Original Author: Lawyer Jie Hui

The year 2025 will be a watershed for the development of stablecoins, as global regulatory frameworks accelerate implementation and continuous improvement, transforming the once “gray area” into clearly defined regulatory categories. This market, valued at over $250 billion, is undergoing the growing pains and transformation from barbaric growth to compliance.

Core Definitions, Classifications, and Importance of Stablecoins

(1) Core Definition of Stablecoins

Stablecoin is a special type of cryptocurrency whose core objective is to maintain value stability (as opposed to crypto assets like Bitcoin and Ethereum that pursue price growth). It achieves value anchoring by being pegged to fiat currencies, commodities, or crypto assets, or by relying on algorithms, providing a value benchmark for the highly volatile digital asset market.

Stablecoins essentially play the role of a “bridge asset” connecting the traditional financial world with the cryptocurrency digital world. They inherit the technological advantages of cryptocurrencies (such as global reach, 24/7 operation, programmability, and peer-to-peer transfer) while possessing the value stability of traditional fiat currencies, currently supporting trillions of dollars in funds circulating within the crypto ecosystem each month.

(2) Types of Stablecoins

According to different anchoring mechanisms, stablecoins are mainly divided into three categories:

1. Fiat-Collateralized Stablecoins: Pegged 1:1 to fiat currencies (such as the US dollar), with reserve assets primarily consisting of cash, short-term government bonds, and other low-risk assets. Typical representatives include USDT (issued by Tether) and USDC (issued by Circle). The core risk lies in the authenticity and transparency of the reserve assets.

2. Cryptocurrency-backed Stablecoins: These are over-collateralized with other crypto assets (with a collateralization ratio typically exceeding 150%), and they maintain stability by automatically adjusting the collateral ratio through smart contracts. A typical representative is DAI (issued by MakerDAO), and the core risk lies in the liquidation risk triggered by a sharp decline in the price of the collateral assets.

3. Algorithmic Stablecoins: No physical collateral, relying on algorithms to adjust supply and demand (such as minting new coins and destroying old coins) to maintain price stability. A typical case is UST, which collapsed in 2022. The core risk lies in the “death spiral” that occurs when the algorithmic mechanism fails (a vicious cycle: price drops lead to panic, panic triggers sell-offs, sell-offs further drive down prices, until the system collapses).

(3) The Importance of Stablecoins

The importance of stablecoins is specifically reflected in the following four core functions:

1. The most original and fundamental functions of stablecoins are as a “medium of exchange”, “measure of value”, and “safe haven” in the cryptocurrency ecosystem.

In cryptocurrency trading, the vast majority of trading pairs (such as BTC/USDT, ETH/USDC) are priced in stablecoins as the unit of measurement (value scale), rather than in the highly volatile Bitcoin or Ethereum. This provides investors with a clear standard for measuring value, avoiding the confusion of measuring volatile assets with other volatile assets.

When the market experiences significant volatility or uncertainty, traders can quickly exchange high-risk assets like Bitcoin and Ethereum for stablecoins (such as USDT, USDC) to hedge against risks, lock in profits, or temporarily exit the market without fully withdrawing funds from the crypto ecosystem (exchanging back to fiat is usually time-consuming and expensive). This greatly enhances capital efficiency and market liquidity.

2. Stablecoins demonstrate low cost, fast speed, and strong financial inclusion characteristics in global payments and remittances

Stablecoins utilize blockchain technology to bring revolutionary changes to cross-border payments and remittances. Compared to traditional bank wire transfers (which may take several days and incur high fees), stablecoin transactions can be completed in minutes with very low fees, without being restricted by business days and time zones.

In addition, stablecoins provide access to the global financial system for hundreds of millions of unbanked individuals who have internet access; people only need a digital wallet to receive and hold stable-value assets.

3. Stablecoins are the lifeblood of decentralized finance (DeFi)

Without stablecoins, the prosperity and development of DeFi would be unimaginable. Almost all lending, trading, and derivatives protocols use stablecoins as the underlying asset. For example, in lending protocols like Aave and Compound, users deposit large amounts of stablecoins such as USDC and DAI to earn yields, or lend out stablecoins for other investment operations, with the interest rate market largely built around stablecoins. In MakerDAO, the DAI stablecoin is the core output of the entire protocol, where users generate DAI by over-collateralizing other crypto assets, thus converting volatile assets into stable assets. In decentralized exchanges (DEX) like Uniswap and Curve, the trading pairs with stablecoins (such as USDT/USDC) often have daily trading volumes exceeding $1 billion, forming the foundation of all trading activities.

4. Stablecoins are the “catalyst” for the digital transformation of traditional finance (TradFi)

The preferred tool for traditional financial institutions and large enterprises exploring blockchain applications is stablecoins. Stablecoins provide the lowest-risk and most familiar entry point for them to enter the cryptocurrency market. Currently, the most promising direction is RWA (Real World Asset tokenization), where stablecoins serve as the core settlement tool, driving the “tokenization” of traditional assets such as stocks, government bonds, and corporate bonds, allowing them to be traded on the blockchain and creating new investment opportunities.

Compliance is a Must When Discussing Stablecoins

In May 2022, the algorithmic stablecoin UST and its sister token Luna spiraled into collapse within a few days, with over $40 billion in market value evaporating instantly. This disaster was not an isolated incident; it was like a giant stone thrown into the crypto lake, the ripples of which profoundly revealed the cracks beneath the façade of stablecoin prosperity: it exposed the fatal flaws of the algorithmic mechanism, raised market doubts about the adequacy of stablecoin reserve assets, and sounded the highest alarm for global regulatory agencies.

Stablecoins are far more than just a “non-volatile cryptocurrency”. They are the infrastructure of the crypto economy, a new paradigm for global payments, and a strategic bridge connecting two parallel financial worlds. Their importance makes compliance, transparency, and robust operation not merely industry issues, but global topics concerning the stability of the entire financial system, which is the fundamental reason why global regulators are now placing such high emphasis on them.

The scale of major stablecoins (such as USDT and USDC, which together account for over 85% of the global market) and their entanglement with the traditional financial system have reached a level of “systemic importance,” with risks potentially transmitting to traditional finance, nearing the critical point of “Too Big to Fail.” This determines that compliance is not an “option,” but a “prerequisite for survival,” for three core reasons as follows:

1. Prevention of the Transmission of Systemic Risks

The collapse of a major stablecoin (such as USDT) will no longer be limited to the crypto market. Due to its holdings by numerous traditional hedge funds, public companies, and payment companies, its failure could trigger a massive liquidation of on-chain DeFi protocols like a domino effect, quickly spreading to traditional financial markets such as stocks and bonds through institutional investors, potentially triggering a global liquidity crisis. Compliance with reserve asset audits and redemption guarantees is the first line of defense to prevent this domino from falling.

2. Block illegal financial activities

The global nature, quasi-anonymity (on-chain addresses can be traced, but user identities are not directly linked), and peer-to-peer transmission characteristics of stablecoins make them very easy to be used for money laundering, terrorist financing, and evading sanctions. In 2023, the global illegal trading volume involving stablecoins reached $12 billion, with over 60% flowing into cross-border sanctioned areas. Without strict KYC (Know Your Customer), KYT (Know Your Transaction), and sanction screening compliance requirements, this efficient financial highway will become a perfect tool for criminals, leading to severe regulatory crackdowns by sovereign nations.

3. Maintain Monetary Sovereignty and Financial Stability

The widespread use of dollar stablecoins in emerging markets (such as over 20% of cross-border trade in Argentina and Turkey settled in USDT) effectively executes a form of “shadow dollarization” when dollar stablecoins issued by private companies are widely adopted in overseas markets. This occurs when citizens in a country spontaneously use dollars to replace their own unstable currency for savings and transactions, which erodes the monetary sovereignty and policy effectiveness of other countries. For the United States itself, if unregulated stablecoins are widely used for payments, the potential risk of a run could threaten domestic financial stability. Therefore, compliance is no longer an option for the industry but a necessary requirement to maintain national financial security.

Talking about stablecoins inevitably involves compliance, because the attributes of their “infrastructure” determine that they can no longer enjoy the “grey area” dividends of early cryptocurrencies. Compliance is no longer a shackle that restrains their development, but rather a license for entry and a trust anchor that determines whether they can be accepted by the mainstream financial system and whether they can continue to survive. The global wave of regulation is not intended to stifle innovation, but rather to attempt to rein in this runaway horse before it's too late, guiding it towards a transparent, robust, and responsible future.

Main Compliance Risks Faced by Stablecoins

(1) Legal Qualification Risk - Regulatory Recognition Differences Lead to Surge in Compliance Costs

Different jurisdictions have different definitions of stablecoins:

1. U.S. regulators are still debating whether stablecoins should be classified as securities, commodities, or payment instruments. For example, the SEC (Securities and Exchange Commission) tends to classify asset-backed stablecoins issued based on specific projects as securities, while the CFTC (Commodity Futures Trading Commission) believes they may fall under commodities, and the OCC (Office of the Comptroller of the Currency) allows banks to issue “payment stablecoins”. This overlapping regulation forces issuers to comply with multiple sets of regulatory requirements.

2. The EU MiCA legislation classifies stablecoins into “electronic money tokens” (tied to a single fiat currency, such as USDC) and “asset-referenced tokens” (tied to multiple assets). The former must meet electronic money regulatory requirements, while the latter must additionally submit a risk reserve scheme.

3. The Hong Kong “Stablecoin Regulation” treats stablecoins as a payment tool that requires strict regulation (focusing on stablecoins as a store of value and medium of payment), rather than as securities or other types of assets.

This qualitative uncertainty, along with the possibility that regulatory bodies (such as the SEC and CFTC in the United States, or regulatory bodies in the European Union) may suddenly introduce a set of strict new regulations and deem existing models as non-compliant, will lead to significant compliance complexities and costs for stablecoin issuers.

(2) Reserve Asset Risk - Opacity Can Lead to Run Crisis

The authenticity, adequacy, and transparency of reserve assets are the core challenges faced by stablecoins, and the industry currently faces three major issues:

1. Insufficient reserve assets. In 2019, it was revealed that Tether (USDT) was only 74% backed by real assets, despite the company's long-standing claims of full collateralization. As of Q3 2024, Tether disclosed that over 60% of its reserves are in short-term government bonds, but it is still questioned due to the lower audit frequency (once per quarter) compared to USDC (once per month). As of now, Tether has also switched to releasing its reserve reports at least monthly and typically provides daily updated reserve data.

2. Non-compliance of assets. Some small stablecoins invest reserve assets in high-risk areas (such as stocks and crypto assets), and in 2023, a certain stablecoin experienced a 30% crash in reserve assets, triggering a de-pegging.

3. Insufficient Disclosure. Only 30% of stablecoin issuers disclose the specific custodial institutions and details of their reserve assets (2024 Crypto Industry Report), making it difficult for investors to verify the authenticity of the assets.

According to the U.S. GENIUS Act, Hong Kong's Stablecoin Regulation, and other new regulations, reserve assets must be 100% composed of cash and highly liquid assets such as short-term government bonds, and must be audited daily. Issuers must meet strict capital, liquidity, and disclosure requirements.

The lack of transparency or insufficient reserve assets can directly trigger a bank run, leading to a decoupling. The issuer will face hefty fines from regulatory authorities, suspension of operations, and even criminal charges.

(3) Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) Risks - A Major Area of Regulatory Penalties

Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) are key areas of regulatory concern. The price stability and global accessibility of stablecoins make them an attractive tool for money laundering and evading sanctions.

Unlike highly volatile cryptocurrencies, stablecoins allow bad actors to maintain asset value while transferring funds. Regulations now require strict KYC (Know Your Customer), KYT (Know Your Transaction), and reporting of suspicious transactions (suspicious behaviors such as frequent small transfers aggregating and large cross-border transfers). Violations of AML/CFT regulations will incur the harshest penalties and severely damage reputations.

(4) Market Integrity Risk - Weaknesses in Investor Protection

The stablecoin market has two core integrity risks that directly harm investors' rights: namely market manipulation and false statements. Large amounts of stablecoins may be used to manipulate the prices of Bitcoin or other crypto assets.

False advertising or insufficient information disclosure regarding reserve assets and algorithmic mechanisms can also mislead investors. Regulatory requirements are now stricter, aimed at ensuring that investors do not suffer losses due to insufficient information.

(5) Systemic Risk - Potential Threats to Financial Stability

Systemic risk is the biggest concern for financial authorities. DeFi protocols hold billions in stablecoins, and even if a major issuer encounters problems, it could trigger a series of liquidations throughout the entire ecosystem. Imagine a domino effect: a major stablecoin collapses, lending protocols that use it as collateral begin to fail, and users who have staked their tokens suffer severe losses. Soon, the shockwaves will spread to traditional financial institutions that have already begun to integrate cryptocurrency technology, and this chain reaction could be devastating.

(6) Sanction Compliance Risk - Challenges of Global Operations

The issuance of stablecoins faces sanction compliance requirements from multiple countries and regions, with core challenges including:

1. Differences in Sanction Lists. The sanction lists of OFAC (Office of Foreign Assets Control of the U.S. Department of the Treasury), the Council of the European Union, and the United Nations Security Council overlap but are not entirely consistent. For example, an entity may be sanctioned by OFAC but not by the EU, requiring targeted screening rules to be established.

2. On-chain address screening. Smart contract addresses may also be included in sanctions lists. For example: "Some issuers use an on-chain address blacklist system (such as Circle's USDC freezing assets of OFAC sanctioned addresses), and built-in sanction screening modules within smart contracts to prevent stablecoins from flowing into sanctioned addresses, achieving real-time compliance.

3. Decentralization Contradiction. Some decentralized stablecoins face challenges in enforcing asset freezes on sanctioned addresses, grappling with the balance between compliance and decentralization.

The complexity of global compliance requires meeting the different sanction lists and requirements of multiple countries at the same time. Stablecoin issuers must find a balance between technological innovation and compliance obligations, which also means an increase in operational costs and compliance difficulties.

(VII) Cross-Border and Jurisdictional Risks - The End of Regulatory Arbitrage

Regulatory arbitrage (the practice of exploiting differences and loopholes in regulatory rules between different countries or regions, choosing to conduct business in areas with the least strict regulations and lowest costs to evade stringent oversight) is a real issue in the stablecoin market. Project teams may choose to register in regions with lenient regulations, but their users are spread across the globe.

This creates a “hell-level” compliance dilemma: the need to simultaneously comply with the different laws of hundreds of jurisdictions, making operation extremely difficult. The inconsistency and even conflict of regulatory policies in different countries leave issuers at a loss.

Global Regulatory Trends

Major jurisdictions around the world are actively taking action to incorporate stablecoins into regulatory frameworks:

(1) U.S. Regulatory Framework

The United States has adopted a multi-headed regulatory framework (SEC, CFTC, OCC, Treasury), and the “GENIUS Act” allows non-bank entities (NBEs) and the subsidiaries of insured depository institutions (IDIs) to act as issuers. The Act emphasizes the redemption process, requiring issuers to establish clear redemption policies and procedures to ensure that stablecoin holders can redeem in a timely manner. However, the Act does not mandate that stablecoins maintain their par value in the secondary market, where most trading occurs.

(2) The EU's MiCA Framework

The EU's Markets in Crypto-Assets Regulation (MiCA) establishes a comprehensive and strict regulatory framework for stablecoins, including licensing requirements, reserve asset requirements, and holder rights.

MiCA divides stablecoins into two categories: “electronic money tokens” and “asset-referenced tokens,” and implements different regulatory requirements for both, aiming to ensure that regulation is aligned with the level of risk.

(3) China's Dual Regulation

China has adopted a unique dual regulation approach for stablecoins: the issuance and trading of stablecoins are strictly prohibited on the mainland, while a comprehensive regulatory system is implemented in Hong Kong.

The Hong Kong “Stablecoin Ordinance” will be officially implemented in August 2025, requiring 100% reserve asset segregation, with reserve assets needing to be high liquidity assets such as cash, US dollars, or Hong Kong dollar government bonds.

The Hong Kong Securities and Futures Commission also requires custodians to be licensed banks in Hong Kong, conducting daily audits and ensuring the ability to redeem the following day. This prudent regulatory approach aims to make Hong Kong a global center for digital asset innovation.

(4) Trends in International Organization Regulation - Promoting Global Unified Regulatory Standards

The Financial Stability Board (FSB) and the Bank for International Settlements (BIS) are developing global uniform regulatory recommendations for stablecoins, aimed at preventing regulatory arbitrage and ensuring global financial stability. In July 2023, the FSB released the “Global Regulatory Framework for Crypto Asset Activities,” which requires stablecoin issuers to meet four core requirements: “adequacy of reserve assets, transparency of redemption mechanisms, anti-money laundering compliance, and systemic risk prevention.”

The Basel Committee on Banking Supervision (BCBS) has recently revised the “Prudential Treatment of Crypto Asset Risk Exposures” standards in 2024, which will officially take effect on January 1, 2025. It proposes a stricter and more prudent global unified framework for risk management of banks holding crypto assets (including stablecoins), aimed at addressing the risks posed by crypto assets while maintaining financial stability.

Compliance Path: A Guide for Issuers and Investors

(1) Issuer: Build a comprehensive compliance system

The issuance of stablecoins faces multidimensional challenges and requires the construction of a comprehensive compliance system from four dimensions: embracing regulation, reserve asset management, technological compliance, and risk prevention.

1. Actively embrace regulation. Prioritize applying for licenses in regions with clear regulations (such as the United States, European Union, and Hong Kong), and communicate regularly with regulatory agencies to avoid compliance surprises.

2. Standardize reserve asset management. Strictly allocate reserve assets in accordance with regulatory requirements (such as 100% cash + short-term government bonds), select top custodians (such as HSBC Hong Kong), and have qualified accounting firms regularly issue audit reports on reserve assets, publicly disclose detailed reserve asset information (including custodian account information and asset type ratios).

3. Strengthen the technical compliance system. Invest resources to build a first-class AML/KYC and sanctions screening system. For example, leading issuers often adopt a combined model of “on-chain transaction tracking + offline identity verification” (such as USDC requiring large users to complete facial recognition + address tracing). At the same time, integrate third-party compliance tools like Chainalysis to achieve KYT screening for cross-chain transactions. In terms of cybersecurity risks, it is necessary to prevent network attacks that could lead to asset theft, loss of private keys, blockchain network failures, vulnerabilities in smart contract code, network forks, and so on.

4. Improve risk prevention and control. Regularly conduct stress tests (e.g., simulating a scenario where 10% of users withdraw their assets simultaneously), the liquidity of reserve assets must meet 100% of redemption needs within 30 days, establish a risk reserve fund (not less than 2% of the issuance scale), to cope with sudden decoupling risks, and develop emergency plans (e.g., a limit redemption mechanism when reserve assets are insufficient).

(2) Investors: Establish a Risk Screening Framework

Investors should conduct thorough due diligence and gain an in-depth understanding of the issuer's qualifications, licensing, reserve asset composition, audit history, and compliance status before researching any stablecoin project. Preferring compliant targets is key to reducing risk, and investors should prioritize stablecoins like USDC that are backed by highly liquid assets and are more transparent, rather than those lacking transparency.

Most importantly, investors must recognize the risks and understand that “stability” is relative and not risk-free. Even fully collateralized stablecoins face counterparty risk, regulatory risk, and technological risk.

Future Outlook: Trends and Challenges of Stablecoin Development

(I) The Development Trends of Stablecoins

Global regulation is reshaping the landscape of stablecoins, but the true anchor of stability comes not only from legal compliance but also from technological transparency and market confidence. Stablecoins driven by compliance will exhibit the following trends:

1. Industry differentiation intensifies, compliance becomes the core competitive advantage

For stablecoin projects, compliance is no longer optional but a manifestation of core competitiveness. Projects that can proactively embrace regulation, achieve extreme transparency, and build a robust compliance system (like Circle, the issuer of USDC) will gain institutional trust and market share.

On the contrary, those projects that attempt to linger in the gray area, with opaque reserves and ambiguous compliance, will continue to face regulatory scrutiny and sudden risks, and their survival space will be constantly squeezed.

The wave of global regulation is pushing stablecoins from the “Wild West” era into a new phase of institutionalization, transparency, and high compliance.

2. Regulatory trends are moving towards unified global regulatory standards

There are still significant gaps in global stablecoin regulation, but the core standards are globally unified. Regardless of regional differences, the three major requirements of reserve asset sufficiency (100% high liquidity asset collateral), transparency of redemption mechanisms (clear T+1 or T+0 redemption processes), and full compliance with AML/CFT (KYC/KYT covering all users) have become universal standards for global regulation. For example, while the U.S. “GENIUS Act”, the EU's Mica, and Hong Kong's “Stablecoin Regulation” differ in licensing application processes and penalty standards, they all strictly require these three points, preventing issuers from exploiting regional policy loopholes for regulatory arbitrage.

3. The application scenarios of stablecoins extend to the real economy

With the acceleration of the tokenization of traditional real-world assets (RWA) such as stocks, bonds, and real estate, stablecoins will become the preferred settlement tool for RWA transactions due to their value stability and compliance transparency. As a tool for cross-border payments, stablecoins have achieved cost reduction and efficiency improvement. Currently, emerging markets such as Southeast Asia and Latin America have become core scenarios for cross-border payments with stablecoins, and in the future, they will extend into areas such as corporate cross-border trade, supply chain finance, and payroll distribution.

4. Conservative Asset Reserves

Regulatory requirements dictate that reserve assets must be cash, short-term government bonds, and other high-quality liquid assets. This will force issuers to abandon high-risk investment strategies and shift towards more transparent and safer models.

(II) Challenges of Stablecoins

Despite the positive trends, stablecoins driven by compliance still face significant challenges:

1. Lack of connection in the redemption mechanism. Currently, most regulations focus on primary market redemptions (direct redemptions by issuers), but the stabilization mechanism in the secondary market (exchange market) is still lacking, and it is necessary to clarify the response rules when the secondary market is unpegged.

2. Lack of Unified Technical Standards. The technical standards for smart contract security, cross-chain transaction compliance, and data privacy protection have not yet been globally unified, which may lead to technical compliance barriers.

3. Challenges to Financial Sovereignty. Large-scale stablecoins may affect the efficiency of a country's monetary policy transmission and financial sovereignty. If stablecoins are deeply integrated with the main financial system, their failure could trigger broader financial turmoil.

Conclusion

The future has arrived, and compliance is no longer an option but a cornerstone of survival. Whether for issuers or investors, only by actively embracing regulation, strengthening risk control, and enhancing transparency can one stand invincible in this transformation. The ultimate goal of stablecoins has never been to replace fiat currency, but to become a stable and efficient light within the financial infrastructure of the digital age.

This road is destined to be long and full of challenges, but it is precisely these challenges that drive stablecoins towards a more mature, inclusive, and sustainable future. What we are witnessing is not just an evolution of technology, but also an evolution of financial civilization.