Stablecoins on the Rise: From Black Markets to Boardrooms

Beneath the vaulted arches of Istanbul’s Grand Bazaar, beyond the clamor of haggling merchants and bustling crowds, another form of commerce quietly unfolds. In dimly lit corridors, traders slip in and out of back rooms, exchanging bundles of dollars for digital assets. One such trader reveals that he moves millions daily—primarily in stablecoins, cryptocurrencies pegged to traditional assets, usually the U.S. dollar.

Unlike Bitcoin, the original cryptocurrency known for its volatility, stablecoins maintain a steady value. They are typically backed by cash or government bonds and operate on public blockchains. The largest stablecoin, Tether, remains consistently priced at $1, fluctuating only within a few hundredths of a cent. These digital assets are primarily used to facilitate cryptocurrency trades, acting as a stable bridge between more volatile tokens. However, their use is expanding beyond crypto markets. According to Chainalysis, a blockchain analytics firm, stablecoin transactions—including trading, payments, and transfers—totaled $27.6 trillion last year, accounting for 40% of all value settled on public blockchains, up from 20% in 2020.

This surge is partly due to the broader crypto boom, but stablecoins are also gaining traction in real-world applications. Migrants increasingly use them for remittances, bypassing costly and slow traditional banking systems. The Istanbul trader notes that Grand Bazaar shopkeepers prefer stablecoins for payments due to their speed and efficiency. In economies plagued by inflation and dollar shortages, stablecoins are emerging as a reliable store of value. A survey by Castle Island Ventures and Visa, covering stablecoin users in Turkey and four other emerging markets, found that nearly half use them to preserve their savings.

As their real-world utility expands, stablecoins have begun to diverge from the broader crypto market. According to Bernstein, a brokerage firm, their market capitalization is no longer tightly correlated with other cryptocurrencies (see chart). While the U.S. remains the largest stablecoin market—given their central role in crypto trading—Turkey leads in relative economic impact. In the year leading up to March 2024, stablecoin purchases in Turkey amounted to 4.3% of its GDP. Meanwhile, Ethiopia saw the fastest growth, with transactions under $10,000 nearly tripling in the year to June—suggesting significant use for remittances and daily transactions.

Tether dominates the space, accounting for 70% of stablecoin activity. Its issuer profits by investing its reserves, which currently stand at $113 billion. Of this, 72% is held in U.S. Treasuries, making rising yields a lucrative advantage. However, such dominance comes with risks. A loss of confidence in Tether could send shockwaves through the market, much like the collapse of Terra-Luna, an algorithmic stablecoin system, in 2022. If Tether were forced to liquidate its Treasury holdings quickly, it could disrupt mainstream financial markets.

Tether asserts that its model is secure, pointing to its resilience during the Terra-Luna crisis when it processed over $10 billion in redemptions in just two weeks while maintaining its dollar peg. However, concerns persist over its lack of transparency. Unlike its primary competitor, Circle (issuer of USDC), Tether does not undergo independent audits, making it difficult to verify whether its assets—including riskier holdings such as Bitcoin—adequately match its liabilities. Moreover, Tether does not disclose where its reserves are held. Credit rating agency S&P assigns Tether a risk rating of four out of five in terms of its ability to maintain its peg, whereas Circle’s USDC scores a safer two.

Regulators worldwide are tightening their grip. In January, European exchanges delisted Tether for failing to comply with the EU’s new crypto regulations. Paolo Ardoino, Tether’s CEO, has criticized these rules—particularly the requirement for stablecoins to hold 60% of their reserves in bank deposits, arguing that it exposes stablecoins to systemic banking risks. Despite this, Ardoino says Tether’s primary focus remains on emerging markets, where demand continues to rise.

Even in these markets, however, governments are growing wary. Tether is registered in El Salvador, a country whose pro-crypto president, Nayib Bukele, aims to position it as a global digital asset hub. Previously, Tether was based in the British Virgin Islands—jurisdictions known for their lenient oversight. A 2023 study by TRM Labs, a blockchain intelligence firm, found that Tether transactions accounted for a disproportionately high share of illicit activity. The stablecoin has been used by Iran and Russia to evade sanctions, while a UN report labeled it the "preferred choice" for Southeast Asian money launderers. Tether insists that it collaborates closely with law enforcement, freezing wallets linked to criminal activity and complying with official requests.

Regulatory scrutiny is increasing across the globe. Starting February 25, Turkey will require crypto exchanges to be licensed, implement anti-money-laundering controls, and verify users' identities. In response, platforms like Binance and KuCoin have scaled back their presence in the country. Meanwhile, Nigeria saw a 38% drop in stablecoin transaction volumes in the year to July after authorities revoked over 4,000 exchange licenses, blaming them for the naira’s depreciation.

In contrast, the United States may be signaling a lighter regulatory approach. In January, Donald Trump signed an executive order directing officials to draft a digital asset regulatory framework within six months, declaring his ambition to make America "the crypto capital of the planet." The order supports "lawful and legitimate dollar-backed stablecoins" as a means to reinforce the U.S. dollar’s global dominance.

Greater regulation isn’t necessarily bad for stablecoins. It could pave the way for mainstream financial adoption. Payments giant Stripe recently acquired Bridge, a startup focused on stablecoin infrastructure. Visa has built a platform to help banks issue their own stablecoins, with BBVA, Spain’s second-largest bank, set to be one of its first users—possibly for money transfers.

Stablecoins have already proven their utility in the back rooms of the Grand Bazaar. Their next challenge is to gain legitimacy in the offices of regulators and the boardrooms of Wall Street.