Stablecoin

Cryptocurrencies like Bitcoin have a practical problem: their price fluctuates a great deal. It can rise or fall by ten percent in a single day. That makes them poorly suited for payments, since nobody knows what the amount will be worth tomorrow. A stablecoin solves this by being pegged to a normal currency, usually the US dollar. One unit should always be worth roughly one dollar. Technically, it is a balance in a public database maintained jointly by many computers — this system is called a blockchain.

The dollar that can transfer around the clock

A normal international bank transfer often takes days and costs fees. A stablecoin can be sent halfway around the world in minutes, on any day and at any time. For people in countries with high inflation, this is especially attractive. They would rather hold their savings in digital dollars than in a currency that loses value every month.

Stablecoins are also the standard in crypto trading. Anyone selling Bitcoin usually doesn’t convert it into euros, but into a stablecoin. That is faster and works without a bank in the background. This is why the largest stablecoins together are worth several hundred billion dollars.

It is precisely this size that makes them interesting to regulators. If many people demand their money back at the same time, the issuer must be able to pay it out. A collapse could spill over into banks and financial markets. In the EU, a dedicated set of rules for such tokens has therefore been in force since 2024 under MiCA.

Where the price peg comes from

The most common design is also the simplest: backing with real money. The issuer takes in one dollar and issues a token in exchange. The dollar is held in a bank account or invested in short-term US government bonds. Anyone who returns the token gets their dollar back. The largest examples are USDT from Tether and USDC from Circle.

A second variant backs the token with other cryptocurrencies. Because their price fluctuates, collateral must be deposited in excess. For 100 dollars worth of tokens, about 150 dollars worth of crypto assets are held as collateral. If the value of the collateral falls too far, it is automatically sold off.

A third variant tried to maintain the peg purely through algorithmic rules, without real backing. This model was called an algorithmic stablecoin. The best-known example, TerraUSD, collapsed within a few days in 2022 and wiped out around 40 billion dollars. Since then, the approach has been considered a failure. The technical term for the loss of a price peg, incidentally, is “depegging”.

Stablecoins in the news and payment apps

In everyday life, most people first encounter stablecoins on cryptocurrency trading platforms. There, they serve as a temporary parking spot for money. Increasingly, however, they are also appearing at payment service providers. PayPal has issued its own dollar token, and Visa and Mastercard are testing settlement through them.

In financial news, stablecoins mainly come up in two contexts. First, regulation: how much in reserves must an issuer hold, and who checks that? Second, interest, since issuers earn money from the bonds in their reserves. This makes Tether one of the most profitable financial companies in the world.

A common misconception is to confuse stablecoins with digital central bank money. The digital euro would be state money, issued by the European Central Bank. A stablecoin, by contrast, is a promise made by a private company. How much it is worth depends on whether that company is able and willing to pay.