Stablecoins: Regulatory Challenges and Opportunities

25 Jun 2025

25 Jun 2025 by Luke Puplett - Founder

The rise of stablecoins, with a market already at $250 billion and projected to reach $2 trillion, is reshaping global finance. The Bank for International Settlements (BIS) recently critiqued stablecoins for failing three key tests—singleness, elasticity, and integrity—needed to serve as the backbone of a monetary system. Meanwhile, a16z's forward-thinking analysis sees these challenges as opportunities for innovation. Adding to the conversation, the European Commission is poised to introduce new rules for stablecoins, addressing their cross-border complexities, despite warnings from the European Central Bank (ECB) about potential risks to financial stability. Far from a roadblock, these developments signal a maturing ecosystem where stablecoins can evolve into a faster, cheaper, and more inclusive form of money.

The BIS Report: A Call for Refinement

The BIS, often dubbed the "central bank for central banks," argues that stablecoins fall short of traditional money's standards, yet sees "transformative" potential in tokenizing central bank reserves, commercial bank money, and traditional assets.

Key Challenges Identified

Singleness

Issued by centralized entities with varying standards, stablecoins lack universal interchangeability, leading to liquidity fragmentation and exchange rate discrepancies. This creates inefficiencies when users need to convert between different stablecoin types or when large transactions cause slippage.

Elasticity

Their fixed reserve model, requiring full backing, limits their ability to adapt to economic demands. Unlike traditional banking systems that can create credit through fractional reserves, stablecoins must maintain 1:1 backing, which could strain treasury markets if issuance scales to $2 trillion as projected.

Integrity

Inconsistent KYC/AML compliance raises risks of illicit use, undermining trust. The lack of standardized compliance frameworks across different stablecoin issuers creates regulatory gaps that could be exploited for money laundering or other financial crimes.

Transformative Potential

Despite these challenges, the BIS recognizes the potential for stablecoins to revolutionize finance through tokenization of traditional assets and integration with central bank digital currencies (CBDCs). This balanced perspective sets the stage for optimism: stablecoins have hurdles, but they're surmountable with innovation.

Publication Date: 2025-01-22

EU's New Rules: A Step Toward Global Integration

The European Commission is taking bold steps to regulate stablecoins, proposing that non-EU issued stablecoins be treated as interchangeable with their EU-approved counterparts. This move aims to clarify a legal grey area, ensuring stablecoins function as digital cash across borders.

Key Provisions

Cross-Border Fungibility

The Commission's proposal would allow stablecoins issued outside the EU to be treated as equivalent to EU-approved versions, creating a more seamless global market. This addresses the BIS's singleness concern by promoting universal interchangeability.

National Supervisor Oversight

EU member states would maintain oversight through their national supervisors, ensuring compliance with local regulations while enabling cross-border functionality. This approach balances innovation with regulatory control.

Reserve Management

The Commission asserts that well-governed, fully collateralized stablecoins are unlikely to face runs, and redemptions would likely occur where most reserves are held (e.g., the U.S.). This addresses ECB concerns about financial stability.

ECB Concerns and Responses

The ECB, led by Christine Lagarde, has raised concerns that such fungibility could strain EU banks during market volatility, particularly if overseas holders redeem reserves meant for EU consumers, risking a "run" on deposits. However, the Commission remains confident that proper governance and collateralization can mitigate these risks.

a16z's Vision: Turning Challenges into Opportunities

a16z's analysis aligns with the BIS and ECB on stablecoin challenges but emphasizes solutions that can propel the ecosystem forward, transforming obstacles into building blocks for a better financial system.

Solutions for Singleness

Stablecoin Clearinghouses

Propose stablecoin clearinghouses (like a crypto ACH) to ensure 1:1 fungibility across different stablecoin types. This would address both the BIS's concerns and the EU's push for cross-border interchangeability by creating neutral conversion mechanisms.

Neutral Collateral Layers

Develop neutral collateral layers (e.g., tokenized treasuries) that can serve as backing for multiple stablecoin types, reducing fragmentation and improving liquidity across the ecosystem.

Advanced Exchange Protocols

Implement sophisticated exchange protocols that minimize slippage during large transactions, ensuring stablecoins maintain their value proposition as reliable mediums of exchange.

Solutions for Elasticity

Tokenized Deposits

Suggest tokenized deposits to keep stablecoins in the fractional-reserve system, preserving credit creation while offering blockchain's speed and programmability. This could potentially mitigate the ECB's fears of reserve runs by maintaining traditional banking relationships.

Diversified Collateral

Move beyond T-bills to include tokenized assets like municipal bonds, easing treasury market pressure and creating more resilient backing for stablecoin systems.

Solutions for Integrity

On-Chain Compliance Tools

Develop on-chain compliance tools to integrate stablecoins with AML frameworks, aligning with the EU's reliance on national supervisors to enforce safeguards. This leverages blockchain's transparency to enhance trust and regulatory compliance.

Standardized KYC/AML

Create industry-wide standards for identity verification and anti-money laundering procedures, ensuring consistent compliance across all stablecoin issuers.

Why Stablecoins Are the Future

Stablecoins are already transforming finance, and their growth is unstoppable. The BIS's critiques and ECB's concerns aren't roadblocks but guideposts for improvement.

Global Access

In high-inflation or underbanked regions, stablecoins like USDC and USDT are lifelines, serving 1.4 billion underbanked people and bypassing costly cross-border wires (up to 13%). The EU's rules could further legitimize their global use, expanding access to financial services worldwide.

Efficiency

Near-instant, near-free transactions and programmability make stablecoins ideal for fintech innovation, from smart contracts to cross-border payments. This efficiency could revolutionize how businesses and individuals conduct financial transactions.

Mainstream Momentum

With US lawmakers nearing stablecoin regulation (the Genius Act) and the EU clarifying cross-border rules, stablecoins are gaining institutional trust. As US Treasury Secretary Scott Bessent noted, their proliferation could "reinforce US dollar supremacy" while democratizing access to dollar-denominated financial services.

Real-World Impact

Stablecoins are already being used by millions of people for remittances, international trade, and as a hedge against local currency volatility. In countries with unstable currencies, stablecoins provide a reliable store of value and medium of exchange that local banking systems cannot match.

Building a Unified Monetary Future

Combining insights from the BIS, a16z, and the EU's regulatory push, here's how we can overcome stablecoin challenges to create a next-generation financial system.

Universal Access

Partner with banks and fintechs to create seamless on/off-ramps, ensuring stablecoins are as easy to use as cash, aligning with the EU's vision of interchangeable tokens. This requires collaboration between traditional financial institutions and crypto-native companies.

Clearinghouses

Develop decentralized protocols for instant, at-par conversions, supporting the EU's fungibility goals and the BIS's singleness ideal. These clearinghouses would act as neutral infrastructure, similar to how traditional banking systems handle interbank transfers.

Diversified Collateral

Move beyond T-bills to tokenized assets like municipal bonds, easing treasury market pressure and addressing ECB concerns about reserve runs. This diversification would make stablecoin systems more resilient to market volatility.

Compliance Innovation

Build on-chain AML/KYC tools to meet BIS and ECB standards, leveraging stablecoins' transparency to enhance trust. Blockchain's inherent auditability can actually improve compliance compared to traditional financial systems.

Local Integration

Launch local-currency stablecoins to complement USD stablecoins, integrating with regional systems to balance global access with monetary sovereignty, as the ECB advocates. This approach respects local monetary policies while enabling global connectivity.

The Road Ahead: Collaboration is Key

The BIS, ECB, and EU developments aren't setbacks but a roadmap for progress. Stablecoins' challenges—singleness, elasticity, integrity, and cross-border risks—require collaboration among entrepreneurs, regulators, and institutions.

Startup Opportunities

Startups can build clearinghouses, compliance tools, and new collateral models. The regulatory clarity provided by the EU and other jurisdictions creates opportunities for innovative solutions that address the specific challenges identified by the BIS.

Regulatory Cooperation

Regulators, as the EU demonstrates, can provide clarity while balancing risks. The collaborative approach between the European Commission and ECB shows how different regulatory bodies can work together to create frameworks that promote innovation while protecting financial stability.

Bank Integration

Banks can embrace stablecoins, as a16z suggests, by issuing their own or integrating with DeFi to stay competitive. Traditional financial institutions have the opportunity to lead the transformation rather than being disrupted by it.

Global Coordination

The BIS's optimism about tokenization and the EU's proactive rules signal that central banks and governments are open to change. Stablecoins, with their ability to democratize finance, are the perfect vehicle to drive this transformation.

A Global Financial Revolution

Stablecoins may not yet meet the BIS's three tests or fully assuage the ECB's concerns, but they're closer than ever. With a16z's solutions, the EU's regulatory clarity, and global momentum, stablecoins are poised to become "better money"—programmable, accessible, and trusted.

The journey toward a unified monetary future requires patience, collaboration, and innovation. As a16z notes, transitioning to new technology is messy, but the rewards—faster, cheaper, more inclusive money—are transformative.

Let's seize this moment to build a monetary system that works for everyone, everywhere. The challenges identified by the BIS and concerns raised by the ECB are not insurmountable obstacles but valuable guidance for building a more robust and inclusive financial system.

Key Players and Resources

Are you shaping the future of finance? Join the conversation on X to share your ideas for making stablecoins the cornerstone of a global, inclusive economy!

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