Stablecoins thrive on regulation, but is that enough?

Business Times

30-07-2025

STABLECOINS have brought national-currency denominated monies onto blockchain. Not only is this highly commendable, it also crucially exposes the slowness of traditional money issuers in adopting new technologies.
Recent regulatory advances, however, now seem to bestow stablecoins with specific advantages that may drive money fragmentation and arbitrage, create new compliance risks and distort fair competition.
Economically, stablecoins are equivalent to e-money and bank deposits, as they promise the bearer a redemption at par (1:1) in a national currency. Like e-money institutions and banks, stablecoins need to observe certain rules to ensure par redemption is being observed, mostly by maintaining a dedicated pool of high-quality assets. Similar to all par commitments, there is a risk that par redemption cannot be sustained.
The distinctive innovation with stablecoins lies in the use of blockchain as a payment processing platform. It affords tamper-evident records and advanced functionalities through programmability to support advanced payment automation promising important efficiency gains.
The composability of blockchains makes it easy to combine different instruments in the same environment. Additionally, the use of permissionless blockchains as a readily available public financial market infrastructure offers important economies of scale.
Speed is not the problem...
The innovation with stablecoins lies not in moving money quickly. Speed is not the problem as most banks can already process payments instantly. They have also not solved for what the main obstacles for moving money are – namely compliance and intermediation.
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Unlike other forms of money, stablecoins are increasingly being transferred in a manner akin to bearer instruments. This practice appears to be accommodated by emerging regulation in the European Union (EU), through Markets in Crypto-Assets Regulation and European Banking Authority (Mica) guidance, and in the US, via the Genius Act for person-to-person transfers.
... Compliance is
While neither Mica nor the Genius Act explicitly classify them as bearer instruments or provide a lenient compliance regime, their treatment of transferability – especially in non-intermediated contexts – may de facto enable transactions that occur outside of traditional compliance channels.
Easy transferability is desirable and may be critical to facilitate new use cases. But it creates new challenges for compliance. Like cash – of which there are far more US banknotes circulating abroad than stablecoins – this ease of transferability can be a key success factor.
However, compliance frameworks exist to ensure money is transferred only upon certain checks to avert money laundering and terrorism financing and observe sanctions. Money can normally not be sent to anyone, nor can money be used to settle any debt.
Intermediation makes compliance checks more cumbersome. Banks do typically only maintain a direct relationship with a reduced set of banks. This means the payer bank needs to find a bank that maintains a relationship – typically through a correspondent bank – with the payee bank. This is a challenge, especially in cross-border payments.
Even for EU banks, nearly half of all cross-border payments require four or more banks for a transfer from payer to payee. Every participant in a payment chain will need to adhere to compliance checks as a monetary claim is being passed forward. The longer the chain, the more burdensome the checks. This is the reason for big frictions in payments.
There are two ways to address this friction: reduce the number of compliance checks or ensure more direct monetary relations to keep compliance checks few.
Regulation needs to be harmonised
Stablecoins can be transferred to third parties, not clients of the stablecoin issuer. Only this enables the borderless and frictionless transfer the stablecoin industry rightly aspires to.
In many cases, unless there is a direct transfer to an individual, transfers will probably occur on exchanges that will be required to perform certain checks. But delegating compliance is delicate and near impossible if the issuer were to assume liability for failed compliance.
The alternative is a clearing arrangement like the one maintained by banks. Banks accept each other's liabilities through so-called nostro accounts upon meeting their respective prudential standards.
If banks or other stablecoin issuers were to readily accept certain stablecoins, then transferring them would be relatively easy and solve for 'last mile' issues. Cheques work similarly.
If an entity wants to issue money, the choice would be in most jurisdictions to adopt any of the following models: a bank, an e-money institution or an asset manager. To maintain a level playing field, the rules for issuing and transferring money should be similar also to ensure the incentives for sound money issuance are aligned.
There is generally no regulatory gap when it comes to issuing money. With stablecoins, regulators now risk creating one failing their own principles of same risk, same activity, same regulation.
For countries still considering stablecoin regulation, a better approach would be to simply map them into existing regulation or even better, ask stablecoin issuers to elect any of the existing regulatory models. OMFIF
The writer is senior adviser at Accenture and visiting fellow at the London School of Economics and Political Science