What is a stablecoin?

A dumbbell made from stacks of gold coins with dollar signs on the flat center plates.

In the rapidly evolving world of digital assets, one innovation stands out for its potential to bring stability and reliability to the historically volatile blockchain-based currency market: the stablecoin. As the name suggests, a stablecoin is a type of digital currency designed to maintain a stable value. These digital currencies are pegged to a traditional fiat currency like the US dollar. Stablecoin use has increased significantly in recent years: In the past 18 months, the total market capitalization of stablecoins has more than doubled to $250 billion, from $120 billion, and industry forecasts expect it to reach up to $2 trillion by 2028. With major players like JPMorgan Chase experimenting with tokenized deposits and PayPal launching its own stablecoin, digital money is a major story in digital finance.

Get to know and directly engage with senior McKinsey experts on stablecoins

Anutosh Banerjee is a partner in McKinsey’s London office, Matt Higginson is a partner in the Boston office, and Garry Spanz is an associate partner in the New York office.

For individuals and organizations looking to capitalize on the benefits of blockchain-based transactions—including fast, secure transactions and access to global markets—volatile digital assets like Bitcoin present a challenge: Their price fluctuations make them impractical for everyday transactions and predictable business operations. Stablecoins address this limitation by maintaining stable values while preserving the technological advantages of blockchain-based currencies. As the use of digital currency continues to grow and mature, understanding stablecoins is becoming increasingly important for anyone looking to navigate the new financial landscape.

To learn more about stablecoins and how they stand to affect the financial-services industry, read on.

How do stablecoins work?

Stablecoins are digital assets issued by private companies as tokens on a blockchain, typically pegged to a fiat currency like the US dollar, and backed by reserves such as cash or highly liquid securities. They are designed to offer a stable store of value and medium of exchange, unlike volatile digital assets such as cryptocurrencies. Some stablecoins are issued by private institutions on public blockchains such as Ethereum. Unlike central bank digital currencies (CBDCs), stablecoins are not official legal tender and receive varying levels of regulatory scrutiny and oversight. Examples of stablecoin issuers include Tether (USDT), Circle (USDC), and EUR CoinVertible (EURCV).

The primary mechanism that ensures stability for stablecoins involves collateralization. For instance, Circle’s USDC is backed by about 90 percent short-term US Treasuries or repurchase agreements, with the remainder held in cash. This backing ensures that holders can redeem stablecoins at any time for their underlying asset, thereby maintaining their stability.

What are the benefits of stablecoins?

Stablecoins can offer five primary benefits:

Speed and availability. Traditional payment systems can take up to five business days to complete transactions—and are only open during business hours. Stablecoins, by contrast, work 24/7 and settle payments almost instantly.
Lower costs. Legacy payment networks rely on multiple intermediaries, which typically levy fees. Stablecoins cut out many of these middlemen, making transfers much cheaper. One example: Some nontraditional providers using stablecoin technology charge about one-fifth of what traditional players charge for cross-border payments.
Better transparency and control. Complex legal infrastructure can obscure the routing and status of payments, especially during international transfers. Stablecoins allow real-time tracking. And payments are automatically checked for anti-money-laundering and know-your-customer issues with digital compliance processes and smart contracts (through self-executing code).
Global access. Much of the traditional payment infrastructure relies on banks, which often require a state-issued ID or multiple proofs of residence to open an account. Stablecoins use infrastructure that’s “wallet based” rather than “account based,” expanding access to anyone with an internet connection.
Business innovation. Stablecoins allow for new features that haven’t traditionally been available. Smart contracts enable, among other things, automated portfolio rebalancing, instant settlement, and the ability to use tokenized assets as payment vehicles.

What are the most common uses for stablecoins?

Much of the growth projected for stablecoins in the coming years depends on diversifying and expanding use cases. Key examples include the following:

Cross-border and real-time payments and remittances. Where permitted, stablecoins offer a faster and cheaper alternative to traditional remittance solutions. This is especially important for migrant workers and in solving perennial small business challenges.
Trading and capital-market settlement. Stablecoins can be used as tokenized cash for secure, blockchain-based settlement in financial markets.
Treasury and tokenized cash management. Firms use stablecoins as on-chain cash reserves to optimize liquidity, improve operational flexibility, and reduce friction in treasury operations.
Complement to CBDCs. In jurisdictions piloting CBDCs, stablecoins serve as complementary digital instruments, allowing private-sector experimentation and interoperability with CBDCs. (We’ll go into this in more detail later in this Explainer.)

How are regulations evolving to oversee stablecoins?

Regulations governing stablecoins are evolving rapidly as governments and financial institutions recognize their growing influence on global finance. These regulations aim to ensure the stable and secure operation of tokenized cash, covering aspects such as reserves, disclosures, anti-money-laundering and know-your-customer compliance, and proper licensing of issuers.

In 2023, the first wide-ranging regulatory frameworks were introduced, including the Regulation on Markets in Crypto-Assets (MiCA) rules for stablecoins in the European Union and similar measures in Hong Kong, Japan, and Singapore. In the United States, the Senate passed the Guiding and Establishing National Innovation for US Stablecoins (GENIUS) Act of 2025, stipulating conditions for reserves, stability, and oversight.

What tech advancements are enabling the stablecoin ecosystem?

Technological advancements in blockchain, e-wallets, and on-chain analytics are enhancing the stablecoin ecosystem. Blockchains such as Avalanche, Ethereum, and Solana have improved performance and faster consensus mechanisms, reducing network congestion and fees.

Wallet technology has also evolved, with institutional-grade wallets intended to reduce the risk of private key compromise. On-chain analytics have advanced from basic transaction tracking to sophisticated behavioral and risk analysis, providing real-time transaction surveillance and anti-money-laundering screening tools.

What risks are involved with stablecoin use?

For financial institutions, stablecoins could pose real risks to their business model. If customers and companies start holding stablecoins instead of keeping money in bank accounts, banks could lose access to the deposits they depend on to make loans and fund operations. That’s because the money backing stablecoins is held by the issuer, not by the bank.

There are also operational challenges. To work with stablecoins, banks would need new technology, like blockchain infrastructure and digital-wallet integrations. They’d also need to make sure they can track transactions in real time and stringently adhere to anti-money-laundering and anti-fraud regulations. Without effective controls and internal capabilities, there’s a risk of regulatory missteps or security failures.

What’s the relationship between stablecoins and CBDCs?

CBDCs and stablecoins are both forms of digital money, but they come from very different places. CBDCs are issued by governments and backed by central banks, while stablecoins are created by private companies and tied to existing currencies. Even though they serve similar purposes—like making digital payments faster and more efficient—they aren’t direct competitors.

Instead, CBDCs and stablecoins are likely to coexist, at least for the foreseeable future. Each has strengths: CBDCs offer more stability and encourage trust because they’re government-backed, while stablecoins can move quickly and adapt to new technologies. The mix of public and private digital money could help meet different user needs across markets.

There’s still a lot of uncertainty, though. Governments are moving slowly on CBDCs, and stablecoin regulation is still being developed. For now, stablecoins are filling gaps in the market, especially in cross-border payments. But as CBDCs develop, the balance could shift. Their relationship is still taking shape, but both are expected to play important roles in the future of money.

How are financial institutions already using stablecoins? And how can they prepare for the future?

Large financial institutions are increasingly participating in the stablecoin ecosystem, with some issuing their own stablecoins or experimenting with tokenized deposits (a similar but distinct form of tokenized asset). For example, JPMorgan Chase’s JPM Coin uses tokenized bank deposits for real-time, on-chain settlement between institutional clients.

Other institutions, such as Citibank, Goldman Sachs, and UBS, are experimenting with tokenized deposits and cash through initiatives like the Canton Network. These developments indicate a growing interest among large financial institutions in using stablecoins and tokenized assets for various applications.

Looking ahead, financial institutions should think about the role they want to play in the new digital ecosystem—then acquire the appropriate talent and build the necessary technological capabilities. They should also engage with regulators to stay informed about evolving requirements. Finally, they could establish a market blueprint to identify promising opportunities and test demand for stablecoin-based applications.

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