Stablecoins: Progression, Not Disruption

Technological advancements often come with an inherent limit regarding their effectiveness and appeal. Once they have addressed all possible challenges, their expansion potential is essentially constrained. For example, when every potato enthusiast owns a potato peeler, the market for peelers reaches its growth limit. The pressing concern surrounding AI today revolves around the extent of problems it can tackle. The market may already be saturated, or it might hold virtually unlimited potential.

How do stablecoins fit into this picture? They have surged from nearly nonexistent at the beginning of the decade to a market capitalization in the mid-12 digits, with monthly transaction volumes exceeding $1 trillion. Citigroup projects that the total stablecoin market cap could reach approximately $2 trillion by decade’s end.

When we discuss trillions, it feels much more akin to AI than to potato peelers.

However, do stablecoins possess an inherent cap? Is their applicability confined to a specific range of challenges? If so, where does this limitation lie? How much further can stablecoins expand, and what obstacles might they face?

To address these inquiries, let’s revisit the factors contributing to stablecoins’ success, the limitations on future growth, and the implications for their overall utility, i.e., the range of challenges they can effectively address.

Three key reasons underline the current appeal of stablecoins.

Stable Prices, Low Volatility

The foremost reason is price stability. Many cryptocurrencies exhibit volatility, which makes them suitable for speculation but difficult to use as everyday currencies. The value of stablecoins is consistent—by design. Their fundamental value proposition lies in this price stability.

This stability can also be viewed as an advantage over other cryptocurrencies expected to appreciate in value. If you anticipate your coins to double in five years, you might hesitate to spend them now. But if you expect your coins to maintain their value or possibly decrease, you’re more inclined to use them before they lose worth.

Greater Portability 

The second reason is portability. Converting fiat to crypto can be cumbersome, while swapping one crypto for another is generally easier. Many users find it more efficient to convert fiat into stablecoins en masse, then effortlessly transfer value among various cryptocurrencies as needed. USDT is the most traded coin overall due to its effectiveness in facilitating crypto trades.

In many markets, these two factors complement each other. In countries where national currencies depreciate faster than the pegged currencies of stablecoins, individuals can use stablecoins to protect their wealth from devaluation. Additionally, strict currency controls often implemented to curb capital flight can be navigated by citizens accessing stablecoins.

Tax Optimization

The third reason is taxes. Many jurisdictions—including the United States, Canada, the United Kingdom, Japan, and Australia—classify cryptocurrencies as commodities rather than currencies. Consequently, capital gains taxes are imposed on cryptocurrency price increases, making each transaction a taxable moment. Many users and businesses seek to utilize crypto for its portability, akin to payment systems, so the price stability of stablecoins helps them avoid taxable events during regular transactions.

Fiat currency serves as the modern state’s crown jewel. Beyond the symbolic value of a national currency, controlling the source of everyone’s money offers a significant advantage. To grasp the importance of this, consider rewatching Ridley Scott’s Black Rain (a fantastic film for many reasons, including Michael Douglas sporting an iconic mullet).

If stablecoins are generating hundreds of billions in fiat equivalents and facilitating trillions in value each month, authorities will undoubtedly take a keen interest in their operations. You can’t run a private mint handling such liquidity and expect to evade regulatory scrutiny.

History indicates that states will regulate any sector they can. They must; any unregulated activity poses an implicit threat to their authority. Since they do not create goods (besides possibly regulations), they need to secure resources. To claim a share of any activity, states must first quantify and control it. This perspective aligns with Charles Tilly, a respected sociologist of the last century, who referred to states as “protection rackets” and “organized crime.”

Centralized activities are also why states historically favored tariffs over taxes. In earlier times, when bureaucracies were smaller and populations more dispersed, it was challenging for states to impose income taxes. They lacked the data and technology needed for enforcement. Therefore, they preferred tariffs, as there are fewer ports and bridges than households and businesses.

In essence, greater centralization makes it simpler to quantify and regulate (and, of course, tax). More succinctly, centralization invites regulation. The more vital an activity is to state power, the greater the incentive to regulate it, and the act of printing money is as central as it gets.

Stablecoins are no different. Their centralized nature, in terms of both value source and operational dynamics, has attracted regulators who have been actively developing rules. While such regulation might be necessary and prudent, it invariably restricts stablecoins’ utility.

Rules, Their Effects, and Extrapolating the Future

The number of regulations has surged recently, possibly in response to rising demand. In fact, Tether and Circle, the leading stablecoin providers, are engaging in the regulatory landscape with distinct strategies. They recognize their role as private USD mints and institutions managing significant private deposits, similar to banks. Established stablecoin issuers seem to welcome regulation.

Regulators argue that stablecoin regulation benefits everyone by safeguarding users and providing issuers with “more predictable regulatory environments.” Unsurprisingly, this viewpoint is echoed by the SEC.

While this rationale holds merit, the existing regulations impose substantial barriers to how and where stablecoins may be utilized.

Let’s examine Europe first, as regulatory jargon is practically the official language of the EU. The Markets in Crypto-Assets Regulation (MiCA) is the principal framework for stablecoin regulation in Europe. Enacted in 2023, its real impact only began to manifest in Q1 2025. As MiCA mandates stablecoin issuers to secure an e-money license from at least one European state, major platforms such as Binance and Coinbase delisted nine leading stablecoins, including USDT, the market’s largest stablecoin. (Additionally, a coalition of nine major European banks is attempting to introduce their own euro-pegged stablecoin.)

MiCA acted as a regulatory bombshell, effectively banning prominent stablecoins as it sought to replace them with government-backed European options.

On the other hand, the USA has adopted the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, which is somewhat more accommodating. It allows the Treasury Department to recognize foreign stablecoin providers that are adequately regulated in their home jurisdictions, sparing them from needing a local US presence. It also specifies various criteria like reserve requirements and public disclosures.

While the GENIUS Act restricts issuers and protects users, it also subjects them to the Bank Secrecy Act to combat money laundering. Anyone familiar with acquiring crypto on an exchange knows that AML and KYC processes create significant friction, effectively limiting how holders can utilize stablecoins. Ironically, reducing such friction was one of the original appeals of stablecoins. Although enhanced consumer protections may expand stablecoins’ utility in the long run, a user looking to buy and trade USDT now may not share this perspective.

Although the EU and the USA may be the most influential markets for stablecoins, numerous other markets already have regulations in effect (e.g., Japan, Canada, Chile) or are developing them (e.g., the UK, China, Australia, Brazil, Turkey).

Picture a vast Venn diagram encompassing all these regulatory systems, with stablecoins’ utility existing in the areas where they overlap and where their use remains commercially viable. How expansive is that area? Given that stablecoins are tethered to national currencies, which governmental bodies guard carefully, will these diverse regulatory systems likely align or diverge in the future?

The more complex the regulatory landscape, the smaller and more limited the spaces where stablecoins can thrive. While these tokens will find niches, some niches are more constrained than others. It’s improbable that any stablecoin, tied to a national or regional fiat currency, will satisfy every regulator across all necessary markets to emerge as a global currency. This explains why the actual adoption of stablecoins in the real world tends to be much more geographically limited than the “global digital dollars” many envisioned. Even USDT, the most used stablecoin, operates efficiently in only a few lenient jurisdictions. With approximately 40% of USDT’s market cap and essentially the same product, USDC faces similar structural constraints.

Thus, stablecoins represent centralized fiat tokens. Their centralized nature and tethering to state fiat make them prime targets for regulators, leading to costs and friction for all parties involved. This process is already underway and is likely to persist. Does this imply doom for stablecoins?

Probably not. As tokenized fiat, stablecoins are poised to flourish wherever fiat currencies are robust enough. In essence, this pertains to standard payment systems. I recently defined payments as instructions to settle a debt. In scenarios where an intermediated exchange of value occurs, stablecoins will likely serve as that value. The prospect of capturing a segment of the payment market from competing fintech solutions (or defending against such losses) likely motivates established fintech entities like Klarna, PayPal, and Stripe to develop their stablecoins or stablecoin accounts. Stablecoins are morphing into conventional payment fintech, but perhaps only conventional payment fintech.

Conventional implies compliance with state regulations and the functional and geographic limitations such regulations impose. It entails substantial fees for intermediaries. It creates friction for users.

However, a vast universe of value escapes the payment model, whether due to the need for direct, disintermediated transfers, disregard for political boundaries, absence of debt, or all of the above. Recognizing this potential for value transfer can be challenging, given the dominance of the fragmented and intermediated payment paradigm. Until recently, technological advances have limited our ability to explore alternative options.

Every time you toss a coin to a busker or offer a tip to a content creator, you’re transferring value without settling a debt. Whenever cash transitions from one hand to another, the transfer is direct and unmediated. Now envision that busker located halfway across the world, discovered via an app. To unlock the full potential of the value transfer universe, we must integrate that directness and borderlessness into our digital landscape.

Effective value transfer requires less friction than fiat, both in technical and regulatory terms. Achieving this necessitates a currency that is independent of national currencies and decentralized. That’s where bitcoin comes into play. Bitcoin represents an open, decentralized, neutral monetary network accessible to anyone, anywhere, at any time. While stablecoins must navigate the regulatory thicket, bitcoin soars effortlessly above it all.

Bitcoin was designed for the internet, making it inherently programmable in ways that stablecoins can only vaguely emulate. Unlike stablecoins, which often require third-party custodians, bitcoin transactions occur directly and without intermediaries between millions of users globally. The future promises by stablecoins, lacking in credibility, is already a reality for bitcoin.

Utility is a core concept in economics, representing the essence of decision-making. Individuals opt for what they perceive as most beneficial, and the most useful options are simply those that people select.

People are utilizing stablecoins, demonstrating their utility. That value won’t vanish, but regulation constrains it. The growth of stablecoins will plateau where their utility is sufficiently offset by the friction created by regulation. The current and likely future regulatory landscape implies we are nearing this balance.

Conversely, since Bitcoin is decentralized and not reliant on state-backed fiat currencies, it is inherently difficult to regulate, attracting much less oversight. Its digital-native nature makes it suitable for a global commerce landscape characterized by seamless value flow across borders, regardless of application. If regulatory considerations limit stablecoins’ utility and bitcoin faces minimal regulation, it’s evident who is likely to prevail in the utility competition.

This is a guest post by Roy Sheinfeld from Breez. The opinions expressed are solely his own and do not necessarily reflect those of BTC Inc or Bitcoin Magazine.