Why Stablecoins Are Becoming Wall Street's New Favorite Asset Class

Stable coins currently represent a $255 billion market capitalization as of early June 2025, according to CoinMarketCap. This rapidly expanding asset class has shown remarkable resilience, sustaining seven consecutive months of positive market cap growth despite a more volatile crypto market year-to-date. Experts project the stablecoin market could reach an impressive $500–750 billion in the coming years, with some optimistic forecasts suggesting growth to $2 trillion within just three years.

Stablecoins, digital currencies designed to maintain a stable value by pegging to external assets like the US dollar, have evolved from a niche cryptocurrency concept to a significant financial instrument. The stablecoin market now accounts for approximately 7% of the broader $3 trillion crypto ecosystem[-5]. Furthermore, transaction volumes involving these stable currencies have risen significantly from $521 billion to $710 billion monthly. Notably, the market is dominated by USD-backed variants, with Tether (USDT: $155 billion) and USD Coin (USDC: $62 billion) together accounting for over 90% of total stablecoin market capitalization.

This article explores what stablecoins are, how they work, and why traditional financial institutions are increasingly embracing them. Readers will discover the mechanics behind how stable coins maintain their peg, understand their advantages over traditional fiat currency, and learn about the regulatory developments shaping this nascent but rapidly maturing ecosystem.

What Are Stablecoins and How Do They Work

Stablecoins have emerged as a novel solution to cryptocurrency volatility by incorporating price stability directly into the assets themselves. These digital currencies minted on blockchain networks bridge the gap between traditional fiat currencies and cryptocurrencies, offering both the stability of the former and the utility of the latter.

Fiat-backed vs Algorithmic Stablecoins

Stablecoins can be categorized into four primary types based on their underlying collateral structure, though two dominate the market: fiat-backed and algorithmic stablecoins.

Fiat-backed stablecoins operate on a straightforward principle: for each token issued, an equivalent amount of fiat currency is held in reserve. These reserves are maintained by custodians or financial institutions and regularly audited to ensure compliance. Tether (USDT) and USD Coin (USDC) exemplify this model, with USDT reporting approximately 85.05% of its reserves held in cash and cash equivalents, including 75.86% specifically in U.S. Treasury Bills.

In contrast, algorithmic stablecoins maintain their peg without external collateral. Instead, they employ specialized algorithms and smart contracts to dynamically manage token supply based on market demand. These stablecoins typically follow one of three approaches:

1. Rebasing - automatically adjusting total supply when prices deviate from the peg
2. Seigniorage - utilizing multiple tokens where one maintains the peg while another serves as a share in seigniorage
3. Fractional - combining collateral assets with algorithmic mechanisms

However, algorithmic stablecoins carry higher risk profiles, as evidenced by TerraUSD's catastrophic meltdown in May 2022, which erased $28 billion from the Terra ecosystem in a single day.

How Stablecoins Maintain Their Peg

The stability mechanisms behind stablecoins represent years of financial engineering aimed at maintaining their critical 1:1 peg with reference assets.

For fiat-backed stablecoins like USDC, peg maintenance relies on four crucial elements:

• Full reserve backing with equivalent dollar amounts in highly liquid reserves
• Regulatory compliance providing institutional trust
• Market arbitrage mechanisms creating price equilibrium
• Transparent operational practices including regular audits

This arbitrage mechanism ensures stablecoins trade within narrow bands around their pegs. When prices deviate, market participants capitalize on the difference, effectively bringing the price back toward the fixed rate.

Algorithmic stablecoins, however, rely on smart contracts that respond to supply and demand imbalances. If trading above the peg, additional tokens are minted to reduce price; if below, tokens are burned to increase price. This approach mimics central bank monetary policy but lacks the institutional backing that provides stability.

Stablecoins vs Traditional Fiat Currency

While both stablecoins and traditional currencies function as media of exchange, several key differences distinguish them:

The most apparent distinction concerns technology infrastructure. Stablecoins operate on blockchain networks, enabling round-the-clock transactions without banking intermediaries. Traditional currencies, conversely, depend heavily on banking systems with limited operating hours and settlement windows.

Additionally, transaction speed differentiates these two monetary systems. Stablecoin transfers can settle within minutes globally, whereas traditional cross-border payments often require days to complete. This efficiency makes stablecoins particularly valuable for remittances and international payments.

Stablecoins also offer programmability through smart contract integration, allowing for automated execution of financial agreements. This feature creates possibilities for more complex financial applications that traditional fiat currencies cannot natively support.

Nevertheless, traditional currencies maintain advantages in widespread acceptance, regulatory clarity, and consumer protections. Their position as legal tender backed by government authority provides a level of security that most stablecoins currently cannot match.

Stablecoin Market Cap and Institutional Growth

The stablecoin ecosystem has become a significant player in global treasury markets, with major issuers now ranking among the top 10 holders of US government debt worldwide. This rapid ascension reflects the growing institutional acceptance of these digital assets as legitimate financial instruments.

Current Market Size: $255 Billion and Rising

The global stablecoin market has reached approximately $255 billion in capitalization as of mid-2025, growing at a compound annual rate of 65% since 2021. Presently, USD-denominated stablecoins dominate this landscape, accounting for 99% of the entire stablecoin ecosystem. Tether (USDT) leads with 62.45% market dominance, operating across multiple blockchain networks.

Market analysts project substantial growth ahead. J.P. Morgan Global Research forecasts the stablecoin market could reach $500-750 billion in the coming years, a more conservative estimate than some projections suggesting $2 trillion by 2028. Based on sophisticated stochastic models, Coinbase Research anticipates the market will center around $1.2 trillion by end-2028.

This expansion translates into significant US Treasury demand. Growing from $275 billion to $1.2 trillion would require approximately $925 billion in net Treasury issuance over about 175 weeks—roughly $5.3 billion weekly. Consequently, stablecoins now represent approximately 1.1% of the total US dollar supply, a small but rapidly growing segment of the monetary landscape.

Wall Street Entry: JPMorgan, BNY Mellon, Stripe

Major financial institutions have moved decisively into the stablecoin space throughout 2025:

• Circle, issuer of the $62 billion USDC stablecoin, completed its initial public offering in June 2025 and subsequently applied for a banking license
• Payments giant Stripe acquired stablecoin firm Bridge for $1.1 billion in early 2025, enabling its business customers to hold, send, and receive stablecoins
• Goldman Sachs and Bank of New York Mellon launched initiatives to tokenize shares of money market funds

Moreover, Visa has unveiled a bank stablecoin issuance platform, while credit card companies have developed infrastructure enabling payments funded by stablecoins. Major non-financial corporations including Amazon and Walmart are reportedly considering stablecoin issuance, signaling potential mainstream corporate adoption.

Indeed, a consortium of the nation's largest banks is exploring the possibility of issuing a joint stablecoin, primarily to counter increasing competition. This institutional interest has accelerated following the passage of the GENIUS Act, which created regulatory clarity through both state and federal pathways for stablecoin issuers.

Stablecoins vs Money Market Funds

Although superficially similar, stablecoins and money market funds (MMFs) exhibit fundamental differences in market behavior. Both aim to provide investors with safe, money-like assets and engage in liquidity transformation that renders them vulnerable to runs.

The economic structure appears nearly identical—essentially making payment stablecoins "tokenized MMFs used for payments"—yet their market responses differ markedly. During periods of financial stress, both experience "flight-to-safety" dynamics, with investors fleeing riskier assets toward safer alternatives.

A critical distinction emerges in their responses to external shocks. Research demonstrates that while crypto market shocks significantly affect stablecoins but leave MMFs untouched, US monetary policy shocks impact both but in opposite directions. When monetary policy tightens, prime money market funds typically see inflows as investors seek higher yields, whereas stablecoins experience substantial outflows as crypto markets turn bearish.

Furthermore, multinational corporations are increasingly exploring stablecoins for treasury operations and cross-border payments. The traditional financial sector has responded by developing tokenized money market funds, primarily to maintain competitiveness and unlock new use cases like margin collateral posting, essentially evolving to compete with stablecoin functionality.

The infographic below highlights the similarities and differences between stablecoins and money market funds, showing why Wall Street increasingly views stablecoins as more than just a crypto experiment — but as programmable financial infrastructure.

Why Wall Street Is Embracing Stablecoins

Traditional financial institutions now recognize multiple advantages offered by stablecoins beyond their price stability. The integration of these digital assets into mainstream financial systems reflects their practical benefits rather than mere speculation.

24/7 Liquidity and Instant Settlement

Wall Street values stablecoins primarily for their ability to enable instant settlement regardless of traditional banking hours. Unlike conventional payment systems that process transactions only during business days with delays of one to three days, stablecoins operate continuously, providing round-the-clock liquidity. This perpetual availability frees trapped capital, thereby improving operational cash flow for institutions managing large treasury positions. In fact, many corporations report cost savings of at least 10% after implementing stablecoin solutions for cross-border payments.

Programmability and Smart Contract Integration

Perhaps most importantly, stablecoins offer something traditional currency cannot: programmability. These digital assets function as the building blocks for programmable money, enabling automatic execution of financial transactions based on predefined conditions. Financial institutions can leverage smart contracts that execute "if-then-else" logic without human intervention. Applications include automatic fund sweeping between accounts, instantaneous supply chain financing, real-time cross-border settlements, plus peer-to-peer lending with automated repayment schedules. Companies like Compound demonstrate this capability by creating interest rate markets that allow programmatic borrowing using stablecoins as collateral.

Cross-border Payments and Treasury Efficiency

For multinational corporations, stablecoins solve persistent challenges in international payments. The traditional system requires funds to pass through multiple correspondent banks before reaching their destination, introducing costs, delays, plus compliance risks. Corporate treasurers often pre-fund accounts well in advance to prevent liquidity gaps, inefficiently allocating capital. Through stablecoin integration, enterprises can convert US dollars into tokens, transmit them across blockchain networks, afterward settle into local currency via banking partners. This process reduces settlement time from weeks to hours, creating meaningful working capital advantages for companies moving millions at once.

Stablecoins as a Hedge Against Volatility

Research demonstrates that dollar-backed stablecoins serve as effective hedges against market volatility. Their low conditional correlations with cryptocurrency portfolios make them particularly suitable for risk management. Studies show all stablecoin types systematically reduce portfolio tail risk, yet USD-pegged stablecoins outperform gold-pegged variants as hedges against traditional cryptocurrencies. In emerging markets experiencing currency instability, stablecoins provide vital access to dollar-denominated assets, offering businesses protection against local currency fluctuations.

Regulatory Clarity and the GENIUS Act

The GENIUS Act of 2025 represents landmark legislation establishing the first comprehensive federal regulatory framework for stablecoins in the United States. This pivotal law creates clear pathways for stablecoin issuance, imposes stringent reserve requirements, thus legitimizing these digital assets within the traditional financial system.

This regulatory shift echoes sentiments voiced by Federal Reserve Chair Jerome Powell, who emphasized that stablecoins can only function as part of the financial system if they are anchored in strong, coordinated oversight.

The GENIUS Act delivers on that principle, offering the dual federal and state licensing pathways that create the clarity institutional players have long demanded.

Federal and State Licensing Pathways

The legislation establishes dual licensing pathways for permitted payment stablecoin issuers. On the federal track, eligible entities include subsidiaries of insured depository institutions, nonbank entities approved by the Office of the Comptroller of the Currency (OCC), uninsured national banks, along with federal branches of foreign banks. Concurrently, state-level qualification remains available for issuers maintaining below $10 billion in outstanding stablecoins. This state pathway requires certification that the state's regulatory regime meets or exceeds federal standards through approval by the Stablecoin Certification Review Committee.

Reserve Requirements and Audit Standards

At the core of the GENIUS Act lies the mandate for 100% reserve backing with high-quality, liquid assets. Permitted reserve assets include US dollars, deposits at insured institutions, short-term Treasuries with maturities under 93 days, plus overnight Treasury repurchase agreements. Issuers must maintain these reserves on at least a one-to-one basis with their outstanding stablecoins.

Transparency requirements include mandatory monthly public disclosures detailing reserve composition. These reports must undergo examination by registered public accounting firms, coupled with CEO and CFO certifications attesting to their accuracy. Larger issuers with more than $50 billion in outstanding stablecoins must publish annual audited financial statements.

Impact on Non-bank Issuers and Banks

The GENIUS Act fundamentally reshapes the competitive landscape by enabling non-bank entities to issue stablecoins under federal oversight. Even so, public companies not primarily engaged in financial activities face additional hurdles, requiring unanimous approval from the Stablecoin Certification Review Committee.

For consumer protection, the legislation establishes a priority claim system whereby stablecoin holders' claims take precedence over all other creditors in insolvency scenarios. This provision creates a final backstop, effectively segregating reserve assets from bankruptcy estates.

As a result of this regulatory clarity, financial institutions now have well-defined pathways to enter the digital asset space through stablecoin subsidiaries, opening new funding channels alongside innovative customer service opportunities.

Risks and Challenges in Stablecoin Adoption

Despite their rapid adoption, stable coins face considerable challenges that could impede their integration into mainstream finance. These risks range from structural vulnerabilities to technical limitations and regulatory concerns.

Run Risk and De-pegging Events

The primary threat to stablecoins remains their vulnerability to runs, where large groups of investors simultaneously redeem holdings. The collapse of TerraUSD in May 2022 demonstrated how quickly a stablecoin can unravel. Similarly, USDC briefly de-pegged to $0.87 in March 2023 when Silicon Valley Bank collapsed with $3.3 billion of its reserves. Moody's calculated over 600 de-pegging events among large-cap stablecoins in 2022 and 2023. These events undermine the foundational promise of stable value.

Interoperability Across Blockchains

Technical constraints hinder seamless operation across different blockchain systems. Research from the New York Federal Reserve reveals surprisingly low price correlations (averaging just 0.381) between native stablecoins and their bridged representations across different blockchains. This fragmentation violates the Law of One Price, creating inefficiencies not present in traditional banking. Users often cannot combine balances across different stablecoin types or platforms, limiting practical utility.

Regulatory Fragmentation and Global Coordination

Divergent national approaches toward stablecoins threaten to fragment the global financial system. Countries have adopted starkly different policies, reflecting competing strategic interests yet hindering coordinated oversight. The Financial Stability Board notes that implementation of international recommendations remains at an early stage, creating risks of regulatory arbitrage.

BIS and ECB Concerns on Singleness and Integrity

The Bank for International Settlements argues that stablecoins fail three fundamental tests for sound money:

• Singleness: Stablecoins trade at varying exchange rates depending on the issuer
• Elasticity: Issuers cannot expand their balance sheets at will
• Integrity: As digital bearer instruments, stablecoins are vulnerable to misuse due to weak KYC compliance

The European Central Bank further warns that widespread adoption of dollar-based stablecoins could weaken monetary sovereignty and control over financial conditions.

Conclusion

Stablecoins have undoubtedly established themselves as a transformative force in the financial world. Their remarkable growth to a $255 billion market capitalization demonstrates their transition from cryptocurrency experiments to essential financial infrastructure. Wall Street giants now recognize the potential these digital assets offer beyond mere price stability.

The dual architecture of stablecoins—fiat-backed and algorithmic—provides different risk-reward profiles for investors. Fiat-backed options like USDT and USDC currently dominate, accounting for over 90% of the market. Their full reserve backing offers security that algorithmic alternatives still struggle to match, especially after the TerraUSD collapse highlighted inherent vulnerabilities.

Traditional financial institutions embrace stablecoins primarily because of three distinct advantages. First, they operate continuously without banking hours constraints, allowing instant settlement regardless of time zone or day. Second, their programmability through smart contracts enables automated financial transactions previously impossible with conventional currency. Third, they significantly streamline cross-border payments, reducing settlement times from days to minutes while cutting costs.

The passage of the GENIUS Act marks a watershed moment for stablecoin adoption. This comprehensive regulatory framework establishes clear federal and state pathways for issuance, mandates 100% reserve backing, and creates transparency requirements that legitimize these assets within the traditional financial system.

Challenges still exist, nonetheless. Run risks remain a genuine concern, as evidenced by multiple de-pegging events over the past three years. Technical limitations hinder seamless operation across different blockchain systems. Additionally, divergent regulatory approaches worldwide threaten to fragment the global financial landscape.

Looking ahead, stablecoins stand poised to reshape financial services fundamentally. The projected growth to potentially $1.2 trillion by 2028 suggests these digital assets will become increasingly integrated into everyday financial operations. Major corporations exploring stablecoin issuance signals broader acceptance beyond traditional financial institutions.

Stablecoins thus represent the intersection of traditional finance and blockchain technology—combining the stability of conventional currency with the efficiency and programmability of digital assets. Their continued evolution will likely bridge the remaining gaps between these two worlds, creating a more efficient, accessible financial ecosystem for both institutions and individuals alike.

Key Takeaways

Stablecoins have evolved from niche crypto assets to a $255 billion market that's reshaping how Wall Street thinks about digital finance and cross-border payments.

• Stablecoins offer 24/7 liquidity and instant settlement, eliminating traditional banking delays and freeing up trapped capital for institutions

• Major financial players like JPMorgan, Stripe, and BNY Mellon are entering the space, with projections reaching $1.2 trillion by 2028

• The GENIUS Act provides regulatory clarity with dual federal/state licensing pathways and mandates 100% reserve backing for legitimacy

• Smart contract programmability enables automated financial transactions impossible with traditional currency, creating new efficiency opportunities

• Despite growth potential, risks remain including run vulnerabilities, blockchain interoperability issues, and regulatory fragmentation globally

Wall Street's embrace of stablecoins signals a fundamental shift toward programmable money that combines traditional currency stability with blockchain efficiency, positioning these assets as critical infrastructure for the future of finance.

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