Tether
USD Coin
The Dollar Goes On-Chain
Cryptocurrency's greatest practical paradox is this: the most widely used digital assets in crypto markets are not cryptocurrencies in the ideological sense. They are digital dollars — stablecoins pegged to the US dollar, issued either by centralized companies holding dollar reserves or by decentralized protocols using over-collateralized crypto assets.
Stablecoins resolve a fundamental tension in crypto adoption. Bitcoin and Ether are volatile. A merchant who accepts BTC today cannot be sure what it will be worth tomorrow. A DeFi protocol that denominates loans in ETH must grapple with collateral value swings. But the entire infrastructure of permissionless, borderless, programmable finance that Ethereum's smart contracts enable is genuinely useful — if only there were a stable unit of account within it.
Stablecoins provide that stability. And in doing so, they have introduced something the crypto ecosystem's founders did not fully anticipate: the US dollar has become the dominant currency of decentralized finance, extending dollar influence deeper into the global economy than physical US banking infrastructure ever reached.
How Stablecoins Work
The three principal stablecoin models reflect different engineering philosophies.
Fiat-backed stablecoins — Tether (USDT) and USD Coin (USDC) being the largest — hold dollar-denominated assets (cash, Treasury bills, commercial paper) in custody and issue tokens representing claims on those assets. Each token is redeemable for one dollar. This is straightforward conceptually, but it reintroduces centralization: a company holds the reserves, files with regulators, and can freeze accounts. Tether's whitepaper and operational disclosures have faced significant scrutiny over whether its reserves fully back its issued supply.
Crypto-collateralized stablecoins — MakerDAO's DAI being the canonical example — are backed by cryptocurrency locked in smart contracts, with over-collateralization to buffer against price volatility. If the collateral's value falls below a threshold, the system automatically liquidates to maintain the peg. No company holds reserves; the peg is maintained algorithmically by code and economic incentives. This preserves decentralization at the cost of capital efficiency: you must lock $150 of ETH to borrow $100 of DAI.
Algorithmic stablecoins — the most experimental category — attempt to maintain pegs through supply manipulation and arbitrage incentives without any collateral. Terra's UST was the highest-profile example and its catastrophic collapse in May 2022, which vaporized approximately $40 billion in value within days, demonstrated the systemic risks of undercollateralized algorithmic designs.
The Dollar Dominance Effect
The combination of global crypto rails and dollar-pegged stablecoins has created an unprecedented vehicle for dollar adoption. A wallet holding USDC is, functionally, a dollar account accessible to anyone with internet access — regardless of whether their country has a banking system, regardless of whether they meet US banking KYC requirements, regardless of what their local currency is doing.
For users in countries with rapidly depreciating currencies — Argentina, Turkey, Venezuela, Nigeria — stablecoins have provided a practical refuge. A Nigerian small business owner who cannot easily open a US bank account can hold USDC on a self-custodied wallet as protection against naira volatility. An Argentine entrepreneur can invoice international clients in USDC and preserve value outside the peso's inflation. The financial product these users want is simply: a dollar. Stablecoins deliver it without requiring any relationship with the US banking system.
This has extended the dollar's reach in ways that are simultaneously a feature (from the perspective of dollar hegemony) and a concern (from the perspective of monetary sovereignty in developing economies). When citizens in a country hold a significant portion of savings in dollar stablecoins, their government's monetary policy has reduced effectiveness. This is a digitally accelerated version of "dollarization" that has historically affected economies like Ecuador and Panama.
Remittances: Competing with Western Union
International remittances — money sent by migrant workers to families in their home countries — represent one of the clearest use cases for stablecoins. The World Bank estimates global remittance flows at over $800 billion annually. Traditional remittance services charge average fees of 5-7%, with fees in some corridors exceeding 10-15%. For a low-wage worker sending $200 home, this represents a meaningful tax on economic activity.
Stablecoin transfers on networks like Stellar (specifically designed for low-cost cross-border payments) or on Ethereum Layer 2s can settle in seconds with fees measured in cents. The protocol doesn't care about the size of the transfer, the sender's nationality, or the recipient's banking status.
Adoption has been real but uneven. Corridors between the US and Latin America, and between European diaspora communities and West African recipients, have seen genuine stablecoin remittance activity. Barriers remain: recipients need access to a way to convert stablecoins to local currency, which depends on local crypto exchange infrastructure. The last-mile problem — connecting on-chain settlements to local cash — limits adoption in the areas that would benefit most.
Regulatory Response: From Skepticism to Rulemaking
For much of stablecoins' early history, regulators treated them as curiosities or threats. The regulatory posture shifted decisively in 2021 when Tether's market capitalization exceeded $60 billion, making it larger than many mid-sized banks. The President's Working Group on Financial Markets issued a report calling for stablecoins to be regulated as banks. Congressional hearings featured Tether's executives alongside major banks' compliance officers.
The concern is systemic risk. A large stablecoin experiencing a bank-run scenario — many holders simultaneously demanding redemptions — could be forced to liquidate Treasury holdings or commercial paper at scale, potentially disrupting short-term credit markets. This is not a theoretical risk: the mechanics are similar to money market fund runs that required government intervention during the 2008 financial crisis.
The European Union moved first with comprehensive regulation, passing the Markets in Crypto-Assets (MiCA) framework in 2023, which imposes reserve, disclosure, and operational requirements on stablecoin issuers. The United States continued a fragmented approach with the SEC, CFTC, and banking regulators each claiming jurisdiction over different aspects of stablecoin activity.
CBDC Competition
Central banks watching stablecoin adoption have increasingly framed Central Bank Digital Currencies as a policy response. A state-issued digital dollar would offer stability, regulatory clarity, and (from the state's perspective) appropriate surveillance capabilities, potentially displacing private stablecoins.
The China-issued digital yuan (e-CNY) is the most advanced CBDC, with hundreds of millions of dollars in pilot transactions. The European Central Bank is developing a digital euro. The Federal Reserve has published research but taken no firm commitment position, constrained by political concerns about financial privacy and the banking lobby's opposition to a product that would compete with commercial bank deposits.
The outcome of the CBDC vs. stablecoin dynamic will significantly shape the global financial architecture of the next decade. If private stablecoins maintain regulatory permission to operate at scale, the dollar's dominance extends through permissionless rails. If governments succeed in replacing them with CBDCs, digital money becomes programmable but state-controlled — a very different set of properties.
The Stakes
Stablecoins sit at the intersection of every major question in digital finance: the future of dollar hegemony, the nature of privacy in digital payments, the boundary between banks and technology companies, and the accessibility of global financial infrastructure to people currently excluded from it.
The technical architecture — reserves on one side, tokens on the other — is simple. The consequences are not. Whether stablecoins represent a democratization of dollar access or an expansion of surveillance-capable financial infrastructure, or some mixture of both, depends on regulatory decisions still being made. What is clear is that stablecoins have already reshaped how value moves across borders — and that reshaping will not reverse regardless of how the regulatory debates resolve.