Keeping crypto calm: The rise of stablecoins

Henrik Helsen
19 hours ago
4 min read

Over the past decade, the price of many cryptocurrencies (“crypto”) - most notably Bitcoin - has surged beyond heights even the most bullish investors might have predicted. It is this spike - and associated volatility - that has attracted considerable attention from markets. What fewer people know is that beyond cryptocurrencies lies a slightly different but equally intriguing asset class: the stablecoin.

In simple terms, stablecoins are digital tokens whose value is pegged to an underlying asset. There are around $300bn of stablecoins in circulation and the vast majority are pegged at parity to the US dollar. The fundamental purpose of stablecoins is to facilitate digital transactions using a medium of exchange that is going to maintain its underlying value. For example, crypto traders can move gains into stablecoins, allowing them to avoid converting such gains into fiat currency (which, in a digital context, is much more illiquid). Fintech companies are also increasingly making use of stablecoins. This is because they can be used to settle transactions almost instantly whereas conventional bank transfers can take hours or even days.

It is tempting, then, to think of stablecoins as a form of “digital money”. However, this is slightly misleading. There are four types of stablecoin: fiat-collateralised, commodity-collateralised, crypto-collateralised and algorithmic.

Fiat-collateralised (“fiat”) stablecoins can be redeemed for “real” currency at any point.

That is, they are backed by real currency reserves in a bank somewhere. This requires the stablecoin issuer to have bank deposits equal to the value of stablecoin that they issue. Commodity stablecoins can be redeemed for a physical commodity like a precious metal (or more commonly, its real fiat value). Like with fiat stablecoins, this requires issuers to have commodity deposits in a bank.

Crypto-collateralised stablecoins are backed by cryptocurrencies. At first glance, backing a relatively safe asset like a stablecoin with a riskier one like Bitcoin or Ethereum seems somewhat backward. In order to overcome this issue, stablecoins are often over-collateralised to insure against price swings of the cryptocurrencies e.g. a stablecoin worth $1 might be backed by $1.50 of Ethereum. In practice, investors often do have to accept some additional risk but the major advantage of crypto-collateralised stablecoins is the fact that they are essentially entirely out of the jurisdiction of conventional monetary authorities. In a time of banking instability, this can be particularly beneficial. The fact that crypto-collateralised stablecoins operate on public blockchains and leave permanent transaction records means they are not particularly attractive to criminals in a way that some have suggested.

Algorithmic stablecoins are the most complex and the most risky, because most are not backed by another asset (tangible or intangible). As the name suggests, an algorithm is used to control the supply and demand of such stablecoins depending on where the actual price is relative to the peg. For example, if the price falls below the peg, stablecoins are “destroyed” to push the price up.

Stablecoins are drawing increasing regulatory attention, because they represent a form of currency that is beyond the control of conventional central bank policy. The GENIUS Act of 2025 required all fiat stablecoins to be backed with high quality assets (essentially, cash). The legislation also gave the Federal Reserve the power to introduce additional controls on who could issue stablecoins . Similarly, the EU’s MiCA (Markets in Crypto-Assets Regulation) regime required issuers to publish regular reserve reports and audits . However, many of these new rules focus on fiat-backed stablecoins and regulators across the world seem less sure of how to approach crypto-collateralised ones.

Additionally, there is the question of how stablecoins will interact with proposed central bank digital currencies. Given souring relations between Europe and the US, it seems likely that the European Parliament will approve a “digital euro” when the issue comes up for a vote later this year, as a means of reducing dependence on US-dominated financial architecture. Whether both can coexist remains very much an open question.

Arguably the biggest question surrounding stablecoins is whether they will ever be fully incorporated into cross-border payment systems. At the moment, stablecoins are most heavily used by crypto speculators, given their potential to act as “digital cash” in the crypto ecosystem. Even though the market of stablecoins has risen almost tenfold since 2020, they still represent only around 10% of the value of global crypto.

Considerable attempts have been made to use stablecoins for this purpose. J.P. Morgan, an investment bank, has issued its own JPMCoin to tokenise USD deposits and instantly settle transactions between corporate clients. However, this technology has mostly been used for large-scale transfers, instead of payments by individual actors. Smaller firms like Remitano and Circle have pioneered the use of stablecoins for remittances, but these still take up a tiny share of the value of such payments.

More widespread adoption of stablecoins and a more coherent regulatory framework may well boost the use of fiat stablecoins for transfers, even if technical obstacles and consumer scepticism remain. For now, however, the use of stablecoins will be overwhelmingly concentrated in the crypto trading market - which itself may see significant downside volatility in years to come.

The views and opinions expressed in this article belong solely to the writer and do not necessarily reflect the views and opinions of the Warwick Economics Summit.

Reference List

DefiLlama. “DefiLlama,” January 30, 2026. https://defillama.com/stablecoins.

Kinexys by J.P. Morgan. “JPM Coin: Institutional Deposit Tokens & Blockchain Payments by Kinexys | J.P. Morgan,” 2019. https://www.jpmorgan.com/kinexys/digital-payments/jpm-coin.