A Brief Discussion on the Eight Major Potential Risks of Stablecoins

As a significant innovation in the cryptocurrency sector, stablecoins were designed with "stability" as their primary goal. However, their potential harms and risks have attracted widespread attention from global regulatory bodies, academia, and the market.

Written by: She Yunfeng

Source: Mobile Payment Network

Stablecoins are a special type of cryptocurrency that maintain price stability by pegging to a stable asset (such as the US dollar, gold, other fiat currencies, or crypto assets). They aim to address the excessive price volatility of traditional cryptocurrencies like bitcoin and ethereum. Stablecoins retain the advantages of blockchain technology, such as decentralization and efficient cross-border payments, while reducing volatility through reserve assets or algorithmic mechanisms, thus serving as a "bridge" between traditional finance and the crypto world.

In 2025, stablecoins will upgrade from being "connectors" of crypto assets to becoming new global payment infrastructure, with a total market capitalization surpassing $250 billions and trading volumes outpacing the combined total of Visa and Mastercard. Tech giants like JD.com and Ant Group are rushing to enter the field, while the US and Hong Kong are accelerating legislation. According to Citi's forecast, the scale of stablecoins will reach $1.6 trillion to $3.7 trillion by 2030, indicating the undeniable heat and promising prospects of stablecoins.

However, while stablecoins are a major innovation in the crypto sector and are designed for "stability," their potential harms and risks have drawn broad attention from global regulators, academia, and the market. This article provides a brief analysis of the associated risks and hidden dangers.

I. Depegging and Run Risks

The value of stablecoins depends on their pegged assets (such as the US dollar or US Treasuries) or algorithmic mechanisms. However, market panic, insufficient reserves, or algorithmic failure can lead to price depegging. Once "depegging" occurs, the value system of the stablecoin collapses, the foundation of investor trust disappears, and a run may be triggered, further creating a vicious cycle.

Although stablecoins are called "stable," this does not mean their price is always unchanged. Their market price can fluctuate slightly due to supply and demand, funding rates, exchange rates, and other factors. Usually, such fluctuations are within 1%, which is considered a relatively normal range. However, if the fluctuation exceeds 2% and cannot recover for an extended period, it is considered a depegging event.

"Depegging" has occasionally occurred in the history of stablecoins. For fiat-backed stablecoins, depegging incidents are usually caused by insufficient reserves or significant flaws or lack of transparency in reserve disclosures. For non-fiat-backed stablecoins, depegging is even more common, with major market fluctuations in crypto assets like bitcoin and ethereum potentially causing depegging.

In 2023, USDC suddenly depegged, with its price dropping from $1 to $0.87 in a short period. The root cause was that Circle, the issuer of USDC, had about $3.3 billions in cash deposited at the recently collapsed Silicon Valley Bank (SVB). The fundamental reason behind this depegging was market concern over Circle's reserves. Fortunately, the US government announced it would guarantee all SVB depositors, and USDC returned to $1 within a few days.

Compared to fiat-backed stablecoins, algorithmic and synthetic stablecoins face even higher depegging risks. The collapse of TerraUSD (UST) is one of the most destructive systemic risk events in crypto history. This "algorithmic stablecoin" experiment, led by South Korean entrepreneur Do Kwon, wiped out $40 billions in market value within a week, destroying the wealth of countless investors and triggering a chain collapse in the global crypto market.

On October 13 this year, during a wave of crypto liquidations, the synthetic stablecoin USDe issued by Ethena Labs severely depegged from the US dollar, dropping as low as $0.62 on some decentralized exchanges—a 38% depegging. Shortly after, in early November, the synthetic stablecoin USDX issued by Stable Labs depegged again, deviating significantly from its $1 peg and raising concerns about potential chain reactions in related DeFi protocols.

II. Dominance of Stablecoins and Dollarization Risks

The rapid development of stablecoins is reshaping the global monetary system and the landscape of financial power. Currently, US dollar stablecoins overwhelmingly dominate the market, backed by the US government's strategic intent to incorporate stablecoins into the dollar system through legislative regulation. This has sparked deep concerns worldwide about the risks of "digital dollarization."

In June this year, at the 2025 Lujiazui Forum, former PBOC Governor Zhou Xiaochuan stated that many US dollar stablecoins have already emerged in the market, and other regions are also considering developing stablecoins based on their own currencies. He believes that US dollar stablecoins, supported by the powerful dollar system, are more likely to have a global impact. When considering the future role of stablecoins, vigilance must be maintained regarding their connection to dollarization issues.

Over the past five years, the stablecoin market has experienced explosive growth, soaring from about $5 billions in 2020 to $273.45 billions in 2025—an increase of more than 50 times—forming a market structure absolutely dominated by US dollar stablecoins. This market is not only huge but also highly concentrated, reflecting the current balance of power and strategic posture in the global digital currency field.

It is precisely the high concentration and absolute dominance of the US dollar in the stablecoin market that gives the US an inherent advantage in rule-making in this field. With the passage of the "Genius Act," the US is systematically transforming this market advantage into institutional hegemony, further squeezing the living space of non-dollar stablecoins and bringing deep-seated dollarization risks to the global financial system.

III. Financial Stability and Technical Risks

In addition to the aforementioned depegging and run risks, the rise of stablecoins may lead to financial "disintermediation," i.e., funds flowing outside the traditional banking system, which could potentially impact banks' deposit business and credit creation capacity.

As the correlation between stablecoins and traditional financial markets increases, their risks may be transmitted to the banking system through liquidity channels. For example, if the custodian bank is not the original deposit bank, the loss of core deposits may force banks to shrink their balance sheets, impacting bank clearing and settlement income.

The "relocation" of deposits means that residents in high-inflation countries tend to hold stablecoins instead of bank deposits, and cross-border payments bypass traditional remittance systems, exacerbating financial disintermediation.

Moreover, the 100% reserve model locks funds in banks, preventing them from creating credit through fractional reserves. The BIS points out that if stablecoin absorption reaches $2 trillion (projected for 2028), it could divert $1.5 trillion in bank deposits, weakening the financing capacity of small and medium-sized enterprises.

Additionally, stablecoins are pegged to short-term US Treasuries and other assets, with 90% of US dollar stablecoin reserves in short-term US Treasuries. Their sell-off could amplify US Treasury volatility. If the market for pegged assets fluctuates (such as a sharp drop in US Treasury prices), it could trigger stablecoin price shocks and exacerbate systemic risk in financial markets. If the US fiscal deficit worsens, risks could spread globally through the stablecoin channel. As a major holder of US Treasuries, China may face the risk of a shrinking value of its foreign exchange reserves.

Furthermore, the operation of stablecoins is highly dependent on technical infrastructure such as blockchain networks, oracles, and cross-chain bridges. Vulnerabilities in these areas are major sources of systemic risk. For example, smart contract vulnerabilities (such as the $62 millions loss in the 2024 Curve attack) and cross-chain bridge hacks (such as the $3 millions theft from the Nervos network) can trigger chain reactions. Technical vulnerabilities can lead to huge economic losses, data breaches, and undermine market confidence, potentially causing other systemic risks.

IV. Regulatory Pressure and Related Risks

As the regulatory framework for stablecoins is still being built, differences in regulatory standards across countries and lack of coordination will increase compliance costs for banks' cross-border business. At the same time, such fragmentation may lead to regulatory arbitrage and compliance risks.

It is worth noting that the current clarity and positivity of policies on stablecoins and crypto assets are based on specific political trends. Any change in regulatory policy could alter the entire market trajectory. Therefore, we must be alert to the "pendulum effect" of regulatory changes that may be triggered by shifts in the political environment (such as government transitions or geopolitical conflicts), i.e., policies swinging from active support to strict restriction.

At the same time, the global nature, quasi-anonymity (on-chain addresses are traceable, but user identities are not directly linked), and peer-to-peer transmission features of stablecoins make them easily used for money laundering, terrorist financing, and sanctions evasion.

In 2023, the global volume of illegal transactions involving stablecoins reached $12 billions, with over 60% flowing to cross-border sanctioned regions. Without strict KYC (Know Your Customer), KYT (Know Your Transaction), and sanctions screening compliance requirements, this efficient financial highway will become the perfect tool for criminals, triggering severe regulatory crackdowns by sovereign states.

Clearly, anti-money laundering (AML) and counter-terrorist financing (CFT) are key regulatory focuses. Due to their convenience and anonymity, stablecoins may be used for illegal gambling, underground banking, scam money laundering, dark web transactions, and other illicit activities. The anonymity of stablecoins increases the difficulty of regulation by facilitating money laundering and terrorist financing. Criminals use concepts like "stablecoin" and "DeFi" to attract funds with promises of "high returns and principal protection," but in reality, they operate Ponzi schemes.

Domestically, virtual currencies represented by stablecoins are becoming mainstream tools for money laundering. In February 2025, China's Supreme People's Procuratorate stated that in current telecom fraud crimes, the channels for funds are intertwined and concealed, and virtual currency "money laundering" has become the mainstream method. Criminals use "small and multiple" transfers to move fraud-related funds, making tracing difficult. In addition, official data shows that in 2024, 3,032 people were prosecuted for using "virtual currency" to transfer criminal proceeds and other money laundering crimes.

Criminals exchange illicit funds for stablecoins through overseas virtual currency exchanges or "coin dealers," then convert them into fiat currency abroad, achieving cross-border money laundering. They also use coin-mixing technology to obscure transaction paths or use smart contracts for automatic transaction matching, cutting off the traceability of fund flows. Some groups even set up "score-running platforms" to lure users into pledging stablecoins for money laundering, forming a semi-automated laundering chain. Stablecoin-enabled virtual currency laundering fuels upstream crimes such as telecom fraud and corruption, with funds quickly moving overseas and becoming difficult to recover, seriously threatening people's property safety and financial system stability.

V. Risks to Monetary Sovereignty

As a cryptocurrency pegged to fiat currency or other low-volatility assets, the rapid development of stablecoins poses significant challenges to global monetary sovereignty, especially in economies with fragile financial systems or high inflation.

In countries with high inflation or unstable currencies, such as Venezuela, Argentina, and Nigeria, residents have lost confidence in their national currencies and turned to stablecoins like USDT and USDC for daily transactions and value storage. For example, Nigeria's USDT trading volume grew by 50% year-on-year in 2022, and stablecoin trading in Africa and Latin America accounts for over 30% of the global total. This trend of "stablecoinization" is essentially a form of "dollarization," squeezing the circulation space of local currencies and causing central banks to lose control over money supply.

Currently, most global stablecoins are pegged to the US dollar. Their international use may further strengthen the dollar's dominance in the international monetary system, hinder the internationalization of currencies like the RMB, and impede the development of a multipolar international monetary system. Emerging economies may experience a "dual-currency economy," with local currencies and US dollar stablecoins circulating in parallel, or even accelerating dollarization.

As "digital dollarization" deepens, central banks' monetary policy transmission mechanisms will be severely weakened. Central banks will find it difficult to effectively manage the economy by adjusting interest rates or money supply, as a significant portion of economic activity will take place in an "off-balance-sheet" system dominated by US dollar stablecoins. This not only weakens the government's ability to stabilize the economy but also undermines one of the state's core powers—currency issuance. The Bank for International Settlements (BIS) has explicitly warned that cryptoization (especially stablecoinization) can circumvent capital controls and directly threaten monetary sovereignty.

Therefore, China must also be vigilant about the monetary sovereignty issues brought by stablecoin "dollarization." On one hand, be alert to stablecoins functionally replacing sovereign currency and weakening the central bank's ability to regulate money supply, interest rates, and exchange rates; on the other hand, be wary of the US potentially freezing stablecoin assets to impose sanctions, similar to an on-chain extension of SWIFT, increasing political risks for emerging markets.

VI. Capital Flight Risks in Emerging Markets

Previously, the Bank for International Settlements (BIS), known as the "central bank of central banks," stated in an advance chapter of its annual report that stablecoins performed poorly in the three key tests as pillars of the monetary system. Even under regulation, the limitations of stablecoins make it difficult for them to "take the lead." BIS warns that stablecoins may weaken monetary sovereignty and trigger capital flight risks in emerging economies.

The weakening of monetary sovereignty has been mentioned above. The main mechanism of capital flight is that enterprises and residents exchange local currency for USDT, USDC, and other US dollar stablecoins, using blockchain's cross-border transfer capabilities to quickly move funds, bypassing traditional foreign exchange controls and bank scrutiny. This leads to massive capital outflows, pressure on foreign exchange reserves, and increased depreciation pressure on local currencies. For example, in countries with strict capital controls like Argentina and Nigeria, stablecoins have become tools for moving assets overseas into US dollar assets.

In high-inflation countries, widespread use of stablecoins by the public and enterprises for transactions and value storage erodes the foundation of local currency circulation, reduces the effectiveness of central bank monetary policy, and may render government policies to regulate interest rates and exchange rates ineffective. Furthermore, the anonymity and peer-to-peer nature of stablecoins provide new avenues for underground banking, money laundering, and terrorist financing, increasing regulatory difficulty.

When large amounts of funds leave the local currency system and circulate in the crypto ecosystem, the effectiveness of traditional monetary policy tools on the real economy is diluted. Stablecoins may replace bank deposits, causing deposit outflows and reducing the money multiplier, hindering the central bank's ability to regulate the economy through credit transmission mechanisms. Stablecoin-supported cross-border capital flows can occur uninterrupted, easily bypassing capital controls and fueling speculative hot money shocks in emerging markets. If a country experiences political or financial instability, stablecoins can enable large-scale capital withdrawals within hours, causing sharp short-term fluctuations in exchange rates and financial markets, and bringing significant financial stability shocks.

In summary, the capital flight risks triggered by stablecoins in emerging economies will impact monetary policy transmission, financial stability, and monetary sovereignty.

VII. Fake Stablecoins and Fraud Risks

As society's attention to stablecoins increases, scams targeting stablecoins are bound to rise. Individuals or enterprises holding or trading stablecoins may encounter many traps. Among them, "fake stablecoins" are particularly harmful but easily overlooked.

The "fake stablecoins" referred to here are those where scammers exploit investors' or counterparties' lack of understanding of cryptocurrencies,

using personally issued "fake USDT" or "fake USDC" to defraud counterparties of fiat funds (similar to counterfeit money in the real world). Many of these fake stablecoins can be transferred and traded normally at first, and some can even be exchanged for real stablecoins. However, once the scam reaches the closing stage and the project runs away, these stablecoins become worthless and cannot be exchanged for other cryptocurrencies. In July 2025, an investment platform called "DGCX Xinkangjia" used the name of the Dubai Gold & Commodities Exchange (DGCX) to attract funds, using USDT as the deposit and withdrawal method, and ultimately defrauded over $1 billion in assets.

Additionally, as stablecoins gain popularity, various digital currencies and related concepts represented by "stablecoins" are attracting market attention. Some illegal institutions and individuals, under the guise of "financial innovation," "blockchain technology," "digital economy," or "digital assets," exploit the public's limited understanding of new financial concepts. They issue or hype so-called "virtual currencies," "digital assets," or "stablecoin investment projects," promising high returns to lure the public into speculative trading.

For individuals or enterprises, before making investments or financial decisions, it is essential to verify the legitimacy of relevant institutions and products through official channels of national financial regulatory authorities and choose licensed and regulated financial institutions. Fully understand the high complexity and volatility of digital currencies such as "stablecoins" and related innovative concepts, establish correct monetary concepts and rational investment philosophies, consciously resist and stay away from any form of virtual currency speculation, illegal token issuance, and unapproved "digital asset" investment projects, and effectively protect personal property safety.

VIII. Risks of Weakening Central Bank Digital Currencies

Fiat-backed stablecoins and central bank digital currencies (CBDCs) are two core forms of digital currency. While they share technical similarities, they differ significantly in terms of issuers, credit backing, and application scenarios.

First, their issuers and credit backing are different. CBDCs are issued by central banks, backed 100% by national credit, and have unlimited legal tender status (e.g., digital RMB is equivalent to cash). Stablecoins, on the other hand, are issued by private institutions (such as Tether and Circle) or decentralized protocols, with credit relying on collateral assets or algorithmic mechanisms. Fiat-backed stablecoins are pegged 1:1 to fiat currency and require reserve assets to maintain stability.

Second, their degree of centralization and regulatory systems differ. CBDCs are issued by central banks, such as the digital RMB, which adopts a fully centralized two-tier operation system, is strictly regulated by the central bank, and supports controllable anonymity. Fiat-backed stablecoins, although more decentralized, rely on public chain consensus mechanisms (such as ethereum), support anonymous transactions, and while regulatory frameworks are being established in several regions, they are not yet complete.

Finally, their stability and application scenarios differ. CBDCs mainly focus on domestic retail payments (such as consumer spending and government fee payments) and strengthening monetary policy transmission (such as targeted subsidies). Stablecoins currently focus mainly on cross-border payments, DeFi ecosystems, and crypto asset trading.

Nevertheless, stablecoins and CBDCs still share some similarities in digital form and efficiency improvement, payment media, and technical means. Both exist in digital form, are based on blockchain or distributed ledger technology (DLT), support peer-to-peer transactions and automated settlement, and can significantly improve payment efficiency. Both also have the attributes of a transaction medium and support programmability, helping to address shortcomings in traditional payment systems.

Previously, the US passed the "Genius Act" to bring stablecoins under regulation. In fact, another key crypto bill, the "Anti-CBDC Surveillance State Act," was passed by the US House of Representatives alongside the "Genius Act." Its aim is to protect Americans' financial privacy and prohibit the Federal Reserve from issuing retail CBDCs without explicit congressional authorization.

From another perspective, the US's improvement of the stablecoin regulatory framework is essentially also a restriction on central bank-issued digital currencies, encouraging and regulating privately issued digital currencies, and thus establishing a crypto strategy that advances private stablecoins and national digital asset reserves in tandem. This shows its market-oriented approach to promoting digital assets and its intention to prevent central banks from expanding control over monetary policy. In other words, US dollar stablecoins remain an on-chain extension of dollar hegemony, and the establishment of a regulatory framework is intended to further consolidate the dollar's dominant position.

Although fiat-backed stablecoins and CBDCs (digital RMB) are significantly different, there is still overlap and even competition in cross-border scenarios and certain fields. If stablecoins are allowed to develop unchecked domestically, they may weaken the development of the digital RMB and adversely affect domestic financial stability. Therefore, maintaining the mainland's leading position in CBDC research and development, as well as Hong Kong's first-mover advantage in stablecoin regulatory systems and innovative development, and allowing Hong Kong and the mainland to explore separately and form complementary experiences is currently the most suitable path.