In the EU, the Markets in Crypto-Assets (MiCA) Regulation fully came into force on December 30, 2024; it covers cryptoasset issuance and services not covered by existing financial services and products regulation, and it includes stablecoins. While this legislation provides the regulatory clarity for which the industry has often asked, many industry players criticize it for being too onerous. By contrast, the US presidential election led to a sharp uptick in the price of Bitcoin and other cryptocurrencies; this reflects market participants’ expectation of a more lenient regulatory approach to the sector from the incoming US administration. We don’t know yet what will transpire in the US, but we do know — from the questions we get asked — that there’s a lot of confusion out there about what different terms mean and what the implications may be from a regulatory perspective, so here’s a quick reminder.

Cryptocurrencies (like Bitcoin) are speculative assets. There’s no backing asset and no issuer. Despite their name, they fail the test of what constitutes “money”: Their volatility means they’re not a store of value, they’re not a universally accepted means of payment, and they’re not a unit of account anywhere (quite the contrary — the value of cryptocurrencies is typically expressed in another currency such as USD, GBP or EUR).

Stablecoins come in many shapes and sizes, and the differences matter. Stablecoins were first created as an on-ramp to the cryptocurrency ecosystem, partly because the existing banking system cannot support the requirements for 24/7/365 funds transfer and partly because market participants wanted to keep their funds inside of the cryptocurrency world but without being exposed to the volatility of the actual cryptocurrencies. Most are pegged to the US dollar, but there are also stablecoins pegged to EUR, GBP, and other currencies. Stablecoins are still predominantly used within the cryptoasset ecosystem (including DeFi), but they’ve also taken on a wider role as a payment and value transfer mechanism. Unlike cryptocurrencies, most stablecoins have a backing asset to help them keep their value; in theory, holders of stablecoins should always be able to redeem their holdings at face value of the pegged currency (i.e., 1 USDC (Circle) should always be 1 USD; 1 USDT (Tether) should always be 1 USD, etc.). But all stablecoins are not created remotely equal. Here are the major different types of stablecoins you’ll encounter and the salient differences between them:

  • Deposit tokens. Strictly speaking, they don’t even belong here, as they are direct one-to-one representations of cash in an escrow account (i.e., cash that can’t be used for other purposes until the corresponding tokens are destroyed). Deposit tokens use the same type of distributed ledger technology (DLT) as cryptocurrencies and stablecoins but aren’t available on public blockchains. The best-known example is JPMorgan’s JPM Coin (now called Kinexys Digital Payments). Their value is in faster, more efficient business payments that help keep costs down and free up liquidity.
  • Fiat-backed stablecoins. This is the most prevalent form of stablecoin. But despite what some assume, “fiat-backed” doesn’t mean that the backing asset is cash. The backing asset of such stablecoins is typically a (small) proportion of cash, with the rest made up of Treasury bills (T-bills) and other assets that are regarded as cash-equivalent. If that sounds like a money market fund, that’s because the backing assets of many stablecoins are indeed managed like money market funds. Aside from MiCA, however, there are currently no rules regarding what constitutes a permissible backing asset. For example, should commercial paper be permitted? If so, what grade of commercial paper? And outside of MiCA’s reach, there are no reporting requirements (even though some, like Circle, voluntarily issue monthly attestations). This clearly has implications for redemption: Will you be able to get the same amount of hard currency back that you put in?
  • Commodity-backed stablecoins. As the name suggests, the backing asset for such coins is a commodity like gold or silver or possibly oil. Examples include PAXG (PAX Gold, regulated by the New York Department of Financial Services) and XAUt (Tether Gold). Theoretically, such stablecoins could be collateralized against any fungible commodity, but so far, none of those attempts have gained any meaningful traction.
  • Crypto-collateralized stablecoins. Again, the name speaks for itself: The backing asset for such cryptocurrencies is other cryptocurrencies such as Bitcoin or Ether. In theory, the value of the coin should be kept close to that of a hard currency (usually USD). Given that the underlying currencies are often highly unstable, such crypto-collateralized coins are typically overcollateralized, using algorithms to manage ratios.
  • Algorithmic stablecoins. Also known as noncollateralized stablecoins, there’s no backing asset of any kind, as the name implies; algorithms decide whether the supply should go up or down to maintain an exchange value of one hard currency unit (usually USD). What could possibly go wrong? See the Terra LUNA crash of May 2022, which wiped out $50 billion in valuation and caused lots of small investors to lose all of their savings.

CBDCs (central bank digital currencies). These are included here because we’re occasionally asked about “bank-issued cryptocurrencies.” Central banks don’t issue cryptocurrency; they issue fiat money — but any bank could, with regulatory permission, issue fiat-backed stablecoins. But that’s not what we’re talking about here: CBDCs are issued by a country’s or currency bloc’s central bank. They come in two forms: wholesale (for use between banks and other financial institutions) and retail or general (for use by individuals and businesses). The public focus has been mainly on retail CBDCs, which banks started investigating a while ago in reaction to declining cash use. Apart from in China and India, CBDCs in major economies remain at the investigation or design phases, and it’s not always clear what need they will actually meet. Whether or not a CBDC uses DLT is a matter of technical choice, not a foregone conclusion.

Listen to my conversation with my colleagues Peter Wannemacher, Laura Koetzle, and Keith Johnston on this week’s episode of the What It Means podcast.