Key Highlights

  • Dollar pegged stablecoins now exceed 300 billion dollars in combined value, according to the Bank for International Settlements.
  • Regulators worldwide are converging on rules requiring full backing by liquid assets and redemption at par.
  • Stablecoins still lack the singleness and elasticity that define traditional bank money.
  • New frameworks in Britain, the European Union and the United States differ sharply on central bank support.

A Confidence Trick Built on Three Pillars

Modern money functions because of three properties: singleness, where a unit of currency holds identical value regardless of where it is held; transferability, allowing frictionless movement between parties; and elasticity, where supply expands or contracts as conditions require. This arrangement, as researchers at the Centre for Economic Policy Research note, is an institutional construct sustained by central bank liquidity access, deposit insurance and capital rules rather than anything inherent to the currency itself.

Stablecoins, privately issued tokens pegged to reference assets such as the dollar, have emerged as the latest test of this arrangement. Tether's USDT and Circle's USDC dominate the space, together accounting for the overwhelming majority of dollar linked stablecoin value in circulation.

Where Stablecoins Fall Short of True Money

Despite rapid growth, stablecoins have not achieved full monetary status. Their use as a means of exchange remains specialised, concentrated largely in cryptocurrency trading and, increasingly, as a store of dollar exposure in emerging economies with less reliable local currencies. Singleness has occasionally broken down, as when USDC briefly traded well below its dollar peg following the 2023 failure of Silicon Valley Bank, where issuer Circle held reserves.

Elasticity presents a deeper structural question. Without guaranteed access to central bank liquidity facilities, stablecoin issuers may struggle to meet large redemption requests during periods of stress, placing them conceptually closer to money market funds than to insured bank deposits. This distinction matters greatly for financial stability regulators assessing systemic risk.

Diverging Regulatory Paths Could Shape Adoption

Policymakers across major jurisdictions are converging on core principles: full backing with short term liquid assets, redemption at par, and restrictions on interest payments to avoid direct competition with bank deposits. Where they diverge is on central bank support. The Bank of England has proposed that stablecoin reserves include a meaningful share held directly at the central bank, while the European Union mandates minimum bank deposit backing.

America's approach under the GENIUS Act permits limited reward payments through distributors while reserving lender of last resort facilities for traditional banks, though the Federal Reserve may extend narrower settlement account access to non-bank issuers. These differences could determine which jurisdictions become hubs for stablecoin innovation and which remain cautious.

Conclusion

Whether stablecoins ultimately qualify as money may matter less than whether they become more widely used. Growing regulatory clarity, full asset backing requirements and expanding use cases in cross border payments suggest wider adoption is likely, even as competition emerges from tokenised bank deposits that combine programmability with institutional backing. The structural test remains whether stablecoins can maintain elasticity during a genuine crisis without central bank support.

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Disclaimer: This article is for informational purposes only and does not constitute financial or investment advice.