Cryptocurrency has produced one real product and many speculative ones. The real product is stablecoins — tokens pegged 1:1 to a fiat currency, primarily the US dollar — which now process meaningful volumes of cross-border payment and settlement. The speculative products — most of crypto's other ten thousand tokens — have not demonstrated comparable utility. The policy question is how to regulate the real product without inadvertently endorsing the speculative layer that the same firms also operate.

What Stablecoins Are

A stablecoin is a digital token whose value is pegged to a reference asset, almost always the US dollar. The peg is maintained either through collateralization (the issuer holds an equivalent amount of real dollars or dollar-equivalent assets) or through algorithmic mechanisms (no longer trusted after the Terra/Luna collapse in 2022). The major collateralized stablecoins are USDT (Tether), USDC (Circle), and DAI (MakerDAO).

The aggregate stablecoin market capitalization runs around $160 billion as of mid-2024, having recovered from the post-Terra contraction. Daily settlement volume across the major stablecoins exceeds $50 billion, which puts the sector roughly on the order of traditional payment networks like Visa for direct settlement (though the comparison is imperfect because stablecoin volume includes substantial trading-related transfers).

What Stablecoins Actually Do

The clearest demonstrated use cases:

Cross-border remittances: Sending dollars to a recipient in Argentina, Nigeria, or Venezuela through a stablecoin can be faster and cheaper than traditional remittance channels. The recipient holds dollar-denominated value in jurisdictions where dollar bank accounts are restricted or expensive. Daily flows for this purpose in major emerging-market corridors run into hundreds of millions of dollars.

Crypto-market settlement: Most cryptocurrency trading uses stablecoins as the cash leg. Bitcoin trades against USDT or USDC rather than against bank dollars. This is internal to the crypto ecosystem but represents a substantial share of stablecoin volume.

Dollarization in inflation-volatile economies: Argentine retail investors hold stablecoins to escape peso inflation. Turkish savers do the same with lira. The volumes are modest by US standards but significant for the affected economies.

Wholesale settlement of payments at non-bank hours: stablecoin networks operate 24/7, which traditional bank wires do not. Some B2B payments use stablecoins for weekend and after-hours settlement even when the underlying parties have bank relationships.

The 2023 USDC Depeg

The Silicon Valley Bank collapse in March 2023 included Circle's $3.3 billion in SVB deposits, which represented backing for the USDC stablecoin. When the bank failed, USDC briefly traded as low as $0.87 before the Federal Reserve's systemic-risk exception protected the deposit and allowed Circle to recover. The episode was the most serious test of a major US-regulated stablecoin and revealed that the peg depends on banking-system access in ways the marketing did not emphasize.

The depeg illustrates a structural feature of fiat-backed stablecoins: they are not actually independent of the traditional banking system; they ride on it. The collateral has to be held somewhere, and the only options are commercial banks (which can fail) or Treasury bills (which require the issuer to operate a quasi-bank operation). The crypto-libertarian framing of stablecoins as "outside the system" is partly marketing.

The Terra/Luna Catastrophe

The May 2022 collapse of Terra/Luna was the largest single crypto-related loss of value in history — over $40 billion of market cap evaporated in a week. Terra was an algorithmic stablecoin: rather than collateralizing with real assets, it used an arbitrage mechanism involving a sister token (Luna) to maintain the peg. When market stress made the mechanism unprofitable, both tokens spiraled to near-zero.

The lesson — that algorithmic stablecoins are fundamentally fragile — has been broadly accepted. The remaining major stablecoins are collateralized, and the algorithmic-stablecoin category has effectively collapsed. Hilary Allen's Driverless Finance argued before Terra's collapse that algorithmic stablecoins were structurally unsound; the empirical record has confirmed the argument.

The Regulatory Framework Question

Stablecoins occupy an ambiguous regulatory position. They are not securities (no expectation of profit, no fluctuating value). They are not banks (no fractional reserve, no deposit insurance). They are not money-market funds (different operational structure). The SEC, CFTC, OCC, FDIC, and various state regulators have asserted overlapping jurisdiction without producing a coherent framework.

The 2023-2024 Clarity for Payment Stablecoins Act and various state initiatives have proposed dedicated stablecoin regulation: required reserve compositions, regular attestations, holder- identification requirements. None of these has passed federal legislation. The state-level frameworks (New York's BitLicense, Wyoming's Special Purpose Depository Institution) provide partial coverage but inconsistent treatment across jurisdictions.

The EU's MiCA (Markets in Crypto-Assets) framework, in force from 2024, has produced the clearest stablecoin regulatory regime in major jurisdictions. Stablecoin issuers operating in the EU must register, maintain specific reserve compositions, and meet operational requirements. The framework's interaction with non-EU stablecoin issuers is still being worked out.

The Bank-Run Risk

The 2023 USDC depeg revealed that stablecoins face the same kind of confidence-loss dynamics that banks do. If holders doubt the backing, they can redeem en masse and trigger a run. The collateral backing has to be liquidatable fast enough to meet redemption demand, which constrains the reserve composition.

USDT's reserve composition has been a source of recurring concern. Tether's reports have shown substantial holdings in commercial paper and other non-Treasury instruments, which introduces credit and liquidity risk that pure-Treasury backing would not. USDC's reserve composition is cleaner (primarily Treasury bills and Federal Reserve balances since the SVB episode) but the issuer remains private and unregulated as a bank.

The Honest Reading

Stablecoins are the one crypto product that has demonstrated sustained real-world utility. The category has survived multiple stress tests, has grown despite an unfavorable regulatory environment, and has produced clear use cases that other crypto tokens have not matched. The remaining policy question is how to provide a regulatory framework that captures the stability and consumer-protection benefits without choking the innovation, and without inadvertently endorsing the broader crypto-speculation ecosystem that the same firms also operate. The EU has produced a working framework; the US has not. The political-economy obstacles in the US are substantial — bipartisan distrust of crypto generally, divided regulatory jurisdiction, and significant industry lobbying both for and against various provisions. The 2030s will probably produce a US federal stablecoin framework eventually; the question is what damage occurs in the interim from continued regulatory ambiguity.