There has been a lot of talk about stablecoins in recent months, in part fueled by the introduction of the Guiding and Establishing National Innovation for U.S. Stablecoins Act, nicknamed GENIUS Act, in the United States in June 2025. In Canada, the federal government's budget bill (C-15) introduced the Stablecoin Act (Canada). The federal government is trying to respond to the developments in the United States by introducing a regulatory environment that balances innovation with robust supervision. Let's have a closer look at the pros and cons of stablecoins.

What are "stablecoins"?

Stablecoins are a type of crypto asset (often called, misleadingly, a "cryptocurrency") that is designed to maintain a stable value through a peg to a stable asset, specifically a fiat currency such as the Canadian Dollar or U.S. Dollar. Stablecoins are intended to provide an alternative to excessively volatile crypto assets such as Bitcoins. Stablecoins are also distinct from central bank digital currencies (CBDCs) because they are issued privately rather than by a country's central bank.

How are "stablecoins" created?

Stablecoins are issued by private companies such as Circle and Tether. In the United States the issuer must be a permitted payment stablecoin issuer, an entity subject to approval by the Office of the Comptroller of the Currency, or equivalent state-licensed entities that meet or exceed federal requirements. In Canada, an issuer must register with the Bank of Canada and comply with regulatory requirements. As the value of the stablecoin must match the value of the backing fiat currency, the stablecoin issuer must back up its value by holding short-term assets such as treasury bills (T-Bills) that are denominated in the backing fiat currency. This means that in practice a stablecoin operates quite similar to a money market fund.

What are "stablecoins" good for?

Stablecoins are intended to simplify, expedite, and reduce the cost of payment transactions without the inherent price volatility risk of fluctuating crypto assets. Stablecoins are meant to bypass traditional international payment clearance systems, such as SWIFT. The primary benefit comes from potentially lower costs for cross-border payments and remittances. As a secondary benefit, stablecoins could make it easier for clients in foreign countries to hold a foreign currency. The value proposition hinges on the cost reduction in financial intermediation.

Stablecoins compete with other types of FinTech innovation in international payment systems, specialized digital remittance platforms such as Wise or Remitly, or interconnected real-time payment systems such as Project Nexus. The "legacy rails" of traditional correspondence banking networks have rightly been accused of high costs and inflexibility.

What are the private risks of using "stablecoins"?

Fundamentally, stablecoins are not fiat currency and therefore run the risk of de-pegging and loss of value. This can happen when a stablecoin issuer is unable to mobilize sufficient liquidity reserves when a large number of holders cash out stablecoins at the same time (what is called a "run"). In a worst-case scenario, users of stablecoins are at risk of losing their entire investment position. Similarly, the bankruptcy of a stablecoin issuer, perhaps due to lack of regulatory oversight, could leave stablecoins users without recourse to recover their investments. The current U.S. government's laissez-faire approach to regulating the crypto industry puts users of stablecoins in the U.S. likely at larger risk than in Canada.

Users of stablecoins are also subject to operational and security risks due to technical failures, hacking incidents, frauds, and scams. Furthermore, the irreversibility of stablecoin transactions makes it near-impossible to reverse errors or recover funds due to theft.

What are the macro-economic risks of using "stablecoins"?

As stablecoins are backed by short-term assets such as treasury bills, the value of these reserve assets is subject to market fluctuations. When interest rates rise suddenly, the market price of treasury bills drops and can leave a stablecoin issuer with less liquidity to redeem stablecoins. If there is a sudden inrush of redemptions due to economic uncertainty or a market panic, a stablecoin issuer can experience a liquidity crisis.

A Bank of Canada paper by MacDonald and Zhao (2022) discusses Stablecoins and Their Risks to Financial Stability. They show that there are significant risks of runs on stablecoins. These risks are larger when stablecoin issuers are allowed to invest in riskier asset classes such as commercial paper or corporate bonds. A run could be triggered when unfavourable market conditions create an expectation that the reserve asset will loose value, which could prevent the stablecoin issuer from fulfilling redemption requests. This means that reserve assets ought to be highly liquid and free of credit risk. The risk of runs can also be exacerbated by a lack of robust redemption rights and adequate disclosure and reporting standards. Without strong regulatory oversight, stablecoin issuers could be tempted to conceal their financial vulnerabilities.

Stablecoins are also subject to contagion risk. Because there would likely be competing stablecoin issuers, trouble in one place could easily spill over to other issuers as trust in the entire class of assets could be eroded by an adverse event. A stablecoin run could also propagate to other financial markets through the balance sheet of institutional investors. Ashad and Aldasoro (2025) write in their Bank for International Settlements paper Stablecoins and safe asset prices that stablecoins already have a measurable impact on short-term yields in the treasury market. If a stablecoin issuer was forced to liquidate positions in treasury bills in a fire sale to meet high redemption demand during a "run", this sale would depress treasury prices and drive up yields. This in turn can have macro-economic consequences.

How does a "stablecoin" issuer earn money?

There are two primary channels through which stablecoin issuers can earn money. First, they can charge transaction fees just like regular banks. Second, they benefit from interest payments on the treasury bills that they hold to back up their stablecoins. Essentially, stablecoin holders do not receive interest on their holdings, and this means the stablecoin issuer can reap the benefits from holding the backing asset.

Is there a better digital alternative to "stablecoins"?

Yes, absolutely. A central bank digital currency (CBDC) is issued by a central bank and is fully backed by the central bank. There are no risks due to involvement of private issuers. The European Union's is working towards issuing a digital euro that would complement banknotes and coins. A CBDC would likely "crowd out" private stablecoins because of its inherent safety and, likely, wider adoption and larger size.

Are "stablecoins" worth the trouble?

As always, caveat emptor: buyer beware! The inherent risks of using private stablecoins may not outweigh any benefits from lower transaction costs for commercial users. There is practically no benefit to retail customers from using or holding stablecoins. Instead, invest your money where it earns interest and dividends.

On a policy level, the Government of Canada should monitor stablecoins closely because of the significant macro-economic risks. Fundamentally, high transaction costs in today's financial industry mostly stem from lack of competition. But more competition from private stablecoin issuers may not be the answer. A central bank digital currency (CBDC) would be a safer proposition—although Canada's large banks are vehemently opposed because it would erode some of their profitable business. A CBDC would shift some of their clients' funds to the central bank, depriving the commercial banks of some of their low-cost funding by way of deposits. As a result of opposition from banks, pushback from some vocal politicians with a strong interest in promoting private crypto companies, and also concerns by the wider public about privacy protection, the Bank of Canada shelved its retail CBDC project in late 2024. Nevertheless, should the European Union launch its digital euro successfully, the Bank of Canada may want to reconsider its position.

Nobel-prize winning economist Jean Tirole wrote recently that "Stablecoins, like money-market funds, project security but can collapse under pressure. Governments may then feel compelled to bail out holders to protect small businesses and households, to prevent financial contagion or to preserve reputations as crypto-friendly jurisdictions. This expectation encourages risk-taking." He concludes that payment systems should rest on public infrastructure, leaving innovation to building applications on top of this public infrastructure.