Debunking Common Stablecoin Myths

Blockchain Association
7 min readOct 17, 2021


The inherent qualities of cryptocurrencies are desirable for any payment system. They allow for peer-to-peer transfer of value online; they are available 24 hours a day/7 days a week; and they facilitate an almost instantaneous transfer of value. The only problem with this novel asset class is most cryptocurrencies fluctuate in price. Fortunately, there is a solution that helps cryptocurrencies achieve the same utility as traditional payments systems: stablecoins. As their name suggests, stablecoins peg their value to a reference asset or use an algorithmic system to ensure their value remains stable.

Stablecoins are ideal for quick, always-available payments, and they’re programmable, meaning that they can be incorporated into countless applications and protocols that are being developed on top of blockchain and DeFi networks.

Stablecoins give people options. For example, if someone is paid in an unstable fiat currency (the Venezuelan bolivar or Argentine peso, for example), they can protect themselves by exchanging the inflationary currency for a stablecoin backed by a healthier one, such as the US dollar. These stablecoins won’t depreciate overnight and are resistant to confiscation and manipulation by authoritarian governments. As individuals around the world are increasingly subjected to domestic, hyper-inflationary currencies like the bolivar, it is clear that stablecoins and their ability to improve the reach and accessibility of dollars on the internet as a medium of exchange not only preserve free market activities but also help solve significant public policy issues.

There are many different types of assets that can be used to “back” or collateralize a stablecoin, including fiat currency, commodities such as gold, and even other cryptocurrencies. Another form of stablecoin arrangement, algorithmic stablecoins, are generally not collateralized, but rely on an algorithm to maintain price stability by adjusting token supply in response to changing market conditions. For example, if an algorithmic stablecoin drops from the target price of $1 to $0.98, the algorithm will automatically burn a tranche of coins to reduce supply, thereby increasing the price of the stablecoin. Indeed, not all stablecoins are created equal. The use of stablecoins in a wide range of consumer or market facing activities will require adherence to high standards of economic stabilization, trust, transparency and accountability, along with the same risk, the same rules, and technology neutral approaches to comparable payment system operators.

Over the past year, the total supply of stablecoins increased from $20B to more than $125B (it should be noted, however, that of all the major stablecoins in circulation, the United States dollar is the reference asset of choice), and the number of novel and transformative use cases skyrocketed. This flurry of activity in the stablecoin ecosystem catalyzed increased scrutiny of stablecoins among global regulators. With Treasury Secretary Janet Yellen’s decision to convene the President’s Working Group on Financial Markets (PWG) to “discuss interagency work on stablecoins,” it is clear United States’ regulators are making stablecoins a top priority.

With publication of the PWG’s report on reserve-backed stablecoins on the horizon, the Blockchain Association feels it is important to address some of the most common myths around reserve-backed stablecoins that are circulating both among regulators and the media. While algorithmic stablecoins are an active and developing portion of the stablecoin ecosystem, the remainder of this blog post, like the PWG’s report, will focus only on reserve-backed stablecoins and the common misconceptions associated with them.

Myth: Stablecoins are not regulated.

Reality: Stablecoins are regulated in a variety of ways at both the state and federal level. US-based stablecoin issuers must obtain a money transmitter license in every state in which they operate, which subjects them not only to a thorough upfront examination, but also to ongoing reporting and oversight from more than 50 states and territories. US stablecoin issuers must also register as Money Services Businesses with the Financial Crimes Enforcement Network (“FinCEN”), which subjects them to direct regulation by the US Treasury Department. Additionally, some stablecoin projects are in the initial phases of becoming a national bank, which will put them on regulatory parity with some of the United States’ largest financial institutions. These money transmission regulations not only make U.S. states laboratories for national fintech innovation, but they also put U.S. stablecoin issuers on a level regulatory footing with online payments companies, such as PayPal.

Myth: Stablecoins have done little to advance financial inclusion.

Reality: Stablecoins are actively improving cross-border transactions and empowering economically disadvantaged individuals around the world. Leaf Global Fintech developed a simple Stellar wallet that enables central African refugees without bank accounts to securely store, send and receive payments and cash into and out of the network without bank fees from low-tech feature phones. Additionally, two licensed money transmitters, US-based FinClusive and Mexico-based Pago Biccos, have teamed up to help migrant day laborers safely and inexpensively send their US earnings home to Mexico while increasing compliance. By converting their earnings into US dollar stablecoins that are stored and transmitted on the Stellar network, these laborers avoid the risk of theft and assault that comes with carrying hard currency across the US border. And, Circle and AirTM leveraged US dollar stablecoins on Ethereum to

bypass the repressive Maduro Regime and distribute aid disbursements directly to front line medical workers battling the coronavirus in Venezuela. Similar gains in payment system competition, optionality and lowering fundamental costs, including in the US context, which has millions of households on the margins of the banking system, have also occurred as a result of stablecoins.

Myth: The risks associated with stablecoin reserves make this asset class too dangerous for the average consumer to use in everyday life.

Reality: Although stablecoins do carry their own unique risks, industry participants are actively working both internally as well as with Congress and regulators to craft appropriate regulation that will account for these risks. Two of the most commonly cited risks associated with stablecoins are transparency risk and run risk. Transparency risk revolves around the concern that stablecoin projects are not accurately or consistently reporting the contents of the reserves backing their stablecoins to their customers, and run risk involves the scenario where a large number of customers might seek to redeem their stablecoins for dollars simultaneously over concerns around the issuer’s solvency. Some stablecoin issuers seek to address run-risk by maintaining a full reserve in cash and cash equivalents for each stablecoin in circulation, ready for instant withdrawal on demand. Additionally, many issuers provide the public with attestations from an independent auditor certifying the validity and make-up of their reserve, which mitigates transparency concerns and helps to foster trust and accountability in this ecosystem. With traditional banks maintaining only fractional reserves of their customer’s funds, a practice that creates systemic risk and requires a public backstop, stablecoin issuers can help import good practices into traditional banking and payments, including the process of continuous reserve attestations as well as full-reserve management (Circle, for example, has provided the public with over 30 attestations since its inception.)

Myth: Stablecoins threaten the supremacy of the U.S. dollar.

Reality: USD-denominated stablecoins can help ensure the ongoing primacy of the U.S. dollar and support the critical role that the U.S. financial system plays in the global economy. According to Christopher J. Waller, Governor of the Federal Reserve, “stablecoins pegged to the U.S. dollar act as conduits for U.S. monetary policy and amplify policy actions. So, if anything, private stablecoins pegged to the dollar broaden the reach of U.S. monetary policy rather than diminish it.” Indeed, the global reach of US dollar stablecoins on blockchain networks makes it easier than ever for citizens of the world to opt into the US dollar as their currency of choice. In fact, as of October 2020, approximately 75% of global crypto trading volume was denominated in US dollar stablecoins. In other words, instead of threatening the supremacy of the U.S. dollar, dollar-denominated stablecoins can export and amplify US economic and monetary policy around the world.

Myth: Stablecoins present a systemic risk to the global financial system.

Reality: The size and interconnectedness of stablecoins is not large enough to warrant designation as a systemic risk to the global financial system. The borderless nature of stablecoins tends to spread any risk that does exist, lessening the importance and interconnectedness of stablecoins to any one country’s financial system. Moreover, while the impressive growth of stablecoins attests to their popularity with crypto enthusiasts and digital natives, stablecoins have a long way to go before becoming the default payments technology in any economy, much less large, developed economies. While large stablecoins like Tether have achieved significant interconnectedness within crypto markets, crypto markets themselves remain largely self-contained and isolated from the traditional financial system. Additionally, many of these stablecoins increasingly flow through well regulated virtual asset service providers (VASPs), which have a combination of regulatory obligations around asset banking, location of funds, transparency, etc. These obligations ultimately reduce rather than amplify the systemic risk of stablecoins.

With the increasingly important role that stablecoins are playing in payments and other financial services, it is important that we get the public policy on stablecoins right. For reserve-backed stablecoins, consumers should have access to audits on the reserves and issuers should have clear guidelines on how the reserves should be composed. We are glad to see policymakers focusing on this important innovation, and we look forward to working with them to ensure that the regulation of stablecoins is crafted in an effective and appropriate manner.