Stablecoins challenge the traditional financial system

The rise of so-called stablecoins is putting pressure on the global financial system. While these coins were once intended as a stable bridge between cryptocurrencies and fiat currencies, they are increasingly seen as unregulated shadow banks.

What is a stablecoin?

A stablecoin is a cryptocurrency pegged to a traditional currency like the dollar or euro. For every stablecoin issued, a real dollar or euro must theoretically be held in reserve. This keeps the value stable, unlike traditional cryptocurrencies like Bitcoin or Ethereum, which can fluctuate significantly.

The most popular stablecoins, such as Tether (USDT) and USD Coin (USDC) , are increasingly used for payments, international trade, and as alternatives to savings in countries with weak currencies. In theory, they are backed by liquid reserves, but in practice, there is often considerable uncertainty about what exactly this backing entails.

“They accept deposits, manage reserves and process payments – they act like banks, without bearing the responsibilities of banks,” said a Frankfurt financial regulator.

No permit, no protection

Stablecoins often operate outside traditional financial oversight. They don’t require a banking license, fall outside deposit guarantee schemes, and generally lack transparent reporting of their reserves. This makes them vulnerable to uncertainty or a loss of trust.

The European Central Bank therefore warns of the risk of digital bank runs: a sudden outflow of users seeking to convert their coins into “real” money, which could disrupt the system. This could especially impact the stability of the financial system if stablecoins become widely used.

Legal vacuum

Regulators worldwide are trying to intervene. In Europe, the MiCA ( Markets in Crypto-Assets ) regulation was recently adopted, which, among other things, imposes stricter requirements on stablecoin issuers. In the United States, consideration is being given to imposing the same obligations on stablecoin issuers as on commercial banks.

Yet, large stablecoin platforms like Tether continue to operate from countries with weak regulations. This allows them to largely evade scrutiny. Experts call it a form of regulatory arbitrage: operating where the rules are weakest.

Russia: Stablecoins as an escape route

The growing popularity of stablecoins takes on a particular dimension in Russia, where citizens, businesses, and even government agencies are increasingly turning to digital currencies to facilitate international payments and avoid the impact of Western sanctions.

Since the invasion of Ukraine and the subsequent exclusion of Russian banks from the SWIFT system, demand for cryptocurrencies—and particularly stablecoins like USDT—has soared. Stablecoins are used to import foreign goods, facilitate payments to China and Turkey, and move capital outside the country without central bank or government intervention.

Although the Russian central bank is officially critical of cryptocurrencies, the use of stablecoins is tolerated or even encouraged in certain areas within bilateral trade with “friendly” countries. Sberbank and other Russian institutions are now experimenting with blockchain platforms for cross-border transactions in digital assets.

For Russian citizens, stablecoins also offer protection against the weak ruble and capital controls. In the shadow of inflation, sanctions, and financial repression, stablecoins function as a digital treasury: mobile, semi-anonymous, and liquid. Millions of dollars’ worth of USDT and USDC are traded daily via exchanges, peer-to-peer platforms, and Telegram channels.

According to Chainalysis estimates, Russia is now one of the largest stablecoin markets outside the US, measured by transaction volume.

Alternative to the bank

Stablecoins remain attractive to users: they enable lightning-fast, low-cost transactions – without the need for a bank. In some developing countries and autocracies, such as Venezuela, Lebanon, or Russia, they serve as a replacement for the local currency, which is often subject to high inflation, currency restrictions, or geopolitical risks.

But this success story also has a downside. As long as stablecoins operate without oversight and strings attached, they pose a potential threat to public confidence in the broader financial system – especially when governments themselves rely on them while formally warning of the risks.

Why stablecoins remain popular

Despite the risks, stablecoins continue to grow. They offer fast and cheap transactions, independent of traditional banks. In sanctioned countries, they are used as a digital alternative to the international banking system; in Western countries, they serve as a speculative instrument or liquidity tool for crypto investors.

For many people, stablecoins offer an alternative to banking services—especially in countries where banks are unreliable or access is limited. This makes them not just a technical phenomenon, but also a socio-economic one. The shift in trust—from states and central banks to algorithms and private issuers—is fundamental.

Central banks respond

In response, several central banks are developing their own digital currencies, so-called CBDCs ( Central Bank Digital Currencies ). The digital euro, which the European Central Bank is working on, is a case in point. It aims to offer the same advantages as stablecoins, but with a government guarantee and fully complying with existing regulations.

Russia is also developing its own digital ruble, which has been tested with select banks and users since 2023. The central bank hopes this will help it maintain control over digital payments, but success has been limited so far. Users continue to prefer more stable stablecoins, especially for international transactions.

Integration or disruption?

The big question now is whether stablecoins will eventually be fully integrated into the mainstream financial system—under central bank oversight and the same rules—or whether, in their current form, they pose a lasting risk. As long as major players like Russia, Turkey, or Iran use them as a strategic tool in a new economic power struggle, stablecoins will remain more than just a technological innovation—they are geopolitical.

Until then, stablecoins will continue to push the boundaries between innovation, disruption, and survival.

ⓒ Antonio Georgopalis