A brief discussion on the eight potential risks of stablecoins

Stablecoins are a special type of cryptocurrency that maintains price stability by anchoring to a stable asset such as the US dollar, gold, other fiat currencies, or crypto assets. They aim to address the high volatility issues of traditional cryptocurrencies like Bitcoin and Ethereum. Stablecoins retain the advantages of blockchain technology, such as decentralization and efficient cross-border payments, while reducing volatility through reserve assets or algorithmic mechanisms, serving as a “bridge” connecting traditional finance and the crypto world.

By 2025, stablecoins have upgraded from being “connectors” of crypto assets to a new infrastructure for global payments, with a total market capitalization surpassing $250 billion. Their trading volume has outstripped the combined volume of Visa and Mastercard, with tech giants like JD.com and Ant Group rushing into the space. The US and Hong Kong have accelerated legislation efforts. According to Citibank’s forecast, by 2030, the stablecoin market could reach between $1.6 trillion and $3.7 trillion, making their growth and prospects highly significant.

However, despite their design for “stability,” stablecoins as an innovation in the crypto field pose potential risks that have attracted widespread attention from regulators, academia, and markets worldwide. This article provides a brief analysis of these risks.

1. Depegging and Run Risks

The value of stablecoins depends on the pegged assets (like USD or US Treasuries) or algorithmic mechanisms. Market panic, insufficient reserves, or algorithm failures can cause depegging. Once depegging occurs, the stablecoin’s value system collapses, eroding investor trust and potentially triggering runs, which can create a vicious cycle.

Although called “stable,” stablecoins do experience small market price fluctuations due to supply and demand, funding rates, or exchange rates—usually within 1%, which is considered normal. However, if fluctuations exceed 2% and persist without recovery, it is considered a depegging event.

Depegging has occurred in the past. For fiat-backed stablecoins, events often stem from insufficient reserves or lack of transparency and major flaws in reserve disclosures. Non-fiat-backed stablecoins, especially those based on cryptocurrencies like Bitcoin or Ethereum, are more prone to depegging due to significant market volatility. For example, in 2023, USDC suddenly depegged, dropping from $1 to $0.87 briefly. The cause was that Circle, the issuer, held about $3.3 billion in cash at Silicon Valley Bank (SVB), which had just declared bankruptcy. Market fears about reserves led to the depegging, but US government guarantees for SVB depositors helped USDC recover to $1 within days.

Compared to fiat-backed stablecoins, algorithmic and synthetic stablecoins face even higher depegging risks. The TerraUSD (UST) collapse was one of the most destructive systemic events in crypto history, leading to a loss of $40 billion in market value within a week and triggering a market-wide crash. In October 2023, during a series of liquidations, the synthetic stablecoin USDe issued by Ethena Labs briefly depegged, dropping as low as $0.62 on some decentralized exchanges—a 38% deviation. Similarly, in early November, USDX by Stable Labs also depegged significantly, raising concerns about the stability of related DeFi protocols.

2. Dominance and Dollarization Risks

The rapid growth of stablecoins is reshaping the global monetary system and financial power structure. Currently, US dollar stablecoins dominate the market, backed by the US government’s legislative and regulatory strategies to incorporate stablecoins into the dollar system, raising concerns about “digital dollarization.”

In June 2025, at the Lujiazui Forum, Zhou Xiaochuan, former governor of the People’s Bank of China, noted that many US dollar stablecoins already exist, and other regions are considering developing their own fiat-backed stablecoins. He emphasized that US dollar stablecoins, supported by the strong US dollar system, are more likely to have a global impact. When considering the future role of stablecoins, vigilance is necessary, especially regarding dollarization risks.

Over the past five years, the stablecoin market has exploded from about $5 billion in 2020 to $273.45 billion in 2025—more than 50 times growth—forming a market structure dominated by US dollar stablecoins. The market is highly concentrated, reflecting the current global power dynamics in digital currencies.

This concentration and US dollar dominance give the US an inherent advantage in rule-setting. With the passage of the “Genius Act,” the US is systematically transforming this advantage into institutional dominance, further squeezing out non-dollar stablecoins and deepening dollarization risks globally.

3. Financial Stability and Technical Risks

Beyond depegging and runs, stablecoins could lead to “disintermediation” of finance, where funds bypass traditional banks, impacting deposit-taking and credit creation. As stablecoins become more interconnected with traditional markets, their risks can propagate through liquidity channels, such as if custodial banks are not the original deposit-taking banks, leading to bank balance sheet contractions and affecting settlement revenues.

“Fund migration” occurs when residents in high-inflation countries prefer holding stablecoins over local bank deposits, and cross-border payments bypass traditional remittance systems, exacerbating financial disintermediation.

A 100% reserve model would lock funds, preventing banks from creating credit through fractional reserves. The BIS warns that if stablecoins reach $2 trillion in reserves by 2028, they could divert $1.5 trillion from bank deposits, weakening SME financing.

Stablecoins often peg to assets like short-term US Treasuries—about 90% of USD stablecoins’ reserves are in short-term US debt. Selling these assets during market stress could amplify US Treasury volatility. If US debt prices plummet, it could cause a chain reaction affecting stablecoin prices and systemic financial risks. Worsening US fiscal deficits could also transmit risks globally via stablecoins, with China holding significant US debt exposed to valuation declines.

Technologically, stablecoins rely heavily on blockchain networks, oracles, and cross-chain bridges. Vulnerabilities here—such as smart contract bugs (e.g., the 2024 Curve attack causing $62 million in losses) or cross-chain bridge hacks (e.g., Nervos Network losing $3 million)—pose systemic risks. These vulnerabilities can lead to large financial losses, data breaches, and loss of market confidence, potentially triggering broader systemic crises.

4. Regulatory Pressures and Risks

As regulatory frameworks for stablecoins are still evolving, differing standards across countries increase compliance costs for cross-border banking and may lead to regulatory arbitrage and compliance risks.

Current policies supporting stablecoins and crypto assets are influenced by specific political climates. Changes in regulation—due to political shifts or geopolitical conflicts—could cause policy swings from supportive to restrictive, creating uncertainty.

Furthermore, the global and semi-anonymous nature of stablecoins (on-chain addresses are traceable but user identities are not directly linked) makes them attractive for money laundering, terrorism financing, and sanctions evasion.

In 2023, illegal transactions involving stablecoins reached $12 billion, with over 60% flowing to sanctioned regions. Without strict KYC (Know Your Customer), KYT (Know Your Transaction), and sanctions screening, stablecoins could become tools for illicit finance, prompting severe regulatory crackdowns.

AML and CFT (Countering Financing of Terrorism) are key concerns. Their convenience and semi-anonymity make stablecoins susceptible to misuse in illegal gambling, underground banking, scams, and dark web activities. Criminals may use “stablecoins” and “DeFi” concepts to disguise schemes like Ponzi schemes, raising enforcement challenges.

In China, virtual currencies like stablecoins are increasingly used for money laundering. In February 2025, the Supreme People’s Procuratorate reported that crypto-based money laundering—via small, multiple transactions—has become a major method for transferring illicit funds, with over 3,000 prosecutions in 2024. Criminals convert illicit gains into stablecoins via offshore exchanges or “coin dealers,” then transfer funds abroad or use coin-mixing techniques to obscure transaction paths, complicating investigations. Some gangs even set up “mixer platforms” to facilitate laundering, fueling telecom scams and corruption, and making recovery difficult, threatening financial security.

5. Threats to Monetary Sovereignty

Stablecoins pegged to fiat or low-volatility assets pose a challenge to global monetary sovereignty, especially in fragile or high-inflation economies.

In countries like Venezuela, Argentina, and Nigeria, where trust in local currencies is low, residents increasingly use stablecoins like USDT or USDC for daily transactions and savings. For example, Nigeria’s USDT trading volume grew by 50% in 2022, with stablecoin activity in Africa and Latin America accounting for over 30% of global volume. This “stablecoinization” effectively results in dollarization, squeezing out local currencies and diminishing central banks’ control over money supply.

Most stablecoins are anchored to USD, which could further strengthen the dollar’s dominance in the international monetary system, hindering the internationalization of currencies like the RMB and impeding the development of a multipolar global currency system. Emerging economies may develop “dual currency” systems, with local currencies and dollar stablecoins coexisting, or accelerate dollarization.

As “digital dollarization” deepens, central banks’ monetary policy transmission could weaken significantly, as many economic activities shift to the “offshore” sphere dominated by stablecoins. This undermines governments’ ability to stabilize the economy and erodes core sovereign powers like issuing currency. The BIS warns that cryptoization, especially stablecoinization, can bypass capital controls and threaten monetary sovereignty.

In China, similar concerns exist. Excessive development of stablecoins could weaken the digital yuan’s role, impair monetary policy effectiveness, and complicate regulation. Maintaining leadership in CBDC development and fostering a separate, innovative stablecoin regulatory environment in Hong Kong could be a strategic approach to balance innovation and sovereignty.

6. Capital Flight Risks in Emerging Markets

The BIS has noted that stablecoins perform poorly in the three key tests of a resilient monetary system. Even with regulation, their limitations hinder their role as a pillar of the financial system. The BIS warns that stablecoins could weaken monetary sovereignty and trigger capital flight in emerging economies.

Capital flight occurs when firms and residents convert local currency into stablecoins like USDT or USDC, leveraging cross-border transfer capabilities to move funds abroad, bypassing foreign exchange controls and banking scrutiny. This can deplete foreign reserves and cause currency depreciation. Countries like Argentina and Nigeria, with strict capital controls, see stablecoins as a tool for moving assets offshore into US dollar holdings.

In high-inflation countries, widespread use of stablecoins for transactions and savings erodes the local currency’s foundation, reduces the effectiveness of monetary policy, and complicates government interventions. The anonymity and peer-to-peer nature of stablecoins also facilitate underground banking, money laundering, and terrorist financing, increasing regulatory challenges.

Massive capital outflows into crypto ecosystems can diminish the effectiveness of traditional monetary policy tools, as stablecoins may replace bank deposits, leading to deposit withdrawals and lower money multipliers. Cross-border flows supported by stablecoins can bypass capital controls, fueling hot money inflows and outflows, causing short-term market volatility and financial instability, especially during political or economic crises.

In summary, stablecoins pose significant risks of capital flight in emerging markets, impacting monetary policy, financial stability, and sovereignty.

7. Fraudulent Stablecoins and Scam Risks

As public awareness of stablecoins grows, so does the prevalence of scams targeting them. Individuals and enterprises face numerous schemes, notably “fake stablecoins.”

“Fake stablecoins” refer to fraudulent tokens issued by scammers to deceive investors or trading partners, often mimicking legitimate stablecoins like USDT or USDC. These can initially transfer and exchange normally, even redeem for real stablecoins, but after the scam operator disappears, the tokens become worthless and unexchangeable. For example, in July 2025, a platform called “DGCX Xin Kang Jia” fraudulently claimed to be affiliated with Dubai Gold & Commodities Exchange, using USDT to solicit funds and ultimately stealing over $1 billion.

Additionally, as stablecoins gain popularity, malicious actors exploit the hype by promoting “virtual currencies,” “digital assets,” or “investment projects” under the guise of financial innovation, blockchain, or digital economy themes. They promise high returns and lure the public into speculative trading, often via social media or fake websites.

Individuals and companies should verify the legitimacy of institutions and products through official channels, choose licensed financial institutions, and understand the high volatility and complexity of digital assets. Avoid participating in unregulated or suspicious schemes, and protect personal assets from scams.

8. Risks to Central Bank Digital Currencies (CBDC)

Fiat-backed stablecoins and CBDCs are both digital currencies but differ significantly in issuance, backing, and use cases.

• Issuer and Credit: CBDCs are issued by central banks, fully backed by government credit, and have legal tender status (e.g., digital RMB). Stablecoins are issued by private entities or decentralized protocols, relying on collateral or algorithms, and are pegged 1:1 to fiat currencies, maintained via reserves.

• Centralization and Regulation: CBDCs are fully centralized, regulated by the central bank, supporting features like controlled anonymity. Stablecoins, especially decentralized ones, rely on blockchain consensus mechanisms, support semi-anonymous transactions, and are subject to evolving regulatory frameworks.

• Stability and Use Cases: CBDCs mainly target domestic retail payments, enhancing monetary policy transmission and financial inclusion. Stablecoins focus on cross-border payments, DeFi, and crypto trading.

Despite differences, both are digital, based on blockchain or DLT, support peer-to-peer transactions, and can improve payment efficiency. Both also support programmability, enabling innovative financial applications.

The US, through the “Genius Act,” has regulated stablecoins while also passing legislation like the “Anti-CBDC Monitoring Act” to restrict the Federal Reserve from issuing retail CBDCs without explicit congressional approval. This reflects a strategy to promote private stablecoins and limit central bank issuance, maintaining US dollar dominance and preventing potential overreach of monetary policy.

From another perspective, regulation of stablecoins may serve to restrict the expansion of CBDCs, especially in cross-border contexts. Excessive development of stablecoins domestically could undermine the digital yuan and impact financial stability. Strategic separation—allowing Hong Kong to innovate in stablecoin regulation while China advances CBDC development—may be the optimal path forward.