUS Act, payment stablecoins became a supervised activity, and the proposed OCC rules supply the detail. They include a $5 million minimum capital floor for new federal issuers, transition to federal oversight at $10 billion, a proposed limit of two business days for timely redemption, and audit obligations. Issuers with at least $25 billion outstanding would hold 0.5% of reserves in insured deposits, capped at $500 million. Only issuers below $10 billion in market capitalisation may opt for a state-level regulatory regime, with annual state recertification. These are proposals until finalised, so the detail may shift.

US regulators have also been explicit that token holders are not covered by deposit insurance, a point worth repeating because the user experience resembles a bank account. It is not one.

Where Are Stablecoins Used?

Cross-border business settlement is the clearest established use, particularly for payments too small or too frequent to justify correspondent banking fees. Treasury movement between entities of the same group is another, because it involves sophisticated parties who can manage custody.

Card networks and payment processors have begun offering stablecoin payout and settlement options, which matters because it puts the token behind a familiar interface, so merchants never handle it directly.

What remains less established is everyday retail payment, and here the evidence deserves care. Raw on-chain transfer figures are enormous, but they include automated activity, internal transfers between an issuer's own addresses and exchange plumbing. Adjusted estimates that filter this out are substantially lower, and anyone quoting a headline volume figure without saying whether it is raw or adjusted is not saying much.

Why Do Central Banks Object?

Start with the businesses, because their interest is the least ideological. Correspondent banking is slow and expensive at small values, and anyone who has waited three days for a modest cross-border payment to clear can see the appeal of settlement that takes minutes and does not observe weekends. That is an operational complaint, not a political one.

Regulators see the same instrument and see a funding question: if deposits drift out of banks and into private tokens, banks have less to lend. The Bank for International Settlements (BIS), the institution central banks themselves bank with, put numbers on this in its Annual Economic Report 2026, and the numbers were not what either camp expected. Modelling adoption at one, two and three trillion dollars in market value, it found the net effect on output was small, and in its US-calibrated version slightly negative over the medium term. The objection is not that stablecoins would blow something up; it is that they would impose real costs while delivering very little growth.

The BIS argument is structural, not technical. It holds that stablecoins fail on singleness, the property that a dollar from one issuer is interchangeable with a dollar from another at par, because different tokens trading at slightly different values reintroduces a problem that nineteenth-century private banknotes had and that modern monetary infrastructure exists to solve. The BIS also argues they fail on elasticity, on interoperability across chains, and on integrity, given that permissionless rails weaken anti-money-laundering controls.

The sharpest version of the argument is playing out in countries with unstable currencies. Holding a dollar-referenced token is a sensible decision for one household and a problem when several million make it at once, because it hollows out monetary sovereignty and reshapes how capital moves. The BIS calls this stablecoin dollarisation, and it is already observable in economies from Lagos to Buenos Aires and Istanbul.

Benefits and Opportunities

The genuine advantages are narrow and real: settlement that does not observe banking hours, programmability that allows a payment to carry conditions, and access to dollar-denominated value for people whose local banking system does not readily provide it.

Regulatory clarity has itself become an opportunity. Institutions that would not touch an unsupervised instrument can consider a federally chartered one, which is why bank subsidiaries and payment companies have entered a market they previously avoided.

What Are the Limitations and Open Problems?

The market size figures are softer than they look. Reported totals for 2026 varied across the low $300 billions depending on the provider and the date, and even the OCC, the US regulator writing the rulebook, worked from private-sector forecasts giving an upper bound of $500 billion for 2026, not a measured figure. Any precise number is best treated as an estimate with a methodology attached.

Concentration is a further concern. The market is dominated by two issuers, compliance costs tend to entrench incumbents, not diversify a market, and a payment system resting on two private balance sheets carries an obvious single-point-of-failure question.

Compliance is also now a continuous obligation, not a one-time hurdle, with redemption timelines, reserve requirements and audit duties applying on an ongoing basis.

Conclusion

Stablecoins have completed an unusual journey: from a trading utility, to a payments instrument, to a supervised financial activity with capital requirements and a rulebook. That progression is close to what the sector asked for, and it has come with the constraints that supervision always brings.

The BIS question is the one still hanging over all of this. A payment instrument can be useful, properly regulated and widely adopted while still not being money in the way a monetary system needs money to behave, and that gap only shows itself under stress. The next couple of years, as the US rules finalise and enforcement begins, will test the argument.

There is a longer-dated risk worth naming too. Stablecoins settle on blockchains secured by elliptic-curve cryptography, the same mathematics a sufficiently advanced quantum computer could eventually break. How close that threat actually is is examined in the rise of quantum computing.