Stablecoins

Table of contents

What are stablecoins?

Stablecoins are a type of cryptocurrency designed to maintain a stable value by pegging their price to a reserve asset, such as fiat currency or commodities. Unlike volatile cryptocurrencies like Bitcoin, stablecoins offer price stability, making them a crucial tool for financial transactions, remittances, and risk management.

There are three main types of stablecoins:

Fiat-backed stablecoins

Fiat-backed stablecoins are pegged to traditional currencies like the US dollar (USD) or euro (EUR), and are backed by equivalent reserves held in banks or other financial institutions. Examples include USDT (Tether) and USDC (USD Coin). They offer a reliable medium of exchange but depend on centralized entities to maintain transparency and solvency.

Crypto-backed stablecoins

Crypto-backed stablecoins are collateralized by other cryptocurrencies and often require over-collateralization to absorb market volatility. For instance, DAI is a crypto-backed stablecoin that is maintained through a system of smart contracts and governance mechanisms. While they are more decentralized than fiat-backed stablecoins, they are also exposed to market fluctuations of their underlying assets.

Algorithmic stablecoins

Unlike the first two categories, algorithmic stablecoins maintain their peg through automated supply-and-demand mechanisms rather than direct collateral. These systems rely on smart contracts to expand or contract the supply of the stablecoin based on market conditions. However, as seen with the collapse of TerraUSD (UST), algorithmic stablecoins can be highly vulnerable to instability and market-driven failures.

Stablecoins facilitate seamless crypto transactions, reduce volatility risks, and enable a bridge between traditional finance and decentralized ecosystems. However, their reliance on different stabilization mechanisms introduces unique risks that need to be managed effectively.

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How are stablecoins used in illicit finance?

While stablecoins offer benefits for legitimate commerce, they are also increasingly used in illicit financial activity due to their liquidity, global reach, and price stability. Criminal actors have leveraged stablecoins to:

Launder proceeds from fraud and scams
Evade economic sanctions — particularly through decentralized exchanges and peer-to-peer transfers
Fund illicit marketplaces, including darknet platforms and cybercrime-as-a-service
Receive ransomware payments in more stable denominations

Because stablecoins are widely accepted and maintain a steady value, they are often used as on- and off-ramps for illicit funds. TRM Labs helps law enforcement and financial institutions detect and disrupt these flows using blockchain intelligence, transaction tracing, and risk scoring.

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What are some considerations law enforcement, crypto businesses, financial institutions, and regulators need to keep in mind when dealing with stablecoins?

Law enforcement

Law enforcement agencies are increasingly encountering stablecoins in financial crime investigations. Criminals may exploit stablecoins to launder funds, evade sanctions, or conduct illicit transactions while avoiding the price fluctuations of other cryptocurrencies. Investigators rely on blockchain intelligence tools like TRM Labs to track illicit transfers and uncover hidden financial networks.

Tracking illicit transactions: Due to the transparent nature of blockchain technology, agencies can trace stablecoin transactions to identify suspicious activity, track wallet movements, and link addresses to known illicit actors.
Seizure and recovery of funds: With the right tools and intelligence, law enforcement can work with exchanges and other financial institutions to freeze and recover stolen or illicitly obtained stablecoins, disrupting criminal operations.

Crypto businesses

For cryptocurrency exchanges, payment processors, and DeFi platforms, stablecoins offer a valuable tool for enhancing liquidity and facilitating cross-border transactions.

Payment processing: Many businesses accept stablecoins as payment due to their stability and ease of transfer. This reduces reliance on traditional banking infrastructure, especially in regions with limited financial access.
Liquidity management: Crypto exchanges and DeFi platforms use stablecoins to provide liquidity in trading pairs, allowing users to move in and out of crypto assets without exposure to extreme volatility.
Compliance and fraud detection: As regulators tighten oversight of crypto businesses, ensuring compliance with anti-money laundering (AML) and counter-terrorism financing (CTF) regulations is crucial. By monitoring stablecoin transactions using blockchain intelligence and AML compliance tools like TRM Labs, businesses can identify and report suspicious activity.

Financial institutions

Banks and financial institutions are exploring ways to integrate stablecoins into their services, offering customers new opportunities for digital payments and financial innovation.

Cross-border payments: Stablecoins enable instant, low-fee global transactions, providing a faster and more efficient alternative to traditional remittance services.
Digital asset custody: Many institutions are developing custody solutions for stablecoins, allowing them to securely store and manage digital assets on behalf of clients.
Institutional investment: Some financial entities use stablecoins for settlements, trading, and hedging strategies, leveraging their price stability for risk management.

Regulators

As stablecoins become more widely adopted, regulatory agencies are working to establish frameworks to ensure their safe use while mitigating financial risks.

Compliance and oversight: Regulatory bodies are developing guidelines for stablecoin issuers, including requirements for reserve transparency, audits, and risk management protocols.
Market stability and consumer protection: Authorities aim to prevent systemic risks posed by unstable or poorly managed stablecoins by enforcing standards that ensure financial stability and consumer safety.
Central Bank Digital Currencies (CBDCs): Some governments are exploring the development of their own digital currencies as a regulated alternative to private stablecoins, ensuring state control over monetary policy and financial infrastructure.

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How does TRM Labs support law enforcement, crypto businesses, financial institutions, and regulators in mitigating risk and enforcing the licit use of stablecoins?

TRM Labs provides blockchain intelligence solutions that help law enforcement, regulators, financial institutions, and crypto businesses monitor and manage risks associated with digital assets, including stablecoins.

For law enforcement: TRM Forensics enables investigators to trace stablecoin transactions, link addresses to illicit actors, and gather evidence for financial crime cases.
For crypto businesses: TRM Transaction Monitoring and Wallet Screening help exchanges and DeFi platforms detect suspicious transactions and ensure compliance with global AML regulations.
For financial institutions: TRM’s analytics tools assist banks in identifying high-risk transactions, managing counterparty risks, and maintaining regulatory compliance when dealing with stablecoins.
For regulators: TRM provides risk intelligence solutions that allow policymakers to assess stablecoin adoption, detect illicit financial flows, and enforce compliance frameworks.

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What are some key challenges and considerations for stablecoins?

While stablecoins offer numerous benefits, they also present challenges that need to be addressed:

Regulatory uncertainty: Governments worldwide are debating how to regulate stablecoins, focusing on transparency, reserve audits, and operational stability.
Counterparty risks: Fiat-backed stablecoins depend on centralized issuers, raising concerns about insolvency, mismanagement, and the integrity of reserve holdings.
Algorithmic stablecoin failures: The collapse of TerraUSD (UST) highlighted the risks of uncollateralized stablecoins, emphasizing the need for robust risk management strategies.
Security vulnerabilities: Stablecoins are susceptible to smart contract exploits, hacking attempts, and financial fraud — making cybersecurity a top priority for issuers and users alike.

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Who are the major stablecoin issuers?

Here’s a snapshot of today’s leading stablecoins and the organizations behind them:

Note: Market share, regulatory exposure, and risk profiles vary widely. Some issuers provide real-time attestations and regulatory compliance, while others operate from offshore jurisdictions with limited oversight.

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What are some recent policy developments impacting stablecoins?

The GENIUS Act and US stablecoin regulation

In July 2024, US lawmakers introduced the GENIUS Act (Guarding the United States Against Illicit and Unlawful Stablecoins Act), signaling a major push to establish federal oversight of stablecoin activity. The legislation is part of a broader effort to combat the use of stablecoins in illicit finance, including sanctions evasion, terrorist financing, and ransomware payments.

Key provisions of the GENIUS Act include:

Registration requirements: Stablecoin issuers must register with the US Department of the Treasury or face civil and criminal penalties.
Reserve transparency: Issuers are required to maintain 1:1 reserves and submit regular third-party audits detailing reserve composition.
Enhanced compliance obligations: Issuers and intermediaries must implement robust AML/CFT programs aligned with existing Bank Secrecy Act (BSA) standards.
Authority to block illicit issuers: The Treasury may prohibit or restrict the use of stablecoins deemed to pose national security or financial crime risks.

The GENIUS Act highlights the US government’s intent to bring stablecoin issuers under traditional financial compliance frameworks, potentially reshaping how stablecoins are issued, distributed, and monitored globally.

Read the key takeaways about the passage of the GENIUS Act on TRM’s blog here.

Global momentum toward stablecoin regulation

While the US debates comprehensive legislation, many countries have already enacted — or are in the process of enacting — stablecoin-specific regulations.

European Union (EU): Under MiCA (Markets in Crypto-Assets Regulation), stablecoin issuers must maintain full reserves, register with authorities, and adhere to strict disclosure and governance rules. “Significant” stablecoins — those with large market caps or wide usage — are subject to additional capital and liquidity requirements.
Japan: In 2023, Japan passed legislation limiting stablecoin issuance to licensed banks and trust companies. Issuers must segregate customer assets and submit to financial oversight.
Singapore: The Monetary Authority of Singapore (MAS) has proposed new stablecoin regulations that require full backing, daily redemption guarantees, and tight controls over reserve asset quality and custody.
Brazil and Latin America: Several central banks, including Brazil’s, are exploring frameworks to govern stablecoins in parallel with public-private pilots for central bank digital currencies (CBDCs) and digital payment platforms.
United Kingdom: The UK’s Financial Services and Markets Act 2023 gives regulators the authority to supervise fiat-backed stablecoins used for payments, with implementation plans rolling out through 2025.

Together, these global trends signal the rise of a regulated stablecoin ecosystem that aligns with traditional financial compliance and consumer protection standards.

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What’s next for stablecoins?

As regulatory frameworks mature and institutional interest grows, the stablecoin landscape is evolving rapidly. Key trends shaping the future of stablecoins include:

Tokenized bank deposits: Some commercial banks are experimenting with digitized versions of customer deposits that offer the programmability of stablecoins but operate under full banking regulation.
Central Bank Digital Currencies (CBDCs): Governments are exploring CBDCs as an alternative to private stablecoins, with several pilots underway across the EU, China, and the US.
Interoperability standards: Organizations like the Interledger Foundation and BIS Innovation Hub are developing protocols to enable cross-chain and cross-border stablecoin transfers with built-in compliance.
Programmability and compliance automation: Emerging stablecoin frameworks may include smart contract-based compliance, enabling real-time transaction monitoring and enforcement of sanctions or licensing rules.

In the coming years, we may see a convergence between stablecoins, tokenized assets, and regulated digital money, redefining how value moves across borders and financial ecosystems.

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What other resources are available to learn more about stablecoins?

Check out these additional resources and learn how TRM helps financial institutions with stablecoin risk management.

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Frequently asked questions (FAQs)

What is a stablecoin in cryptocurrency?

A stablecoin is a type of cryptocurrency that aims to maintain a stable value by pegging its price to a reserve asset, such as fiat currency (e.g. USD) or commodities. Unlike more volatile crypto assets like bitcoin or ether, stablecoins are designed to minimize price fluctuations and offer a more predictable store of value.

What are the different types of stablecoins?

Stablecoins generally fall into three categories:

Fiat-backed stablecoins are collateralized by traditional currencies like the US dollar and held in reserve by centralized entities (e.g. USDC, USDT)
Crypto-backed stablecoins are backed by other cryptocurrencies and often use over-collateralization to manage risk (e.g. DAI)
Algorithmic stablecoins use automated supply-and-demand mechanisms to maintain their peg without direct collateral (e.g. the now-defunct UST)

Each design offers tradeoffs between decentralization, stability, and regulatory exposure.

Why are stablecoins used in illicit finance?

Stablecoins are increasingly used in illicit activity because of their liquidity, cross-border accessibility, and price stability. Criminal actors may use stablecoins to:

Launder proceeds from scams or fraud
Evade economic sanctions
Pay or receive ransomware
Fund illicit platforms and darknet markets

TRM Labs helps identify these risks through blockchain intelligence, transaction tracing, and risk scoring.

How do law enforcement agencies investigate stablecoin-related crime?

Law enforcement uses blockchain intelligence tools to:

Trace stablecoin transactions to and from wallets linked to criminal activity
Identify behavioral patterns, cross-chain laundering tactics, and darknet exposure
Collaborate with financial institutions and exchanges to freeze or recover assets

Tools like TRM Forensics allow agencies to build detailed, evidence-based investigations into crypto-enabled financial crime.

How do stablecoins support legitimate use cases for crypto businesses?

Crypto exchanges, DeFi platforms, and payment processors use stablecoins to:

Enable faster, cheaper cross-border transactions
Reduce volatility in trading pairs
Streamline liquidity provisioning
Support AML/CFT compliance using transaction monitoring tools

TRM Labs helps these businesses detect fraud, screen wallets, and ensure regulatory compliance.

What should regulators know about stablecoins?

Regulators are focused on:

Reserve transparency: Verifying 1:1 backing and third-party audits
Compliance enforcement: Requiring AML/CFT controls and issuer registration
Consumer protection: Setting rules to prevent algorithmic failures or mismanagement

TRM provides intelligence solutions that support regulatory oversight and risk assessment of stablecoin activity.

What is the GENIUS Act and how does it affect stablecoins?

The GENIUS Act (Guarding the United States Against Illicit and Unlawful Stablecoins Act), introduced in July 2024, establishes a federal framework for stablecoin compliance. Key provisions include:

Issuer registration with the US Treasury
Mandatory reserve audits
AML/CFT program requirements
Authority to restrict non-compliant issuers

This legislation may shape how stablecoins are issued, distributed, and monitored both in the US and globally.

How are global governments regulating stablecoins?

Around the world, stablecoin regulations are taking shape:

EU (MiCA): Requires full reserve backing, governance standards, and oversight of “significant” stablecoins
Japan: Limits issuance to licensed banks and trust companies
Singapore: Proposes rules for full collateralization and daily redemption guarantees
UK: Authorizes supervision of fiat-backed stablecoins under the Financial Services and Markets Act

These efforts reflect a growing consensus on the need for regulated, transparent stablecoin frameworks.

What risks do stablecoins pose?

Key risks include:

Regulatory uncertainty in major markets
Counterparty risk from centralized issuers
Smart contract vulnerabilities in DeFi-based stablecoins
Peg instability, especially with algorithmic models

These risks highlight the importance of robust compliance tools and blockchain intelligence for risk mitigation.

How does TRM Labs help manage stablecoin risk?

TRM Labs supports stakeholders across the digital asset ecosystem with tools to monitor, investigate, and manage risk:‍

Law enforcement: TRM Forensics traces stablecoin flows tied to illicit actors‍
Custodians: TRM strengthens oversight of stablecoin issuer relationships, enabling custodians to assess on-chain activity in real time‍
Stablecoin issuers: TRM Wallet Screening enables teams to screen wallets before minting and detect anomalies, and TRM Transaction Monitoring continuously scans holistic risk exposure‍
Payments providers: TRM gives teams visibility into high-volume participants and ensure trusted access and compliance oversight across institutional users‍
Regulators: Risk intelligence dashboards offer insights into stablecoin adoption and financial crime patterns within your jurisdiction