A decade has passed since the introduction of BitUSD, the first stablecoin, marking a pivotal evolution in the decentralized finance (DeFi) ecosystem. Today, stablecoins are an essential financial instrument within this landscape, with a current total supply exceeding $156 billion. Launched on the BitShares blockchain on July 21, 2014, by crypto visionaries Dan Larimer and Charles Hoskinson, BitUSD was designed to maintain a stable 1:1 value with the U.S. dollar. However, the eventual de-pegging of BitUSD in 2018 highlighted the complexities of early stabilization models.
In contrast, modern stablecoins like Tether (USDT) and USD Coin (USDC) have achieved remarkable stability, primarily through substantial fiat reserves and other robust mechanisms that enhance their reliability. Today’s stablecoins serve critical roles in the cryptocurrency and DeFi ecosystems, providing liquidity for exchanges, facilitating collateralized lending, and allowing market participants to retain digital asset exposure without continuous conversions to fiat currency.

Overview of Stablecoins

Types of Stablecoins

Stablecoins can be categorized based on the mechanisms they employ to maintain price stability:

Fiat-Collateralized Stablecoins: These are backed by fiat currencies like the U.S. dollar, held in reserve by a central custodian. Tether (USDT) and USD Coin (USDC) are examples. Issuers hold fiat in reserve equal to the issued stablecoins, ensuring each coin can be redeemed at a 1:1 ratio, which stabilizes value and builds user trust.

Crypto-Collateralized Stablecoins: Backed by other cryptocurrencies, these stablecoins, like MakerDAO’s DAI, require users to lock in crypto (e.g., Ether) as collateral. Due to crypto’s volatility, they’re often over-collateralized, with automated liquidation to protect the peg.

Algorithmic Stablecoins: These rely on algorithms to control supply based on demand without collateral. For example, FRAX combines algorithms with partial collateral, while TerraUSD (UST) used a seigniorage model before its collapse. Their stability depends heavily on market confidence and algorithm robustness.

Top 5 Stablecoins by Supply (Total Supply - $155.1B, cc: Artemis)

Stablecoin Models: Collateral and Custodian Breakdown

Tether (USDT)

• Collateralization & Custodianship: Tether is fully backed by fiat reserves (cash, cash equivalents, U.S. Treasury securities) and safeguarded by Cantor Fitzgerald. As of October 26, Tether reported $100 billion in U.S. Treasury securities, over 82,000 Bitcoins (~$5.5 billion), and 48 tons of premium-grade gold.
• Supply & Usage Trends: Leading with a supply of $113.4 billion, USDT experienced a 5.73% supply decrease over the past month. Transfer volume rose by 5.27%, but active addresses fell by 6.11%, suggesting a dip in user activity despite stable transaction growth.

USDC

• Collateralization & Custodianship: USDC is fully backed by fiat reserves and managed by BNY Mellon, Customers Bank, and Cross River Bank.
• Supply & Usage Trends: Holding a supply of $33.6 billion, USDC’s supply decreased by 2.46%, while transfer volume surged by 29.95%. Active addresses climbed 23.45%, indicating strong demand for transactions.

DAI

• Collateralization & Custodianship: This overcollateralized stablecoin uses ETH, BTC, private credit, and U.S. Treasury securities, with Coinbase Custody, Sygnum Bank, and Wedbush Securities as custodians.
• Supply & Usage Trends: With a $5 billion supply, DAI saw a 2.75% decrease in supply but experienced a 40.52% increase in transfer volume. Active addresses jumped 45.35%, reflecting rising adoption and transactional activity.

USDe

• Collateralization & Custodianship: A synthetic stablecoin, USDe uses ETH, ETH LSTs, BTC, and USDT to maintain delta neutrality, with Copper, Ceffu, and Cobo as custodians.
• Supply & Usage Trends: USDe holds a $2.7 billion supply, showing a slight dip in transfer volume alongside modest growth in active addresses, indicating stable usage patterns.

PYUSD (PayPal USD)

• Collateralization & Custodianship: Issued by PayPal, PYUSD is fully backed by fiat assets (U.S. Treasury securities, cash, and equivalents) and custodied by State Street Bank and Trust Company and Customers Bank.
• Supply & Usage Trends: PYUSD, the smallest with $598 million in supply, saw a 58.75% increase in transfer volume and an impressive 153.79% growth in active addresses, reflecting substantial interest and expansion in usage.

Stablecoins - Supply (cc: Artemis)

The data from the chart above reveals a clear trend in the growth and fluctuations of stablecoin usage and transfer volumes over time. Starting in early 2018, there is a marked increase in both the supply and transfer volumes of stablecoins, peaking around mid-2021, likely due to the heightened interest in DeFi and broader crypto markets. Post-2021, while the supply has stabilized at a high level, transfer volumes have seen periodic surges, notably around early 2024. This could indicate renewed market activity or volatility during this period.

Stablecoins - Transfer volume (cc: Artemis)

USDT and USDC dominate the stablecoin landscape, representing the largest segments in both supply and transaction volumes. Other stablecoins, such as DAI, BUSD, and newer entrants like PYUSD, have smaller but growing portions, highlighting diversification within the market.

USDC and USDT Distribution

USDC and USDT holdings differ significantly in their distribution across decentralized finance (DeFi) and centralized finance (CeFi) platforms, as well as within various wallets. For USDC, the largest concentration is held in Externally Owned Accounts (EOA) at $16.8 billion, followed by CeFi with $2.3 billion, and Bridge holdings at $1.8 billion. Treasury accounts contain $438 million, while decentralized exchanges (DEXs) hold $388 million, and lending protocols $195 million. Yield farming sees limited use at $3 million, with other miscellaneous holdings amounting to $3.2 billion.

USDC Distribution

In contrast, USDT is far more centralized in its distribution, with a substantial $81.5 billion in EOAs and $26.3 billion in CeFi. Bridge holdings account for $5.1 billion, while DEXs hold $473 million and lending protocols $439 million. Treasury accounts are lower at $54 million, with yield farming at $1 million. Other holdings total $2.5 billion.

USDT Distribution

As of October 2024, Ethereum, Tron, Arbitrum, Coinbase’s Base, and Solana are the leading blockchains for value settled with stablecoins. While Ethereum leads in overall value settled, the higher transaction fees on its network lead to fewer monthly sending addresses compared to lower-fee networks like Tron and Binance Smart Chain. Metrics such as sending addresses, preferred over raw transaction counts due to resistance to manipulation, highlight this nuanced landscape, with Tron, Polygon, Solana, and Ethereum at the forefront in stablecoin activity.

Stablecoin Transfer Volume by Network (in Trillions USD)

2024 Market Trends

Stripe Acquisition of Bridge Network

On October 20, 2024, Stripe’s acquisition of Bridge Network for $1.1 billion marks a significant development in the stablecoin and crypto payments market. Often called the “Stripe of crypto,” Bridge specializes in making stablecoin payments accessible to businesses without requiring them to directly handle digital tokens. Major investors, including Index Ventures and Haun Ventures, have seen a 200% increase in Bridge’s valuation since August, when it reached a $350 million valuation in a funding round involving top-tier firms like Sequoia. With annual revenue estimated between $10 million and $15 million, Stripe’s acquisition reflects its commitment to stablecoin infrastructure, which CEO Patrick Collison likened to “room-temperature superconductors for financial services.

Emerging Markets and Currency Stability

In emerging markets with significant currency devaluation issues, stablecoins serve as a hedge against local currency instability. Countries such as Argentina, Türkiye, and Venezuela have shown substantial stablecoin adoption as residents seek alternatives to depreciating local currencies. For instance, Argentina’s stablecoin transaction volume is notably higher than the global average, at 61.8%, largely driven by inflation and demand for the U.S. dollar proxy.

Stablecoin Trading Volume in Millions (USD) on Bitso vs. Argentine Peso (ARS) Purchasing Power in USD

Share of Selected Countries Retail-Sized Transaction Volume by Asset Type vs. Global Average (in %, July 2023 - June 2024)

Cross-Border Transactions and Remittances

Stablecoins are revolutionizing cross-border payments, especially in Africa and Latin America. In Sub-Saharan Africa, stablecoins are critical for businesses facing foreign exchange shortages and high remittance costs. For instance, stablecoins have reduced remittance fees by approximately 60% compared to traditional methods in Nigeria. Similarly, stablecoins enable cost-effective, fast cross-border transactions in Latin America, with Circle recently expanding in Brazil to cater to this demand.

Regulatory Developments and Challenges

The regulatory landscape varies significantly across regions, influencing stablecoin growth. The EU’s Markets in Crypto-Assets (MiCA) regulation, effective from June 2024, offers a comprehensive regulatory framework, fostering a conducive environment for stablecoin projects in Europe. Conversely, regulatory uncertainty in the U.S. has pushed some stablecoin activities to non-U.S. markets, with issuers like Circle emphasizing the importance of regulatory clarity for sustaining the U.S.’s competitive edge in the stablecoin space.

Institutional and Retail Demand

Stablecoins are increasingly used by both retail users and institutions. In Nigeria, stablecoins are popular for everyday transactions and cross-border payments, while in the EU, stablecoin adoption is higher for B2B transactions such as invoice settlements and remittances. Additionally, countries with high inflation, like Türkiye, have seen high levels of retail adoption as a hedge against inflation.

Stablecoin Purchases with Fiat Currency as a Percentage of GDP by Country (July 2023 - June 2024)

Global Stablecoin Regulation

With financial stability, investor protection, AML compliance, and innovation as key drivers, stablecoin regulations vary widely across countries. Here’s a breakdown of how major jurisdictions are handling stablecoin regulation:

The European Union

• MiCA Regulation: Effective mid-2024, the Markets in Crypto-Assets (MiCA) regulation enforces stablecoin reserve requirements and ensures market integrity and consumer protection.
• Innovation Initiatives: The EU supports innovation through the Blockchain Regulatory Sandbox and DLT Pilot Regime, helping companies test within a compliant framework.
• Notable Exclusions: MiCA currently doesn’t cover DeFi or NFTs, limiting its scope across the broader crypto landscape.

United States

• Multiple Agencies: Regulation is divided across the SEC, CFTC, and FinCEN, creating a complex landscape.
• Federal Bills in Progress: The proposed Lummis-Gillibrand Act and FIT21 seek to establish a unified framework for stablecoin regulation.
• State-Level Leadership: States like New York and Wyoming are ahead, with innovative laws including Wyoming’s recognition of DAOs as legal entities.

United Kingdom

• Stablecoins in Existing Frameworks: Stablecoins are incorporated into existing financial regulations, with the FCA setting AML, KYC, and promotion standards.
• Digital Securities Sandbox: This sandbox allows companies to trial digital asset solutions in a controlled environment, supporting safe experimentation.

Singapore

• Comprehensive Guidelines from MAS: The Monetary Authority of Singapore enforces strong AML, consumer protection, and licensing standards for stablecoins.
• Regulatory Sandbox: Provides a safe testing environment for innovation, with strict KYC, security, and reserve management requirements.

Japan

• FSA-Led Regulation: The Financial Services Agency enforces KYC/AML requirements and requires stablecoin licenses.
• First in International Standards: Japan allows internationally regulated stablecoins to operate domestically, fostering global interoperability.
• Updated Payment Services Act: This recent update ensures security while adapting to new digital asset trends.

United Arab Emirates (UAE)

• VARA’s Licensing Requirements: The UAE’s Virtual Assets Regulatory Authority requires licenses for stablecoin-related activities.
• Focus on Security: Strict KYC and AML frameworks protect consumers and promote responsible growth in the stablecoin space.

Switzerland

• FINMA Oversight: Switzerland’s Financial Market Supervisory Authority (FINMA) takes a principle-based approach, enforcing AML and data protection laws.
• Support for DeFi: The regulatory framework encourages innovation while maintaining security and transparency.

Key Regulatory Themes and Requirements

AML and KYC Compliance

Global AML/KYC adherence, aligned with FATF standards, requires stablecoin issuers to verify identities and monitor transactions, with innovative tools like zero-knowledge proofs recommended for privacy-focused KYC.

Regulatory Sandboxes

Sandboxes facilitate safe testing environments for digital asset products, balancing innovation with compliance. Key jurisdictions, including the UAE, UK, and Japan, employ sandbox frameworks and often collaborate internationally to align regulatory practices.

Privacy and Security Protocols

Stablecoin providers must implement strong cybersecurity measures, with data privacy and asset custody regulations increasingly prioritized; in regions like Hong Kong, secure asset storage is mandated.

DeFi Integration and Exclusion

DeFi remains largely outside stablecoin regulations, but jurisdictions such as the UK and Japan are exploring frameworks to bridge decentralized and traditional finance, while the EU’s MiCA currently excludes DeFi from oversight, pending potential future amendments.

Outcomes and Unintended Consequences

Positive Outcomes

• Increased consumer protection and market integrity have strengthened confidence in stablecoins, fostering growth in regions with clear regulatory frameworks.
• Regulatory clarity in hubs like Singapore and Switzerland has attracted digital asset companies, contributing to economic growth and establishing these locations as global centers for digital assets.

Challenges and Unintended Consequences

• Regulatory Arbitrage: Companies may select jurisdictions with lighter regulations, risking regulatory arbitrage. Areas like Gibraltar and the UAE face challenges in balancing innovation with thorough oversight.
• Privacy Concerns: MiCA’s transparency requirements may conflict with privacy-focused blockchain technologies, potentially compromising user privacy.
• Innovation vs. Regulation: Strict regulatory frameworks could deter new market entrants; for example, the fragmented approach in the U.S. has led some companies to relocate abroad due to regulatory uncertainty.

Conclusion

Stablecoins have rapidly matured over the past decade from BitUSD’s initial concept to a cornerstone of decentralized finance, now boasting a total supply over $156 billion. Modern stablecoins like Tether (USDT) and USD Coin (USDC) have achieved widespread adoption by securing value through substantial fiat reserves, with USDT leading at $113.4 billion in supply. Emerging markets are increasingly adopting stablecoins as hedges against currency devaluation—Argentina’s stablecoin transactions, for instance, make up 61.8% of its retail-sized transaction volume. Regulatory responses vary globally: the EU’s MiCA regulation aims to foster innovation with clear guidelines, while U.S. regulatory uncertainty prompts some issuers to look elsewhere. Institutional interest is surging, exemplified by Stripe’s $1.1 billion acquisition of Bridge Network. As stablecoins continue to bridge traditional finance and crypto, their future hinges on balancing innovation with effective regulation.

Sources

1. https://dune.com/steakhouse/stablecoins
2. www.chainalysis.com
3. https://www.coingecko.com/
4. https://dune.com/KARTOD/stablecoins-overview
5. https://www.artemis.xyz
6. Digital Assets Regulation: Insights from Jurisdictional Approaches

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