Under the Global Regulatory Wave: Compliance Risks and Breakthrough Path of Stablecoins

The year 2025 will be a watershed in the development of stablecoins, as global regulatory frameworks accelerate implementation and continue to improve, with the former "grey areas" being clearly defined within regulatory scope.

This market, worth over $250 billion, is undergoing the growing pains and transformation from barbaric growth to Compliance.

The core definition, classification, and importance of stablecoins

(1) Core Definition of Stablecoin: A stablecoin is a special type of cryptocurrency, with the core goal of maintaining value stability (as opposed to cryptocurrencies like Bitcoin and Ethereum that aim for price growth). It achieves value anchoring by being pegged to fiat currencies, commodities, or other crypto assets, or by relying on algorithms, providing a value benchmark for the highly volatile digital asset market.

Stablecoins essentially act as a "bridge asset" connecting the traditional financial world with the cryptocurrency digital world. They inherit the technological advantages of cryptocurrencies (such as globality, 24/7 operation, programmability, and peer-to-peer transmission) while possessing the value stability of traditional fiat currencies, currently supporting the circulation of trillions of dollars within the crypto ecosystem each month.

(2) Types of stablecoins Based on different anchoring mechanisms, stablecoins are mainly divided into three categories:

1. Fiat-backed stablecoin: Pegged 1:1 to fiat currencies (such as the US dollar), the reserve assets are mostly low-risk assets like cash and short-term government bonds. Typical representatives are USDT (issued by Tether) and USDC (issued by Circle), with the core risk being the authenticity and transparency of the reserve assets.

2. Crypto-collateralized stablecoins: These are over-collateralized with other crypto assets (collateralization rates usually exceed 150%) and maintain stability by automatically adjusting the collateralization rate through smart contracts. A typical representative is DAI (issued by MakerDAO), and the core risk lies in the liquidation risk triggered by a sharp decline in the price of the collateral assets.

3. Algorithmic stablecoins: They rely on algorithms to adjust supply and demand (such as minting new coins and destroying old coins) to maintain price, with a typical case being the collapse of UST in 2022. The core risk lies in the "death spiral" that occurs after the failure of the algorithmic mechanism (a vicious cycle: price decline leads to panic, panic triggers sell-offs, sell-offs further lead to price declines, until the system collapses).

(3) The Importance of Stablecoins The importance of stablecoins is specifically reflected in the following four core functions:

1. The most original and fundamental functions of stablecoins are as a "medium of exchange," "measure of value," and "safe haven" in the cryptocurrency ecosystem. In cryptocurrency trading, the vast majority of trading pairs (such as BTC/USDT, ETH/USDC) are priced in stablecoins (measure of value), rather than the highly volatile Bitcoin or Ethereum. This provides investors with a clear standard of value measurement, avoiding the confusion of measuring volatile assets with other volatile assets.

When the market experiences severe volatility or uncertainty, traders can quickly exchange their high-risk assets like Bitcoin and Ethereum for stablecoins (such as USDT and USDC) to hedge against risks, lock in profits, or temporarily exit the market, without needing to completely withdraw their funds from the crypto ecosystem (exchanging back to fiat currency is usually time-consuming and expensive). This greatly enhances capital efficiency and market liquidity.

2. Stablecoins demonstrate low cost, fast speed, and strong financial inclusion characteristics in global payments and remittances. Stablecoins leverage blockchain technology, bringing revolutionary changes to cross-border payments and remittances. Compared to traditional bank wire transfers (which may take several days and incur high fees), stablecoin transfers can be completed within minutes at extremely low fees, unaffected by business days and time zones.

In addition, stablecoins provide access to the global financial system for billions of people worldwide who do not have bank accounts but can access the internet; all they need is a digital wallet to receive and hold stable-value assets.

3. Stablecoins are the lifeblood of decentralized finance (DeFi). Without stablecoins, the prosperity and development of DeFi would be hard to imagine. Almost all lending, trading, and derivatives protocols use stablecoins as their underlying assets. For example, in lending protocols like Aave and Compound, users deposit large amounts of stablecoins such as USDC and DAI to earn yields or borrow stablecoins for other investment operations. The interest rate market is largely built around stablecoins.

In MakerDAO, the DAI stablecoin is the core output of the entire protocol, where users generate DAI by over-collateralizing other crypto assets, thus transforming volatile assets into stable assets. On decentralized exchanges (DEX) such as Uniswap and Curve, stablecoin trading pairs (like USDT/USDC) often have daily trading volumes exceeding $1 billion, serving as the foundation for all trading activities.

4. Stablecoins are the "catalyst" for the digital transformation of traditional finance (TradFi). The preferred tools for traditional financial institutions and large enterprises exploring blockchain applications are stablecoins. Stablecoins provide the lowest-risk and most familiar entry point for them to enter the crypto market. Currently, the most promising direction is RWA (real-world asset tokenization), where stablecoins serve as the core settlement tool, facilitating the "tokenization" of traditional assets such as stocks, government bonds, and corporate bonds, and enabling trading on the blockchain, creating new investment opportunities.

When talking about stablecoins, compliance must be mentioned. In May 2022, the algorithmic stablecoin UST and its sister token Luna spiraled into a collapse within days, with over $40 billion in market value evaporating instantly.

This disaster is not an isolated case; it is like a giant stone thrown into the cryptocurrency lake, whose ripples profoundly reveal the cracks beneath the surface of stablecoin prosperity: it exposes the fatal flaws of the algorithmic mechanism, raises market doubts about the adequacy of stablecoin reserve assets, and sounds the highest alarm for global regulatory agencies. Stablecoins are far more than just a "non-volatile cryptocurrency."

It is the infrastructure of the crypto economy, a new paradigm for global payments, and a strategic bridge connecting two parallel financial worlds. Its importance makes its Compliance, transparency, and robust operation not just an industry issue, but a global topic related to the stability of the entire financial system, which is the fundamental reason why global regulatory agencies are now paying high attention to it.

The scale of major stablecoins (such as USDT and USDC, which together account for over 85% of the global market) and their interconnection with the traditional financial system have reached a level of "systemic importance," and their risks may transmit to traditional finance, approaching the critical point of "Too Big to Fail." This determines that compliance is not an "option," but a "prerequisite for survival."

The three core reasons are as follows:

1. Preventing the transmission of systemic risks. The collapse of a major stablecoin (such as USDT) will no longer be limited to the crypto market. Due to its holdings by numerous traditional hedge funds, publicly traded companies, and payment companies, its failure would trigger a domino effect, leading to large-scale liquidations of on-chain DeFi protocols and quickly spreading to traditional financial markets such as stocks and bonds through institutional investors, potentially triggering a global liquidity crisis. Compliance reserve asset audits and redemption guarantees are the first line of defense to prevent this domino from falling.

2. The global, quasi-anonymity of stablecoins in blocking illegal financial activities (on-chain addresses are traceable, but user identities are not directly linked) and their peer-to-peer transfer characteristics make them highly susceptible to use in money laundering, terrorist financing, and evading sanctions. In 2023, the global scale of illegal transactions involving stablecoins reached $12 billion, with over 60% flowing to cross-border sanctioned regions. Without strict Compliance requirements for KYC (Know Your Customer), KYT (Know Your Transaction), and sanction screening, this efficient financial highway will become a perfect tool for criminals, leading to severe regulatory crackdowns by sovereign nations.

3. Maintaining currency sovereignty and financial stability The widespread use of US dollar stablecoins in emerging markets (such as over 20% of cross-border trade settled in USDT in Argentina and Turkey) effectively executes a form of "shadow dollarization" when privately issued US dollar stablecoins are widely adopted in overseas markets (where people spontaneously use the US dollar instead of their own unstable currency for saving and trading). This erodes the currency sovereignty and the effectiveness of monetary policy in other countries.

For the United States itself, if unregulated stablecoins are widely used for payments, their potential run risk may threaten domestic financial stability. Therefore, compliance is no longer an option for the industry but a necessary requirement to maintain national financial security. Discussing stablecoins inevitably involves compliance because their "infrastructure" attributes determine that they can no longer enjoy the "gray area" benefits that early cryptocurrencies had.

Compliance is no longer a shackle that binds its development, but rather a license for entry and an anchor of trust for whether it can be accepted by the mainstream financial system and whether it can continue to survive. The global wave of regulation is not intended to stifle innovation, but rather to try to rein in this runaway wild horse before it’s too late, guiding it toward a transparent, stable, and responsible future. The main compliance risks faced by stablecoins.

(1) Legal qualification risk - regulatory recognition differences leading to compliance
The rising regulatory costs have led to differences in the classification of stablecoins across different jurisdictions:

1. U.S. regulators are still debating whether stablecoins should be classified as securities, commodities, or currency transmission tools.

For example: The SEC (U.S. Securities and Exchange Commission) tends to classify asset-backed stablecoins issued based on specific projects as securities, while the CFTC (U.S. Commodity Futures Trading Commission) believes they may fall under commodities, and the OCC (Office of the Comptroller of the Currency) allows banks to issue "payment stablecoins." The overlapping regulations lead issuers to simultaneously meet multiple sets of Compliance requirements.

2. The EU MiCA legislation classifies stablecoins into "e-money tokens" (which are pegged to a single fiat currency, such as USDC) and "asset-referenced tokens" (which are pegged to multiple types of assets). The former must comply with e-money regulatory requirements, while the latter must additionally submit a risk reserve scheme.

3. The Hong Kong "Stablecoin Regulation" regards stablecoins as a type of payment tool that requires strict regulation (focusing on stablecoins as a store of value and medium of payment), rather than as securities or other types of assets. This qualitative uncertainty, along with the possibility that regulatory agencies (such as the SEC and CFTC in the United States, or regulators in the European Union) may suddenly introduce a set of strict new regulations and deem existing models non-compliant, will result in significant compliance complexity and costs for stablecoin issuers.

(2) Reserve Asset Risk - Lack of Transparency Can Trigger a Run on the Bank The authenticity, adequacy, and transparency of reserve assets are the core challenges faced by stablecoins. The industry currently faces three major issues:

1. Insufficient reserve assets. In 2019, it was revealed that Tether (USDT) was only 74% backed by real assets, despite the company's long-standing claims of full collateralization. As of Q3 2024, Tether disclosed that over 60% of its reserves are in short-term government bonds, but it is still questioned due to the lower frequency of audits (once per quarter) compared to USDC (once per month). As of now, Tether has also changed to releasing its reserve reports at least monthly and typically provides daily updated reserve data.

2. Assets are not in compliance. Some small stablecoins invest their reserve assets in high-risk areas (such as stocks and crypto assets). In 2023, a certain stablecoin suffered a 30% drop in reserve assets, triggering a depegging.

3. Insufficient disclosure. Only 30% of stablecoin issuers disclose the specific custodial institutions and details of their reserve assets (2024 Crypto Industry Report), making it difficult for investors to verify the authenticity of the assets.

According to the US GENIUS Act, Hong Kong's stablecoin regulations, and other new rules, reserve assets must be 100% cash, short-term government bonds, or other highly liquid assets, and must be audited daily. Issuers must meet strict capital, liquidity, and disclosure requirements. Lack of transparency or insufficient reserve assets can directly trigger a run on the assets, leading to de-pegging. Issuers will face hefty fines from regulators, suspension of operations, and even criminal charges.

(3) Anti-Money Laundering and Counter-Terrorism Financing (AML/CFT) Risks – A Major Area for Regulatory Penalties. Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) are key focuses of regulatory attention. The price stability and global accessibility of stablecoins make them an attractive tool for money laundering and evading sanctions.

Unlike volatile cryptocurrencies, stablecoins allow bad actors to maintain asset value while transferring funds. Regulations now require strict KYC (Know Your Customer), KYT (Know Your Transaction), and reporting of suspicious transactions (such as frequent small transfers aggregation, large cross-border transfers, and other suspicious activities) procedures, and violations of AML/CFT regulations will incur the most severe penalties and seriously damage reputation.

(4) Market Integrity Risks - Weak Points in Investor Protection The stablecoin market has two core integrity risks that directly harm investor rights: market manipulation and false statements. Large amounts of stablecoins may be used to manipulate the prices of Bitcoin or other crypto assets.

Misleading publicity or insufficient information disclosure regarding reserve assets and algorithmic mechanisms can also mislead investors. Regulatory requirements are now stricter, aimed at ensuring that investors do not suffer losses due to inadequate information.

(5) Systemic Risk - Potential Threats to Financial Stability Systemic risk is the primary concern of financial authorities. DeFi protocols hold billions in stablecoins, and even if a major issuer encounters problems, it could trigger a series of liquidations throughout the entire ecosystem.

Imagine the domino effect: a major stablecoin crashes, lending protocols using it as collateral start to fail, and users staking their tokens suffer significant losses. Soon, the shockwaves will spread to traditional financial institutions that have begun to integrate cryptocurrency technology, and this chain reaction could be devastating.

(6) Sanction Compliance Risks - The Challenges of Global Operations in Stablecoin Issuance Face Sanction Compliance Requirements from Multiple Countries and Regions, with Core Challenges Including:

1. Differences in sanctions lists. The sanctions lists of OFAC (Office of Foreign Assets Control of the U.S. Department of the Treasury), the European Council, and the UN Security Council overlap but are not fully consistent. For example, a certain entity may be sanctioned by OFAC but not by the EU, requiring targeted screening rules to be set.

2. On-chain address screening. Smart contract addresses may also be included in the sanctions list. For example: "Some issuers use on-chain address blacklist systems (such as Circle's USDC freezing assets of OFAC-sanctioned addresses), and smart contracts have built-in sanction screening modules to prevent stablecoin from flowing into sanctioned addresses, achieving real-time Compliance. 3. Decentralized contradictions.

Some decentralized stablecoins find it difficult to forcibly freeze sanctioned addresses' assets, facing the challenge of balancing compliance and decentralization. The complexity of global compliance requires meeting different sanctions lists and requirements from multiple countries simultaneously. Stablecoin issuers must find a balance between technological innovation and compliance obligations, which also means increased operational costs and compliance difficulty.

(7) Cross-border and Jurisdictional Risks - The End of Regulatory Arbitrage Regulatory arbitrage (the practice of exploiting differences and loopholes in regulatory rules between different countries or regions to conduct business in the most lenient and cost-effective locations, thereby avoiding strict regulation) is a real issue in the stablecoin market. Project teams may choose to register in regions with lenient regulations, but their users are spread globally.

This has created a "hellish" compliance dilemma: the need to comply with the different laws of hundreds of jurisdictions simultaneously, which is extremely difficult to operate. The inconsistencies and even conflicts in regulatory policies between different countries leave issuers at a loss. Global regulatory trends show that major jurisdictions around the world are actively taking action and have included stablecoins in their regulatory frameworks:

(1) US Regulatory Framework The United States has adopted a multi-regulatory structure (SEC, CFTC, OCC, Treasury Department). The GENIUS Act allows non-bank entities (NBEs) and insured depository institution (IDI) subsidiaries to act as issuers. The Act emphasizes the redemption process, requiring issuers to establish clear redemption policies and procedures to ensure stablecoin holders can redeem in a timely manner. However, the Act does not mandate that stablecoins maintain par value in the secondary market, where most trading takes place.

(2) The EU's MiCA Framework The EU's Markets in Crypto-Assets Regulation (MiCA) establishes a comprehensive and strict regulatory framework for stablecoins, including licensing requirements, reserve asset requirements, and holder rights. MiCA categorizes stablecoins into two types: "e-money tokens" and "asset-referenced tokens," and imposes different regulatory requirements on both, aiming to ensure that regulation is commensurate with the level of risk.

(3) China's Dual Regulation China has adopted a unique dual regulation for stablecoins: the issuance and trading of stablecoins are strictly prohibited on the mainland, while a comprehensive regulatory system is implemented in Hong Kong. The Hong Kong "Stablecoin Ordinance" will officially come into effect in August 2025, requiring 100% reserve asset segregation, with reserve assets needing to be highly liquid assets such as cash, US dollars, or Hong Kong government bonds.

The Hong Kong Securities and Futures Commission also requires that funds be custodied by licensed banks in Hong Kong, with daily audits to ensure the ability to redeem the next day. This prudent regulatory approach aims to make Hong Kong a global center for digital asset innovation.

(4) International Regulatory Trends of Organizations - Promoting Global Unified Regulatory Standards The Financial Stability Board (FSB) and the Bank for International Settlements (BIS) are developing global unified regulatory recommendations for stablecoins, aimed at preventing regulatory arbitrage and ensuring global financial stability. In July 2023, the FSB released the "Global Regulatory Framework for Crypto Asset Activities", requiring stablecoin issuers to meet four core requirements: "adequacy of reserve assets, transparency of redemption mechanisms, anti-money laundering compliance, and systemic risk prevention."

The Basel Committee on Banking Supervision (BCBS) has recently revised the "Prudential Treatment of Crypto Asset Risk Exposures" standards in 2024, which will officially take effect on January 1, 2025. It proposes a stricter and more prudent global unified framework for the risk management of banks holding crypto assets (including stablecoins), aiming to address the risks posed by crypto assets while maintaining financial stability.

Compliance Path: A Guide for Issuers and Investors

(1) Issuer: Building a comprehensive Compliance system for stablecoin issuance faces multidimensional challenges and requires the establishment of a comprehensive compliance system from four dimensions: embracing regulation, reserve asset management, technical compliance, and risk prevention.

1. Actively embrace regulation. Prioritize applying for licenses in regions with clear regulations (such as the United States, European Union, Hong Kong), and communicate regularly with regulatory authorities to avoid compliance raids.

2. Standardize reserve asset management. Strictly allocate reserve assets in accordance with regulatory requirements (such as 100% cash + short-term government bonds), select leading custody institutions (such as HSBC Hong Kong), and have qualified accounting firms issue regular reserve asset audit reports, publicly disclose reserve asset details (including custody account information and asset type proportions).

3. Strengthen the technical compliance system. Invest resources to build a first-class AML/KYC and sanctions screening system, for example: leading issuers often adopt a combined model of "on-chain transaction tracking + offline identity verification" (such as USDC requiring large users to complete facial recognition + address tracing). At the same time, integrate third-party compliance tools like Chainalysis to achieve KYT screening for cross-chain transactions. In terms of cybersecurity risks, it is necessary to guard against cyber attacks that could lead to asset theft, loss of private keys, blockchain network failures, smart contract code vulnerabilities, network forks, and so on.

4. Improve risk prevention and control. Regularly conduct stress tests (such as simulating a scenario where 10% of users concentrate on redemption), reserve asset liquidity must meet the requirement of covering 100% redemption demand within 30 days, establish a risk reserve fund (not less than 2% of the issuance scale) to respond to sudden de-pegging risks, and develop emergency plans (such as a limited redemption mechanism when reserve assets are insufficient).

(2) Investors: Establishing a Risk Screening Framework Investors should conduct comprehensive due diligence and gain an in-depth understanding of the issuer's qualifications, licensing, reserve asset composition, audit history, and compliance status before researching any stablecoin project. Preferring compliance targets is key to reducing risk, and investors should prioritize stablecoins like USDC that are backed by highly liquid assets and are more transparent, rather than projects that lack transparency.

Most importantly, investors must recognize the risks and understand that "stability" is relative and not risk-free. Even fully collateralized stablecoins face counterparty risk, regulatory risk, and technological risk. Future outlook: Trends and challenges in the development of stablecoins.

(1) The Development Trend of Stablecoins Global regulation is reshaping the landscape of stablecoins, but the true anchor of stability comes not only from legal compliance but also from technological transparency and market confidence. Stablecoins driven by compliance will exhibit the following trends:

1. Industry differentiation intensifies, compliance becomes the core competitive advantage. For stablecoin projects, compliance is no longer an option but a manifestation of core competitiveness. Projects that can proactively embrace regulation, achieve extreme transparency, and build a strong compliance system (such as Circle, the issuer of USDC) will gain institutional trust and market share.

On the contrary, those projects that attempt to linger in the gray area, with opaque reserves and ambiguous Compliance, will continue to face regulatory scrutiny and sudden risks, and their survival space will be constantly squeezed. The wave of global regulation is pushing stablecoins from the "Wild West" era into a new stage that is institutionalized, transparent, and highly compliant.

2. Regulatory trends are moving towards a global unified regulatory standard. There are still key gaps in global stablecoin regulation, but the core standards are unified globally. Regardless of regional differences, the three major requirements have become the universal standards for global regulation: adequacy of reserve assets (100% high liquidity assets collateral), transparency of redemption mechanisms (clear T+1 or T+0 redemption processes), and full compliance with AML/CFT (KYC/KYT covering all users).

For example: The U.S. GENIUS Act, the EU Mica, and Hong Kong's stablecoin regulations, although differing in their licensing application processes and penalty standards, all strictly require these three points, preventing issuers from exploiting regulatory arbitrage by taking advantage of regional policy loopholes.

3. The application scenarios of stablecoins extend to the real economy. With the acceleration of the tokenization of traditional real-world assets (RWA) such as stocks, bonds, and real estate, stablecoins will become the preferred settlement tool for RWA transactions due to their stable value and compliance transparency. As a tool for cross-border payments, stablecoins have achieved cost reduction and efficiency enhancement.

Currently, emerging markets such as Southeast Asia and Latin America have become the core scenarios for stablecoin cross-border payments, and in the future, they will extend to areas such as corporate cross-border trade, supply chain finance, and payroll distribution.

4. The regulatory requirements for asset reserve conservatism state that reserve assets must be high-quality liquid assets such as cash and short-term government bonds. This will force issuers to abandon high-risk investment strategies and shift towards more transparent and safer models.

(2) Challenges of Stablecoins Despite a favorable landscape, stablecoins driven by compliance still face significant challenges:

1. The redemption mechanism connection is missing. Currently, most regulations focus on primary market redemptions (direct redemptions by issuers), but the stabilization mechanism in the secondary market (exchange market) is still lacking, and it is necessary to clarify the response rules when the secondary market becomes unpegged.

2. Technical standards are not unified. Standards at the technical level, such as smart contract security, cross-chain transaction compliance, and data privacy protection, have not yet been globally unified, which may lead to technical compliance barriers.

3. Challenges to Financial Sovereignty. Large-scale stablecoins may affect the transmission efficiency of national monetary policy and financial sovereignty. If stablecoins are deeply interconnected with the main financial system, their failure could trigger broader financial turmoil. Conclusion: The future is here, and Compliance is no longer an option, but the cornerstone of survival.

Whether it is the issuer or the investor, only by actively embracing regulation, strengthening risk control, and enhancing transparency can they remain undefeated in this transformation. The ultimate goal of stablecoin has never been to replace fiat currency, but to become a stable and efficient light in the financial infrastructure of the digital age.

This road is destined to be long and full of challenges, but it is precisely these challenges that drive stablecoins towards a more mature, inclusive, and sustainable future. What we are witnessing is not just an evolution of technology, but also an evolution of financial civilization.