Stablecoin Regulation: Market Development, Risks, and Potential
Jul 24, 2025
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17 min read
Contents
Stablecoin regulation has quickly become one of the most important and confusing topics in fintech compliance. With stablecoins now widely used for payments, trading, and global transfers, regulators in the US and around the world are racing to catch up. But for fintech founders, lawyers, and compliance teams, understanding what actually applies isn’t always clear.
This article breaks down what stablecoin regulation looks like today, where it may be heading, and what it means in practice. We’ll cover how stablecoins are used, the risks they pose, how regulators are responding, and specific compliance issues fintech teams must manage.
Whether you’re issuing stablecoins, building payments infrastructure, or simply integrating them into your product, this guide will help you understand stablecoin regulation with clarity. But first…
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013. If you need assistance with compliance or fintech regulations, click here.
What Is a Stablecoin?
A stablecoin is a type of cryptocurrency designed to maintain a consistent value, usually by “pegging” (equating) to a fiat currency like the US dollar. Unlike other crypto assets, stablecoins aim for price stability rather than price appreciation.
The most common stablecoins are backed by reserves such as cash, Treasury bills, or other liquid assets. Some are issued by regulated financial institutions, while others operate with far less oversight.
Then, we have the algorithmic stablecoins, which attempt to maintain their value using software rules and economic incentives rather than reserves. But these have a history of failure and are viewed skeptically by regulators.
In practice, stablecoins function like digital cash. Their popularity has grown because they offer the speed of crypto without the volatility. In turn, they’re used within crypto ecosystems as:
Payments
Transfers
Trading
A store of value
But despite the name, stability isn’t automatic, and not all stablecoins are created equal. That’s where regulation comes in.
How Stablecoins Are Used In Fintech
Stablecoins started as a crypto-native solution for moving money quickly between exchanges. But over time, their use cases have expanded well beyond trading.
Today, fintech companies use stablecoins to build products that offer faster settlement, lower transaction costs, and cross-border functionality. That includes use cases like:
Peer-to-peer transfers
Merchant payments and checkout tools
On/off ramps for crypto platforms
Remittance and payroll solutions
Embedded finance in apps or platforms
For early-stage startups, stablecoins offer an accessible alternative to traditional banking rails. You don’t need to wait days for an ACH settlement or build around banking hours. Transactions happen quickly and around the clock.
Some companies also use stablecoins behind the scenes for:
Treasury management
Holding USD equivalents in volatile regions
Simplifying global payouts
That flexibility is a big draw. But it’s also what makes stablecoins tricky from a regulatory standpoint. If you’re handling customer funds, enabling transfers, or integrating with wallets, stablecoin regulation probably applies. Even if your platform never converts tokens back to fiat, you likely fall under the mandates of stablecoin regulations.
Why Regulators Care About Stablecoins
Stablecoins may look like a payment infrastructure. But from a regulatory standpoint, they raise a mix of banking, securities, and money transmission questions. That’s why they’re getting attention from nearly every financial regulator in the US and abroad.
Regulators consider stablecoins a potential risk to both consumers and the financial system. The core concerns include:
Run risk: If users lose confidence in a stablecoin’s backing, redemptions could spike, and reserves may not be sufficiently liquid to meet demand.
Illicit finance: Without strong anti-money laundering (AML) controls, stablecoins can be misused for money laundering, terrorist financing, or sanctions evasion.
Consumer confusion: Many users assume stablecoins are as safe as bank deposits, even though most are not insured or overseen by banking regulators.
Market impact: Large redemptions or poor reserve management could disrupt short-term funding markets if assets like Treasuries are sold in bulk.
Regulatory gaps: Stablecoins often fall between existing rules, which makes oversight fragmented and inconsistent.
As stablecoins move closer to mainstream use through partnerships with banks, payment processors, or large consumer apps, regulators are under pressure to set clear expectations. They want stablecoins to be safe, transparent, and not introduce new risks to the financial system.
For fintech teams, this means one thing: if your product uses or interacts with stablecoins in any meaningful way, you’re likely to fall under some form of regulatory scrutiny. The challenge is knowing which rules apply and how to build around them.
This is where specialized compliance support matters. At InnReg, we work with fintech companies to tackle complex product models, including those involving stablecoins. Our team helps map regulatory exposure across multiple regimes and build workflows that hold up under scrutiny without slowing down innovation.
Key Risks Driving Stablecoin Regulation
Stablecoin regulation is largely driven by risk. When regulators look at stablecoins, they’re asking: What happens if this fails? Who gets hurt? What systems are affected? The risks aren’t theoretical. They’ve already played out in real-world scenarios, and regulators have taken notice.
Reserve and Redemption Risk
The biggest concern is whether a stablecoin can be redeemed 1:1 for fiat, especially during market stress. If users rush to cash out and the reserves aren’t available or liquid, the peg can break. That’s exactly what happened with TerraUSD, where billions were wiped out in a matter of days.
Even stablecoins backed by assets can face redemption pressure. If reserves are held in risky or opaque instruments, user confidence evaporates quickly. Without strong reserve practices and transparency, the system can’t hold up.
Liquidity and Market Disruption
Stablecoins often hold reserves in short-term instruments like Treasury bills. If redemptions spike, issuers may need to liquidate those assets quickly, potentially disrupting money markets.
In a stressed environment, that kind of selloff could amplify volatility. Regulators view this as a potential systemic risk, especially as stablecoin adoption grows.
AML and Illicit Finance Concerns
Stablecoins can move value quickly across borders and with limited friction. That makes them attractive for legitimate use cases and for bad actors.
If a platform enables stablecoin transfers without strong KYC, monitoring, and reporting, it may be exposed to money laundering or sanctions evasion risks. Regulators have already signaled that the same AML rules apply here, even if the tools look different.
Consumer Protection and Misrepresentation
Users often assume a stablecoin is “backed” or “safe” just because it holds its peg. But not all stablecoins are equal. Some issuers disclose reserves and audits. Others don’t.
Without clear disclosures and redemption policies, users may not understand what they’re holding or the risks involved. That creates room for regulatory scrutiny, especially if language used in marketing is misleading or overconfident.
Systemic and Monetary Policy Impact
At scale, stablecoins could shift how money flows through the system. They might pull deposits away from traditional banks, affecting credit markets. Or they might become so widely used that a failure triggers broader financial instability.
This is why central banks, the Financial Stability Oversight Council (FSOC), and international bodies like the Financial Stability Board are now actively monitoring the space. The bigger stablecoins get, the more systemic their risk becomes.
How Stablecoin Regulation Works in the US
Stablecoin regulation in the US is still evolving. Right now, there’s no single law or agency that governs all stablecoin activity. Instead, it’s a patchwork of federal guidance layered on top of crypto licensing frameworks, with new legislation in progress.
For fintech teams, this means your regulatory exposure depends heavily on how your product is structured. Are you issuing a stablecoin? Holding reserves? Facilitating transfers? Each activity may trigger different rules.
The Current Legal Patchwork
Most stablecoins in the US today operate under a mix of state money transmitter licenses and federal guidance. That includes supervision from:
State regulators, who issue licenses and set operating requirements
FinCEN, for AML compliance
SEC or CFTC, if your product starts to resemble a security or commodity
Federal banking regulators, if your structure involves deposit-taking or reserve custody
At the federal level, two major legislative proposals are currently shaping the future conversation around stablecoin regulation, with one now signed into law (the GENIUS Act) and the other—Clarity for Payment Stablecoins Act—still under debate.
1. Clarity for Payment Stablecoins Act
This bill, introduced in the US House, focuses on creating a clear federal framework for stablecoin issuers. It would:
Require 1:1 reserves held in high-quality liquid assets
Limit who can issue payment stablecoins (e.g., banks or licensed entities)
Establish clear redemption rights for users
The goal is to establish standards that safeguard users without stifling innovation. It also aims to clarify what qualifies as a “payment stablecoin” and what doesn’t.
2. GENIUS Act and Other Federal Proposals
Signed into law in July 2025, the GENIUS Act establishes the first comprehensive federal framework for stablecoin regulation in the United States. It requires stablecoin issuers to maintain 1:1 reserves in high-quality liquid assets, undergo regular audits, and meet strict disclosure standards.
The law also places large stablecoin issuers under Federal Reserve supervision, treating them similarly to systemically important financial institutions. This means that companies operating at scale must now comply with federal oversight, a shift that will likely affect their product design, reserve strategy, and compliance workflows.
Now that a federal law has been enacted, it will likely reshape how fintechs handle stablecoin compliance.
State Licensing and Money Transmitter Laws
In the US, money transmission is regulated at the state level. If your business involves receiving, holding, or transferring value on behalf of users (including stablecoins), you may need a money transmitter license in every state where you operate.
This applies whether you're issuing stablecoins or simply moving them between users.
Each state has its own rules, definitions, and thresholds. Some states treat stablecoins explicitly as monetary value. Others apply general money transmission rules and interpret stablecoin activity on a case-by-case basis.
Here’s what that means for fintech companies working with stablecoins:
You may need 30-50 separate licenses to operate nationally, depending on your business model and whether certain exemptions apply.
Licensing can take 12-24 months, depending on your structure and your team’s regulatory readiness.
Ongoing requirements include net worth thresholds, bonding, reporting, audits, and examiner access.
Some stablecoin issuers choose to operate under a New York limited-purpose trust charter or similar structures in states like Wyoming or Texas. Others partner with licensed entities to avoid direct licensing, though that comes with its own operational and risk management requirements. For fast-moving startups, this patchwork creates delays, costs, and uncertainty.
Even if federal legislation is passed, some state-level oversight will likely remain, especially for smaller or regionally focused stablecoin platforms. Founders should treat state licensing as a core part of their regulatory strategy.
InnReg supports fintech teams by leading multi-state licensing efforts, helping clients manage regulator questions, set up required compliance policies, and coordinate filings across jurisdictions.
See also:
FinCEN and AML Obligations
Any fintech business that deals with stablecoins must consider how US AML laws apply. That starts with FinCEN: the Financial Crimes Enforcement Network.
FinCEN treats stablecoins as a form of “convertible virtual currency.” That means most platforms handling stablecoins are classified as money services businesses (MSBs) under the Bank Secrecy Act.
If you're receiving, transmitting, or exchanging stablecoins on behalf of users, here’s what typically applies:
Register with FinCEN as an MSB
Maintain a written AML compliance program
Designate a compliance officer
Conduct customer due diligence (CDD/KYC)
Implement transaction monitoring and file Suspicious Activity Reports (SARs)
FinCEN has also made it clear that AML rules apply even if your platform never touches fiat. If you’re moving stablecoins between wallets, you're in scope.
One challenge is adapting traditional AML tools to blockchain-based flows. You’ll likely need blockchain analytics software to trace funds and identify high-risk activity. You’ll also need internal workflows that flag patterns across wallets, not just customer accounts.
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SEC, CFTC, and Securities/Commodities Issues
Stablecoins don’t always fit neatly into regulatory categories, but that hasn’t stopped the Securities and Exchange Commission (SEC) and Commodity Futures Trading Commission (CFTC) from asserting jurisdiction when they believe the line has been crossed.
The SEC typically gets involved when a stablecoin starts to resemble a security. That might include:
Promising returns or yields on stablecoin holdings
Bundling stablecoins into investment products
Using stablecoins in lending programs that resemble securities offerings
These cases often hinge on the Howey Test, which assesses whether users expect profits based on the efforts of others. If a stablecoin product meets that test, the SEC may view it as an unregistered security.
On the other hand, the CFTC considers certain stablecoins to be commodities. This includes asset-backed tokens such as USDT or USDC. The CFTC has used this view to bring enforcement actions, especially when marketing or reserve disclosures are misleading.
Federal Banking Regulators (OCC, Fed) On Stablecoins
When stablecoins involve custody of reserves or resemble deposit-like instruments, banking regulators take an interest. That includes the Office of the Comptroller of the Currency (OCC) and the Federal Reserve (Fed).
The OCC has clarified that national banks may engage with stablecoins in certain ways if they meet safety, soundness, and compliance expectations, such as:
Providing custody for reserve assets
Using stablecoins for payments.
Note: These activities usually require written supervisory approval and must be part of a broader risk management framework.
Meanwhile, the Federal Reserve is focused on the potential systemic impact of large stablecoin issuers. It’s especially concerning when stablecoins are used as a substitute for traditional bank deposits or when they could affect monetary policy transmission.
Under the GENIUS Act, now signed into law, the Federal Reserve takes a direct supervisory role over large or nationally significant stablecoin issuers, similar to how it oversees systemically important payment providers.
For fintechs, this matters if:
You're partnering with a bank to issue or hold stablecoin reserves
You're issuing at scale, with potential consumer-facing exposure
Your stablecoin operations could be interpreted as deposit-like
This is an area where legal and regulatory risk increases quickly with size and volume. Early-stage teams might not trigger banking oversight right away, but once growth accelerates or partnerships expand, that may change.
How Other Countries Regulate Stablecoins
While the US is still shaping its federal approach to stablecoin regulation, other jurisdictions have moved faster. Several countries now have clear regulatory frameworks, especially where stablecoins are used in payments or consumer-facing products.
Understanding how these frameworks work is essential if your fintech operates globally or plans to.
EU (MiCA)
The European Union passed the Markets in Crypto-Assets (MiCA) regulation in 2023, one of the most comprehensive crypto laws to date.
Under MiCA:
Stablecoin issuers must be authorized by regulators
Reserves must be held in high-quality, liquid assets
Stablecoins must be redeemable at par, on demand
Issuers are prohibited from offering interest to users
Non-euro stablecoins face usage limits in EU payments
The law draws a sharp line between payment tokens and investment products. If you plan to offer stablecoin services in the EU, MiCA will apply. Enforcement begins rolling out in phases from 2024 to 2025.
UK (FCA, Bank of England)
The UK is bringing stablecoins under payments regulation as part of its broader financial services reforms.
Key features include:
The Financial Conduct Authority (FCA) regulates stablecoin firms as electronic money institutions
The Bank of England supervises systemically important stablecoins
Requirements around reserve assets, redemption rights, and operational resilience
The UK approach mirrors existing e-money rules, meaning fintechs will need to meet standards similar to licensed payment providers.
Singapore, Hong Kong, Japan
These three jurisdictions are building detailed frameworks, each with its own focus:
Singapore (Monetary Authority of Singapore): Regulates stablecoins pegged to a single currency, requiring 1:1 backing in low-risk assets, prompt redemption, and reserve audits.
Hong Kong (Hong Kong Monetary Authority): Requires stablecoin issuers and related parties to be licensed. Algorithmic stablecoins are excluded.
Japan (Financial Services Agency): Only licensed banks, trust companies, and money transfer firms can issue stablecoins. Redemption and capital standards apply.
All three have moved quickly to define the rules of engagement. If you’re operating in or expanding to Asia, local licensing and reserve practices must be part of your compliance plan.
See also:
Global Coordination (FSB, BIS, G20)
On a multilateral level, groups like the Financial Stability Board (FSB) and Bank for International Settlements (BIS) are working to coordinate cross-border standards. The FSB has issued recommendations on global stablecoins, focused on:
Risk management
Transparency
Regulatory cooperation
“Same risk, same regulation” principles
For fintech companies working across borders, this patchwork of rules is manageable, but only with a well-planned compliance strategy. The bar is rising globally. Licensing, disclosure, and risk controls aren’t optional in most active jurisdictions.
InnReg helps fintech teams navigate this complexity by helping map regulatory obligations across markets, supporting local licensing efforts, and designing compliance programs that can scale internationally. Our experience with cross-border fintech models allows us to help build systems that operate across overlapping regimes while aiming to reduce unnecessary friction.
Common Stablecoin Compliance Challenges
Even when fintech teams understand the regulatory landscape, implementation can be a different story. Stablecoin-related products tend to cross multiple regulatory domains. Therefore, many early technical and operational decisions carry long-term compliance implications.
Here are some of the most common pain points we see:
Licensing Confusion
Founders often assume they don’t need licensing because they don’t handle fiat. But regulators don’t make that distinction. If you’re transmitting stablecoins or storing them for users, you're likely triggering money transmitter rules, MSB registration, or both.
Startups frequently delay licensing until they hit a roadblock. That delay can stall growth or limit market access.
Partner Due Diligence
Using third-party stablecoins doesn’t remove your compliance burden. If you’re integrating or facilitating transfers of someone else’s token, you’re still responsible for knowing how it works and what risks it carries.
Ask:
Is the stablecoin issuer licensed?
Are reserves held transparently and audited?
What happens if the token loses its peg?
Reserve and Audit Management
If you’re issuing a stablecoin or holding reserves on behalf of a partner, you need a documented reserve policy. That includes how assets are held, what qualifies as liquid, and how often they’re verified.
Audits, attestations, and third-party validation are becoming baseline expectations, even when not required by law. Gaps here raise questions from regulators, partners, and customers alike.
Misuse of Terms Like “Stable” or “Backed”
Marketing language matters. If you advertise a token as “backed by USD” or “safe and stable,” regulators will expect that to be provably true.
Avoid claims that suggest:
Government protection or insurance
Guaranteed liquidity
Zero risk
Looking to mitigate risks related to your advertising language? Download our Compliance Glossary for Fintech Marketing to help avoid common missteps and navigate evolving regulatory requirements.
One of the most common misconceptions is that AML obligations only kick in when fiat is involved. That’s not the case.
If your platform allows users to send, receive, hold, or exchange stablecoins, you may be considered an MSB under FinCEN guidance. That means you're subject to the same AML program requirements as if you were handling cash.
This includes:
KYC and identity verification
Transaction monitoring
Suspicious activity reporting
AML program documentation and oversight
The risk is both enforcement and reputational. Banks, partners, and vendors increasingly expect crypto businesses to meet or exceed standard AML expectations.
Monitoring On-Chain Transactions
Stablecoins are crypto-native. That means transactions live on public blockchains, not traditional bank ledgers. But many compliance programs still rely on legacy tools that weren’t built for this environment.
Effective compliance means tracking wallet behavior, not just user behavior. You need to understand:
Who controls each wallet
Where funds originate
Whether a transaction links to a high-risk service (mixers, darknet markets, or sanctioned entities)
Blockchain analytics tools can help, but only if they’re integrated into your workflow. You need policies, thresholds, and escalation procedures built around your specific risk model.
Tools and Risk-Based Approaches
Not all stablecoin activity carries the same level of risk. A B2B settlement platform handling known counterparties has different needs than a consumer-facing app that allows peer-to-peer transfers.
That’s why a risk-based approach is critical. Start by mapping:
User types and onboarding flows
Transaction types and volumes
Geographic exposure
Known vulnerabilities in the product
Then build your compliance stack around those risks. That might include:
Real-time transaction monitoring
Automated sanctions screening
Custom wallet risk scoring
Tiered onboarding and enhanced due diligence
This kind of tailored setup is where many startups bring in outside help.
Rather than relying on rigid, one-size-fits-all models, InnReg works with clients to build stablecoin compliance frameworks tailored to their product, tech stack, and risk profile. This approach can support greater scalability and operational efficiency across jurisdictions.
Designing Stablecoins for Regulatory Alignment
Most well-structured stablecoin systems share a few common core elements. Whether you’re issuing a stablecoin, integrating one, or building infrastructure around them, these are the areas regulators and partners will look at first.
Legal Structure
How the stablecoin is issued and governed matters. Some issuers use a licensed trust company or bank partner. Others pursue direct licensing across states or countries.
Key questions to ask are:
Who legally controls the reserves?
Who’s responsible for redemptions?
What licenses or registrations apply to the issuer and platform?
If the structure isn’t clear on paper, regulators will assume the worst, and users may not know who to hold accountable if something goes wrong.
Note: Remember that legal and compliance are two sides of fintech and not an interchangeable term that means the same thing. While you build your stablecoin system, it’s essential to know the difference and act accordingly.
Reserve Management
A smart stablecoin setup includes a defined reserve strategy, documented policies, and transparent reporting.
At a minimum, that should cover:
Acceptable reserve assets (e.g., cash, short-term Treasuries)
Liquidity standards for redemptions
Segregation of reserves from operational funds
Frequency of audits or attestations (monthly or quarterly)
Some regulators now expect daily reconciliations and third-party attestations. Even where not required, they send a strong signal of risk management maturity.
Disclosures and Redemption Policies
Transparency builds trust and mitigates regulatory risks.
You should clearly publish what backs the stablecoin and how redemption works, including the timing and limits. You should also mention what rights users do and don’t have and whether your stablecoin earns interest or not.
These disclosures should align with actual business practices. If the terms say 1:1 redemption is available “at any time,” your system needs to support that without delay or exceptions.
Tech and Operational Controls
Behind the scenes, you’ll need infrastructure that matches your regulatory exposure. It also means documenting how your compliance and engineering teams interact.
That includes:
Wallet security and key management
Real-time monitoring of reserves and redemptions
Incident response plans
Internal access controls and audit logs
See also:
The Future of Stablecoin Regulation
Stablecoin regulation is moving fast. Over the next 12-24 months, expect more formal rules, especially in the US, where federal legislation is gaining momentum.
Here’s what fintech teams should watch:
US regulation is here. With the GENIUS Act now in force, and the Clarity for Payment Stablecoins Act advancing through Congress, federal licensing, reserve standards, and clearer agency oversight are on track to be introduced.
Global rules are going live. MiCA in Europe, new regimes in the UK and Asia, and coordinated efforts from the FSB are already in motion.
Larger programs will face more scrutiny. Expect pressure on disclosure, redemption, and systemic risk management.
This shift is already affecting product design. Redemption terms, reserve mechanics, and AML workflows are becoming a core part that must be built into your infrastructure, not added after launch.
For fintechs, this is a chance to build trust and credibility. Teams that get ahead of regulation now will be better positioned to scale, without being forced to rebuild later.
Final Thoughts
Stablecoins are no longer a regulatory gray area. Whether you’re issuing, integrating, or building around them, stablecoin regulation now touches nearly every aspect of product, operations, and compliance.
For fintech teams, the challenge isn’t just knowing the rules. It’s applying them in a way that supports growth without adding unnecessary complexity.
That’s where the right compliance partner can make a difference. At InnReg, we work with fintech innovators navigating exactly these challenges, designing frameworks that can help with your product strategy.
How Can InnReg Help?
InnReg is a global regulatory compliance and operations consulting team serving financial services companies since 2013.
We are especially effective at launching and scaling fintechs with innovative compliance strategies and delivering cost-effective managed services, assisted by proprietary regtech solutions.
If you need help with blockchain compliance, reach out to our regulatory experts today:
Published on Jul 21, 2025
Last updated on Jul 24, 2025
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