What Are Stablecoins?

Stablecoins are increasingly in the news, and regulators are moving to control their usage. Here we delve into what stablecoins are and how they work.

A stablecoin is a type of cryptocurrency that, as its name suggests, is stable – in other words, its price does not fluctuate according to the market forces of supply and demand, as do, for example, Bitcoin and Ethereum. Therefore, stablecoins are not generally traded for investment or speculation purposes.

Stablecoins have practical uses, but they also come with risks that might not be immediately apparent to buyers.

The rise of stablecoins

Like a cryptocurrency such as Bitcoin, a stablecoin is a digital asset secured by encryption, making it nearly impossible to replicate. Cryptocurrencies are decentralised, meaning they are not controlled by a central authority such as a bank or government. Transactions are recorded on a public, distributed ledger called a blockchain.

The first stablecoins were launched in 2014 as a means of enabling cryptocurrency investors to park their money in “cash” while trading market-governed cryptocurrencies. However, they have become increasingly used to make cross-border payments, bypassing constraints imposed by governments to control international money flows. For this reason they are a mounting concern for financial regulators worldwide.

The stablecoin market has grown rapidly over the last decade. According to the Bank for International Settlements, the size of the global stablecoin market as of June 2025 was about US$255 billion. This is over an eighth of the world’s total cryptocurrency market, currently about US$3 trillion.

How do they work?

A stablecoin must be stable relative to something, and for 99% of stablecoins that something is the US dollar. There are stablecoins pegged to other fiat currencies, including several pegged to the South African Rand. You also get stablecoins pegged to assets such as commodities, including gold, and even, oddly enough, other cryptocurrencies.

Stablecoins should not be confused with central bank digital currencies (CBDCs). While both are digital units of payment utilising blockchain, stablecoins are privately issued and not regarded by governments as legal tender. CBDCs, on the other hand, are issued by central banks, meaning that an owner has a direct claim on the issuing central bank, as with a banknote.

Stablecoins work in one of two ways:

1. Fully reserved stablecoins: Each stablecoin issued is backed by the asset it pegs, with the issuer holding these assets in reserve. An issuer of a dollar-backed stablecoin, for example, will hold dollars in reserve in proportion to the stablecoins in circulation. This stabilises its price.

2. Algorithmic stablecoins: These maintain their stability through algorithms that respond to supply and demand imbalances by minting or destroying coins. If a stablecoin trades above its pegged value, tokens are minted to reduce its price. Conversely, if it trades below this value, tokens are destroyed, increasing its price.

Stablecoins are not without risks, and issuers may lack transparency. An issuer of an asset-backed stablecoin may, for example, hold lower reserves than required. This occurred with Tether’s USDT, the largest stablecoin by market capitalisation. In October 2021 it failed to produce audits for reserves required to support the quantity of USDT in circulation and was fined $41 million as a result. According to Wikipedia, as at March 2025 Tether had never completed an audit by an accounting firm.

A risk to algorithmic stablecoins is that they have proved vulnerable to a de-pegging “death spiral” – an external event triggers an uncontrolled oversupply and consequent fall-off in price.

Stablecoin use in developing countries

These digital assets are increasingly being used for transferring money across national borders, and especially for remittances to developing countries. Since they can be sent via smartphone, they are highly suitable for rural, unbanked populations. NGOs serving these countries also report using them to avoid regulatory holdups and high banking fees.

Local communities have also started accepting stablecoins as a method of payment and to hedge against inflation and the depreciation of their fiat currency.

Regulatory concerns

Because stablecoins (and other cryptocurrencies) bypass state regulators, there are international concerns around their use for money laundering and illicit cross-border flows. Recently, the South African Reserve Bank (SARB) added crypto assets and stablecoins to a new financial-stability risk category after custody balances at the country’s three largest licensed crypto-asset service providers rose to more than R25 billion.

The Reserve Bank and National Treasury are preparing a framework for overseeing cross-border crypto-asset transactions and updating the country’s exchange-control rules to address gaps exposed by the rapid growth of digital-asset activity. Countries such as Nigeria and Kenya are working on their own strategies. In Nigeria, the Securities and Exchange Commission has been given oversight of crypto and stablecoins and Kenya is getting close to passing legislation that recognises digital assets as payment and licenses stablecoin issuers.

References:

https://en.wikipedia.org/wiki/Stablecoin

https://www.resbank.co.za/content/dam/sarb/publications/reviews/finstab-review/2025/second-edition.pdf

https://www.jpmorgan.com/insights/global-research/currencies/stablecoins

https://topco.co.za/2025/11/20/interoperability-key-to-stablecoins-in-sa/https://www.ifwg.co.za/Pages/Mind-the-stablecoin-gap.aspx