What Are Stablecoins and Why Do They Matter in Payments?

What are Stablecoins?

Stablecoins are a type of cryptocurrency that aim to maintain a steady value by being pegged to another asset, usually a fiat currency such as the US dollar or pound sterling, or a commodity like gold. Unlike volatile cryptocurrencies such as Bitcoin or Ethereum, stablecoins offer price predictability, making them more suitable for everyday payments, cross-border transfers, and business transactions.

Their adoption is growing rapidly as fintech’s, marketplaces, and merchants explore faster, lower-cost ways to send and receive funds globally, without relying solely on traditional financial institutions.

How Do Stablecoins Work?

Stablecoins maintain their value through various mechanisms that “peg” them to an external reference asset:

• Fiat-backed stablecoins (e.g. USDC, USDT): Backed 1:1 by fiat currency reserves held in bank accounts.
• Crypto-collateralised stablecoins (e.g. DAI): Over-collateralised with other cryptocurrencies to protect against market volatility.
• Algorithmic stablecoins (e.g. Frax, historically Terra): Use smart contracts and supply controls to maintain a fixed price, though this model carries higher risk.

The goal is to offer a digital asset with stable purchasing power, ideal for use cases like international payments, e-commerce, and crypto trading.

Why Stablecoins Are Important for the Payments Industry

Stablecoins bridge the gap between blockchain technology and real-world payments infrastructure. They combine the benefits of cryptocurrencies—speed, security, and decentralisation—with the stability of traditional money.

Key advantages include:

• Lower transaction costs compared to card payments or wire transfers
• Near-instant settlement, even across borders
• No dependency on legacy banks or intermediaries
• Programmable money for automated billing, subscriptions, and smart contracts

For consumers and businesses alike, this creates opportunities for more efficient, transparent, and inclusive financial services.

Use Cases: Stablecoins in Payments and Finance

1. Cross-Border Payments and Remittances

Traditional cross-border payments rely on SWIFT, often incurring high fees, long processing times, and poor transparency. Stablecoins enable near-instant, low-cost international transfers, especially valuable in emerging markets where banking access is limited.

Example: A freelancer in Kenya can be paid in USDC by a UK-based client, avoiding currency conversion fees and bank delays.

2. Merchant Acceptance of Stablecoins

A growing number of merchants accept stablecoins for goods and services. Benefits include:

• Reduced reliance on banks and card acquirers
• Instant settlement, improving cash flow
• Minimal risk of chargebacks
• Global accessibility—ideal for online businesses

Payment processors like BitPay, CoinPayments, and NOWPayments offer plug-ins and APIs for seamless integration with ecommerce platforms.

3. B2B and Treasury Use

Businesses are using stablecoins for:

• Supplier payments, especially across borders
• Payroll for remote teams, including gig workers and contractors
• Cash management, where stablecoins act as a hedge against local currency volatility

Stablecoins can also enhance treasury operations by enabling 24/7 liquidity and faster reconciliation.

4. SaaS, Embedded Finance, and Web3

SaaS platforms and fintech apps are embedding stablecoin payment rails to:

• Enable recurring billing and instant payouts
• Power embedded finance tools for users without full banking access
• Offer white-label stablecoin wallets for marketplaces or gig platforms

In Web3, stablecoins are essential for DeFi, DAO payments, and NFT marketplaces.

Stablecoin vs Traditional Payments: Cost and Speed Comparison

Note: Fees depend on blockchain used—e.g. Ethereum gas fees can be high, while Solana and Tron offer ultra-low costs.

Regulation of Stablecoins (UK and EU Focus)

Stablecoins are under increasing scrutiny due to their growing role in digital finance. Regulatory bodies in the UK and EU are developing frameworks to ensure they are:

• Properly backed by reserves
• Subject to transparency requirements
• Compliant with AML/KYC laws

UK Stablecoin Regulation

• The Financial Services and Markets Act 2023 gives the Bank of England and FCA powers to oversee stablecoin systems.
• Stablecoins used for payments may be subject to electronic money or payment systems regulations.

EU Regulation (MiCA)

• The Markets in Crypto-Assets Regulation (MiCA) comes into force in 2025.
• Introduces rules for asset-referenced tokens (ARTs) and e-money tokens (EMTs).
• Issuers must meet capital, governance, and reserve requirements.

AML, KYC, and the Travel Rule for Stablecoin Payments

As stablecoins are used more widely in payments, compliance is essential. Key obligations include:

• Know Your Customer (KYC) checks at the wallet or exchange level
• Anti-Money Laundering (AML) controls for suspicious transactions
• Travel Rule compliance, which requires originator and beneficiary information for crypto transfers above set thresholds

Providers are adopting tools like Chainlysis, Elliptic, and TRM Labs to support compliance and monitoring.

Risks for PSPs, Acquirers, and Payment Platforms

While stablecoins offer promise, they also pose risks to payment businesses:

• Depegging risk (loss of parity with fiat currency)
• Regulatory uncertainty, especially when handling user funds or offering custody
• Liquidity concerns with less liquid stablecoins or low volume blockchains
• Integration complexity with on-chain wallets and smart contracts

PSPs and acquirers must assess these risks carefully when onboarding merchants or supporting crypto acceptance.

CBDCs vs Stablecoins in the Payments Space

While both CBDCs and stablecoins are digital assets, they differ fundamentally:

CBDCs may eventually complement or compete with stablecoins, depending on their design and usability.

On/Off-Ramps: Converting Between Fiat and Stablecoins

To use stablecoins in the real economy, users need access to on-ramps (buying with fiat) and off-ramps (converting back to fiat). This infrastructure includes:

• Centralised exchanges (e.g. Coinbase, Kraken)
• Fintech apps (e.g. Revolut, MoonPay)
• Crypto-friendly banks and wallets

Challenges include compliance, exchange fees, and local regulation, especially when stablecoins are used at scale.

Wrapping It Up: Stablecoins as a Payment Innovation

Stablecoins are reshaping how money moves globally. For consumers, they provide a fast, affordable way to send and receive digital money. For businesses, they unlock new efficiencies in payments, payroll, and treasury management.

As regulation matures and technology advances, stablecoins are poised to become a mainstream component of the payments ecosystem, bridging traditional finance and decentralised innovation.