Stablecoins: Mechanisms, Applications, and Regulation

As a type of cryptocurrency designed to maintain a stable value, stablecoins have been attracting more and more attention over the last decade, particularly due to their low cost and high efficiency for cross-border payments and remittances. In recent months, stablecoins have made frequent headlines in global media as governments and regulatory bodies in several major economies, especially in the United States, advance efforts to establish clear legal frameworks for their use. This paper introduces the evolution, classification, mechanisms, and applications of stablecoins, including fiat-collateralized, commodity-backed, crypto-collateralized, and algorithmic stablecoins. The benefits of stablecoins used in cross-border transactions, decentralized finance (DeFi), and emerging markets, as well as the risks associated with depegging, regulatory uncertainty, lack of transparency for certain stablecoins, and systemic vulnerabilities, are discussed from the economic perspectives. This paper also clarifies common misconceptions and assesses the future outlook of stablecoins in the global financial landscape.