Stablecoins and Crypto Payments

A stablecoin is a crypto asset designed to hold a stable value, usually by being pegged to a fiat currency such as the US dollar. The largest stablecoins are backed by reserves of cash and short term government securities, and the issuer promises that each token can be redeemed for one dollar. Others are backed by crypto assets, or use algorithms to manage supply and hold the peg. Stablecoins are used for trading on crypto exchanges, for cross border transfers, and increasingly for ordinary payments, because they move on blockchain networks around the clock, settle in minutes, and can be sent to anyone with a digital wallet, without going through correspondent banks. For a business that pays suppliers in another country, that speed and availability is attractive compared with a SWIFT payment that takes a day and costs a significant fee. The risks of stablecoins are real and have been demonstrated in practice. A stablecoin is only as good as its reserves and its issuer, and if the market doubts either, the peg can break, as happened dramatically with the algorithmic stablecoin TerraUSD in 2022, which lost almost all its value in days. Reserve backed stablecoins have also faced questions about whether their reserves are sufficient and liquid, and about whether the issuer can freeze tokens or block addresses. Regulation is catching up, with the European Union's Markets in Crypto Assets regulation setting requirements for stablecoin issuers, including reserve standards and authorisation, and other jurisdictions following with their own rules. A BA should treat a stablecoin as a payment instrument with a specific risk profile, not as a generic digital dollar, and should understand the reserve model, the redemption mechanism and the regulatory status before recommending it for any use. Crypto payments more broadly, using assets like bitcoin, remain a small share of real world payments, despite years of attention. The volatility of unbacked crypto assets makes them poor units of account, so a merchant who accepts bitcoin usually converts it to fiat currency immediately. The real innovation from crypto is arguably the underlying technology, tokenisation and programmable money, rather than the currencies themselves. A smart contract that releases payment automatically when goods are delivered is a genuinely new capability, and it is being explored in trade finance and supply chains. For a payments professional, the skill is to separate the useful ideas from the speculation, and to evaluate each new instrument on the same questions that apply to any payment method. Who bears the risk, how is it regulated, what happens when something goes wrong, and who pays the cost. A stablecoin is a crypto-asset designed to maintain a stable value relative to a reference asset, usually the US dollar. The most common design is the fiat-backed stablecoin, where the issuer holds reserves, usually US Treasury bills and bank deposits, equal to the stablecoins in circulation. The reserves must be attested, must be segregated, and must be redeemable on demand. The failure of TerraUSD in May 2022, an algorithmic stablecoin that was not backed by reserves, showed what happens when the backing is not real: the stablecoin lost its peg, fell from 1 dollar to 10 cents, and wiped out 40 billion dollars of value in a week. A tokenised deposit is different from a stablecoin, and the difference matters. A tokenised deposit is a claim on a commercial bank, recorded on a distributed ledger, and it is a liability of the bank, just like an ordinary deposit. It is covered by deposit insurance, it is subject to banking regulation, and it can be used for settlement between banks. A stablecoin is a claim on the issuer, which may not be a bank, and it is not a deposit, it is not covered by deposit insurance, and its regulatory treatment depends on the jurisdiction. The Bank for International Settlements has argued that tokenised deposits are the safer form, because they sit inside the regulated banking system. The EU Markets in Crypto-Assets Regulation, MiCA, which applies from 30 June 2024 for stablecoins, sets the rules. An asset-referenced token must be issued by a legal person in the EU, must hold reserves, must publish a white paper, and must be authorised by the national competent authority. An e-money token, which is a stablecoin referencing a single fiat currency, must be issued by an electronic money institution. A stablecoin that does not comply cannot be offered in the EU, and a stablecoin that is significant, with more than 10 million holders or more than 5 billion euros in transactions a day, is supervised directly by the European Banking Authority. The requirements for a stablecoin product must therefore start with the MiCA classification.