Under the wave of global regulation: Compliance risks and breakthroughs of stablecoins

Author: Attorney Jie Hui; Source: Mankiw Blockchain Law

2025 marks a watershed year for the development of stablecoins. Global regulatory frameworks are accelerating their implementation and continuous improvement, bringing what was once a "gray area" into clear regulatory purview. This market, valued at over $250 billion, is undergoing the painful transformation of its rapid growth to regulatory compliance.

The Core Definition, Classification, and Importance of Stablecoins

(I) The Core Definition of Stablecoins

A stablecoin is a special type of cryptocurrency whose core goal is to maintain value stability (as distinct from cryptoassets like Bitcoin and Ethereum that pursue price growth). This value anchoring is achieved by pegging to fiat currencies, commodities, or cryptoassets, or by relying on algorithms, providing a benchmark for the highly volatile digital asset market.

Stablecoins essentially serve as a "bridge asset" connecting the traditional financial world and the crypto-digital world. It inherits the technical advantages of cryptocurrencies (such as globality, 24/7 operation, programmability, and peer-to-peer transmission) while possessing the value stability of traditional fiat currencies. Currently, it supports the circulation of trillions of dollars in the crypto ecosystem each month. (II) Types of Stablecoins Based on their anchoring mechanisms, stablecoins are primarily divided into three categories: 1. Fiat-collateralized stablecoins: These are anchored 1:1 to a fiat currency (such as the US dollar). Their reserve assets are primarily low-risk assets such as cash and short-term government bonds. Typical examples include USDT (issued by Tether) and USDC (issued by Circle). The core risk lies in the authenticity and transparency of their reserve assets. 2. Crypto-collateralized stablecoins: These are overcollateralized with other cryptoassets (typically exceeding 150%), with smart contracts automatically adjusting the collateralization ratio to maintain stability. A typical example is DAI (issued by MakerDAO). The core risk lies in the risk of liquidation caused by a plummeting price of the collateralized asset. 3. Algorithmic stablecoins: These have no physical collateral and rely on algorithms to regulate supply and demand (such as the mint new coins and burn old ones) to maintain price. A typical example is UST, which collapsed in 2022. The core risk lies in the "death spiral" (a vicious cycle in which falling prices lead to panic, which triggers selling, which in turn causes further price drops until the system collapses) after the algorithmic mechanism fails. (III) The Importance of Stablecoins The importance of stablecoins is specifically reflected in the following four core functions: 1. The most primitive and fundamental function of stablecoins is to serve as a "medium of exchange," "measure of value," and "safe haven" within the cryptocurrency ecosystem. In cryptocurrency trading, the vast majority of trading pairs (such as BTC/USDT and ETH/USDC) are priced in stablecoins (measures of value) rather than the highly volatile Bitcoin or Ethereum. This provides investors with a clear standard of value measurement and avoids the confusion of measuring volatile assets against volatile ones. When markets experience significant volatility or uncertainty, traders can quickly convert their holdings of high-risk assets like Bitcoin and Ethereum into stablecoins (such as USDT and USDC) to mitigate risk, lock in profits, or temporarily exit the market, without having to completely withdraw funds from the crypto ecosystem (converting back to fiat currency is often time-consuming and expensive). This significantly improves capital efficiency and market liquidity. 2. Stablecoins offer low costs, high speed, and strong financial inclusion in global payments and remittances. Leveraging blockchain technology, stablecoins have revolutionized cross-border payments and remittances. Compared to traditional bank wire transfers (which can take days and incur high fees), stablecoin transfers can be completed in minutes, with extremely low fees, and are not restricted by business days or time zones. Furthermore, stablecoins provide access to the global financial system for hundreds of millions of people worldwide who lack bank accounts but have internet access. They only require a digital wallet to receive and hold stable-value assets. 3. Stablecoins are the lifeblood of decentralized finance (DeFi). Without stablecoins, the prosperity and development of DeFi would be unimaginable. Almost all lending, trading, and derivatives protocols use stablecoins as their underlying assets. For example, in lending protocols like Aave and Compound, users deposit large amounts of stablecoins like USDC and DAI to earn yield, or lend stablecoins for other investment activities. These interest rate markets are largely structured around stablecoins. In MakerDAO, the DAI stablecoin is the core output of the entire protocol. Users generate DAI by overcollateralizing other crypto assets, thereby transforming volatile assets into stable ones. On decentralized exchanges (DEXs) like Uniswap and Curve, stablecoin trading pairs (such as USDT/USDC) often exceed $1 billion in daily trading volume, forming the foundation of all trading activity. 4. Stablecoins are a catalyst for the digital transformation of traditional finance (TradFi). Stablecoins are the preferred tool for traditional financial institutions and large enterprises exploring blockchain applications. Stablecoins offer the lowest-risk and most familiar entry point into the crypto market. Stablecoins are currently the most promising area for RWA (tokenization of real-world assets), with stablecoins serving as core settlement tools. They are driving the tokenization and blockchain-trading of traditional assets like stocks, government bonds, and corporate bonds, creating new investment opportunities. When discussing stablecoins, compliance is essential. In May 2022, the algorithmic stablecoin UST and its sister token, Luna, experienced a dramatic collapse within days, wiping out over $40 billion in market capitalization. This disaster was not an isolated incident. Like a boulder dropped into the crypto world, the ripples it created revealed the cracks beneath the surface of the stablecoin boom: it exposed fatal flaws in the algorithmic mechanisms, raised market questions about the adequacy of stablecoin reserve assets, and sounded the highest alarm for global regulators. Stablecoins are far more than just "non-volatile cryptocurrencies." They are the infrastructure of the crypto economy, a new paradigm for global payments, and a strategic bridge connecting two parallel financial worlds. Its importance makes its compliance, transparency, and robust operation no longer merely an industry issue; it becomes a global concern, impacting the stability of the entire financial system. This is the fundamental reason why global regulators are now attaching great importance to it. The scale of leading stablecoins (such as USDT and USDC, which together account for over 85% of the global market) and their intertwinedness with the traditional financial system have made them "systemically important." Their risks could potentially be transmitted to traditional finance, approaching the critical point of being "too big to fail." This means that compliance is not an option but a prerequisite for survival. Three core reasons are as follows: 1. Preventing the Transmission of Systemic Risks A collapse of a major stablecoin (such as USDT) would not be limited to the crypto market. Because it is held by numerous traditional hedge funds, listed companies, and payment companies, its failure would act like a domino effect, triggering large-scale liquidations in on-chain DeFi protocols and rapidly spreading through institutional investors to traditional financial markets like stocks and bonds, potentially triggering a global liquidity crisis. Compliance with reserve asset audits and redemption guarantees is the first line of defense against this domino falling. 2. Blocking Illegal Financial Activities Stablecoins' global nature, quasi-anonymity (on-chain addresses are traceable, but not directly linked to user identities), and peer-to-peer transmission make them highly vulnerable to money laundering, terrorist financing, and sanctions evasion. Global illicit transactions involving stablecoins reached $12 billion in 2023, with over 60% flowing into cross-border sanctioned jurisdictions. Without strict Know Your Customer (KYC), Know Your Transaction (KYT), and sanctions screening compliance requirements, this highly efficient financial highway will become a perfect tool for criminals, triggering severe regulatory crackdowns by sovereign states. 3. Maintaining Monetary Sovereignty and Financial Stability The widespread use of US dollar stablecoins in emerging markets (for example, over 20% of cross-border trade in Argentina and Turkey is settled in USDT) and the widespread adoption of privately issued US dollar stablecoins in overseas markets effectively constitute a form of "shadow dollarization" (where citizens spontaneously use US dollars to replace their own unstable currency for savings and transactions). This erodes the monetary sovereignty and effectiveness of monetary policy in other countries. For the United States itself, if unregulated stablecoins are widely used for payments, the potential risk of bank runs could threaten domestic financial stability. Therefore, compliance is no longer an industry option but an essential requirement for maintaining national financial security. Compliance is essential for discussing stablecoins because their "infrastructure" nature means they can no longer enjoy the "gray area" benefits enjoyed by early cryptocurrencies. Compliance is no longer a shackle that constrains their development; it is instead a license and an anchor of trust that determines their acceptance into the mainstream financial system and their continued survival. The wave of global regulation isn't meant to stifle innovation, but rather to rein in this unbridled phenomenon before it's too late, guiding it towards a transparent, robust, and responsible future. Key Compliance Risks Facing Stablecoins (I) Legal Classification Risks - Differences in Regulatory Designations Lead to Surges in Compliance Costs Different jurisdictions have different definitions of stablecoins: 1. US regulators are still debating whether stablecoins should be considered securities, commodities, or money transmission tools. For example, the SEC (U.S. Securities and Exchange Commission) favors classifying asset-backed stablecoins issued by specific projects as securities, while the CFTC (U.S. Commodity Futures Trading Commission) believes they may be commodities. The OCC (U.S. Office of the Comptroller of the Currency) allows banks to issue "payment stablecoins." This multi-faceted regulatory framework forces issuers to meet multiple sets of compliance requirements. 2. The EU's MiCA regulation categorizes stablecoins as "electronic currency tokens" (pegged to a single fiat currency, such as USDC) and "asset reference tokens" (pegged to multiple asset classes). The former must meet electronic currency regulatory requirements, while the latter require additional risk reserve plans. 3. Hong Kong's Stablecoin Ordinance, on the other hand, treats stablecoins as payment instruments subject to strict regulation (focusing on stablecoins as a store of value and payment medium), rather than securities or other types of assets. This qualitative uncertainty, coupled with the possibility that regulators (such as the US SEC and CFTC, or EU regulators) could suddenly introduce strict new regulations and declare existing models non-compliant, will lead to significant compliance complexity and costs for stablecoin issuers. (II) Reserve Asset Risks – Lack of Transparency Can Trigger a Run Crisis The authenticity, adequacy, and transparency of reserve assets are core challenges facing stablecoins, and the industry currently faces three major issues: 1. Insufficient reserve assets. In 2019, it was revealed that only 74% of Tether (USDT) was backed by real assets, despite the company's long-standing claim of full collateralization. As of Q3 2024, Tether disclosed that short-term Treasury bonds accounted for over 60% of its reserves, but this still raised questions due to its lower audit frequency (quarterly) than USDC (monthly). Tether has since shifted to publishing its reserve reports at least monthly and typically provides daily updated reserve data. 2. Non-compliant assets. Some small stablecoins have invested their reserve assets in high-risk sectors (such as stocks and cryptocurrencies). In 2023, one stablecoin experienced a 30% drop in its reserve assets, triggering a depegging. 3. Insufficient Disclosure. Only 30% of stablecoin issuers disclose the specific custodians and details of their reserve assets (2024 Crypto Industry Report), making it difficult for investors to verify the authenticity of the assets. Under new regulations, such as the US GENIUS Act and the Hong Kong Stablecoin Ordinance, reserve assets must be 100% cash, short-term government bonds, and other highly liquid assets, and must be audited daily. Issuers must meet strict capital, liquidity, and disclosure requirements. Lack of transparency or insufficient reserve assets can directly trigger a run and lead to a depegging of the peg. Issuers face substantial fines, suspension orders, and even criminal charges from regulators. (III) Anti-Money Laundering and Countering the Financing of Terrorism (AML/CFT) Risks—A Key Area of ​​Regulatory Penalties Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) are key regulatory concerns. The price stability and global accessibility of stablecoins make them attractive tools for money laundering and circumventing sanctions. Unlike more volatile cryptocurrencies, stablecoins allow bad actors to transfer funds while maintaining asset value. Regulations now require strict Know Your Customer (KYC), Know Your Transaction (KYT), and reporting procedures for suspicious transactions (suspicious behavior such as frequent aggregation of small transfers or large cross-border transfers). Violations of AML/CFT regulations can result in the harshest penalties and severe reputational damage. (IV) Market Integrity Risks – Weak Points in Investor Protection The stablecoin market presents two core integrity risks that directly harm investor rights: market manipulation and misrepresentation. Large amounts of stablecoins could be used to manipulate the price of Bitcoin or other cryptoassets. False advertising or insufficient disclosure of information regarding reserve assets and algorithmic mechanisms can also mislead investors. Stricter regulatory requirements are now designed to ensure that investors do not suffer losses due to insufficient information. (V) Systemic Risk – Potential Threats to Financial Stability Systemic risk is a primary concern for financial authorities. DeFi protocols hold billions of stablecoins, and even a single major issuer failing could trigger a cascade of liquidations across the entire ecosystem. Imagine the domino effect: if a major stablecoin collapses, lending protocols using it as collateral will begin to collapse, and users who staked their tokens will suffer severe losses. Soon, the shockwaves will spread to traditional financial institutions that have begun integrating crypto, and this chain reaction could be devastating. (VI) Sanctions Compliance Risk – The Difficulty of Global Operations Stablecoin issuers face sanctions compliance requirements in multiple countries and regions. Core challenges include: 1. Differences in sanctions lists. The sanctions lists of OFAC (U.S. Treasury Department's Office of Foreign Assets Control), the European Council, and the UN Security Council overlap but are not completely consistent. For example, if an entity is sanctioned by OFAC but not by the EU, targeted screening rules must be set. 2. On-chain address screening. Smart contract addresses may also be included in sanctions lists. For example: "Some issuers use on-chain address blacklist systems (such as Circle's USDC, which freezes assets in OFAC-sanctioned addresses) and built-in sanctions screening modules in smart contracts to prevent stablecoins from flowing into sanctioned addresses and achieve real-time compliance.

3. Decentralization contradiction. Some decentralized stablecoins find it difficult to forcibly freeze assets in sanctioned addresses, and face the difficult task of balancing compliance and decentralization.

The complexity of global compliance requires meeting the different sanctions lists and requirements of multiple countries at the same time. Stablecoin issuers must find a balance between technological innovation and compliance obligations. Of course, this also means increased operating costs and compliance difficulties.

(VII) Cross-border and jurisdictional risks - the terminator of regulatory arbitrage

(II) The EU's MiCA Framework

The EU's Markets in Crypto-Assets Act (MiCA) establishes a comprehensive and rigorous regulatory framework for stablecoins, including licensing requirements, reserve asset requirements, and holder rights.

MiCA divides stablecoins into two categories: "electronic money tokens" and "asset reference tokens," and applies different regulatory requirements to each, aiming to ensure that regulation is commensurate with the level of risk.

(III) China's Dual Regulation: China has adopted a unique dual regulatory approach for stablecoins: the issuance and trading of stablecoins is strictly prohibited on the mainland, while a comprehensive regulatory system is implemented in Hong Kong. Hong Kong's Stablecoin Ordinance, which officially came into effect in August 2025, requires 100% segregation of reserve assets, which must be highly liquid assets such as cash, US dollars, or Hong Kong dollar government bonds. The Hong Kong Securities and Futures Commission also requires custody by a licensed Hong Kong bank, daily audits, and next-day redemption capabilities. This prudent regulatory approach aims to make Hong Kong a global center for digital asset innovation. (IV) Regulatory Trends in International Organizations: Promoting Globally Unified Regulatory Standards The Financial Stability Board (FSB) and the Bank for International Settlements (BIS), among others, are developing globally unified regulatory recommendations for stablecoins, aiming to prevent regulatory arbitrage and ensure global financial stability. In July 2023, the FSB issued the "Global Regulatory Framework for Crypto-Asset Activities," requiring stablecoin issuers to meet four core requirements: adequacy of reserve assets, transparency of redemption mechanisms, anti-money laundering compliance, and prevention of systemic risks. The Basel Committee on Banking Supervision (BCBS) recently revised its "Prudent Treatment of Crypto-Asset Exposures" standard in 2024, which officially came into effect on January 1, 2025. This standard proposes a more rigorous and prudent global unified framework for banks' risk management of crypto-assets (including stablecoins), aiming to address the risks posed by crypto-assets while maintaining financial stability. Compliance Path: A Guide for Issuers and Investors (I) Issuers: Building a Comprehensive Compliance System Stablecoin issuers face multi-faceted challenges and need to build a comprehensive compliance system encompassing four dimensions: regulatory compliance, reserve asset management, technical compliance, and risk prevention and control.

1. Proactively embrace regulation. Prioritize applying for licenses in regions with clear oversight (such as the US, EU, and Hong Kong), communicate regularly with regulators, and avoid compliance surprises.

2. Standardize reserve asset management. Strictly configure reserve assets in accordance with regulatory requirements (e.g., 100% cash + short-term government bonds), select leading custodians (such as HSBC Hong Kong), and have qualified accounting firms regularly issue reserve asset audit reports. A detailed breakdown of reserve assets (including custodial account information and asset type ratios) should be made public.

3. Strengthen the technical compliance system. Invest resources to build a first-class AML/KYC and sanctions screening system. For example, leading issuers often adopt a combination of on-chain transaction tracking and offline identity verification (e.g., USDC requires large users to complete facial recognition and address tracing). At the same time, integrate third-party compliance tools such as Chainalysis to implement KYT screening for cross-chain transactions. Regarding cybersecurity risks, it is necessary to guard against cyber attacks that could lead to asset theft, loss of private keys, blockchain network failures, smart contract code vulnerabilities, network forks, and more. 4. Improve risk prevention and control. Conduct regular stress tests (e.g., simulate a scenario where 10% of users make a concentrated redemption). Reserve asset liquidity must be sufficient to cover 100% of redemption demand within 30 days. Establish a risk reserve (no less than 2% of the issuance size) to address sudden depegging risks and develop contingency plans (e.g., a limit on redemption when reserve assets are insufficient). (II) Investors: Establish a risk screening framework. Investors should conduct thorough due diligence and thoroughly understand the issuer's licenses, reserve asset composition, audit history, and compliance status before researching any stablecoin project. Preferring compliant assets is key to mitigating risk. Investors should prioritize transparent stablecoins like USDC, which are backed by highly liquid assets, over projects that lack transparency. Most importantly, investors must understand the risks and realize that "stability" is relative, not risk-free. Even fully collateralized stablecoins face counterparty, regulatory, and technological risks. Future Outlook: Trends and Challenges of Stablecoins (I) Trends in Stablecoin Development Global regulation is reshaping the stablecoin landscape, but true stability stems not only from legal compliance but also from technical transparency and market confidence. Compliance-driven stablecoins will exhibit the following trends: 1. Intensifying industry differentiation: Compliance becomes a core competitive advantage. For stablecoin projects, compliance is no longer an option; it's a core competitive advantage. Projects that proactively embrace regulation, achieve extreme transparency, and build robust compliance systems (such as Circle, the issuer of USDC) will gain institutional trust and market share. Conversely, projects that operate in a gray area, maintain opaque reserves, and engage in vague compliance discussions will continue to face regulatory scrutiny and unexpected risks, steadily squeezing their space. The wave of global regulation is pushing stablecoins from their "Wild West" days into a new era of institutionalization, transparency, and high levels of compliance. 2. The regulatory trend is toward unified global standards. Key gaps remain in global stablecoin regulation, but core standards are globally unified. Regardless of regional differences, the three key requirements of reserve asset adequacy (100% collateralized by highly liquid assets), transparency of redemption mechanisms (clear T+1 or T+0 redemption processes), and full AML/CFT compliance (KYC/KYT coverage for all users) have become universal regulatory standards. For example, while the US GENIUS Act, the EU Mica, and the Hong Kong Stablecoin Ordinance differ in licensing application processes and penalty standards, they all strictly require these three elements, preventing issuers from exploiting regulatory arbitrage by exploiting regional policy loopholes. 3. Stablecoin application scenarios extend to the real economy. With the acceleration of the tokenization of traditional real-world assets (RWAs), such as stocks, bonds, and real estate, stablecoins will become the preferred settlement tool for RWA transactions due to their stable value, compliance, and transparency. As a cross-border payment tool, stablecoins have achieved cost reduction and efficiency improvement. Currently, emerging markets such as Southeast Asia and Latin America have become core scenarios for stablecoin cross-border payments, and in the future, they will extend to areas such as corporate cross-border trade, supply chain finance, and payroll. 4. Conservative Asset Reserves Regulations require that reserve assets must be high-quality liquid assets such as cash and short-term government bonds. This will force issuers to abandon high-risk investment strategies and adopt more transparent and secure models. (II) Challenges of Stablecoins Despite positive market trends, compliance-driven stablecoins still face significant challenges: 1. Lack of coherence in redemption mechanisms. Currently, most regulatory focus is on redemptions in the primary market (direct redemption by the issuer), but stabilization mechanisms in the secondary market (exchange market) remain lacking, and clear rules for responding to depegging in the secondary market are needed. 2. Inconsistent technical standards. Technical standards for smart contract security, cross-chain transaction compliance, and data privacy protection have yet to be globally unified, potentially leading to technical compliance barriers. 3. Challenges to financial sovereignty. Large-scale stablecoins could impact a country's monetary policy transmission efficiency and financial sovereignty. If stablecoins are deeply interconnected with the main financial system, their failure could trigger broader financial turmoil. Conclusion The future is here, and compliance is no longer an option; it's the cornerstone of survival. Issuers and investors alike can only remain viable in this transformation by proactively embracing regulation, strengthening risk management, and enhancing transparency. The ultimate goal of stablecoins has never been to replace fiat currencies, but to become a stable and efficient beacon of light in the financial infrastructure of the digital age. This road is destined to be long and challenging, but it is precisely these challenges that are propelling stablecoins towards a more mature, inclusive, and sustainable future. What we are witnessing is not only a technological evolution, but also the evolution of financial civilization.