What Are Stablecoins and Why Do They Matter in Payments?
10 June 2025
Written by Libby James
Libby James is co-founder, director and an expert in all things merchant services. Libby is the go-to specialist for business with more complex requirements or businesses that are struggling to find a provider that will accept them. Libby is regularly cited in trade, national and international media.
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
|
Payment Method |
Settlement Time |
Typical Cost |
Cross-Border Capability |
|
Credit/Debit Card |
1–3 business days |
1.5–3.5% + fees |
Limited, expensive |
|
Bank Wire (SWIFT) |
1–5 business days |
£10–£40 |
Yes, slow and costly |
|
Stablecoin Transfer |
<1 minute to few mins |
Often <£0.01–£1 |
Instant, global |
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:
|
Feature |
CBDC |
Stablecoin |
|
Issuer |
Central Bank |
Private Company or DAO |
|
Backing |
Fiat currency |
Fiat, crypto, or algorithm |
|
Use Case |
Public digital money |
Payments, trading, DeFi |
|
Regulation |
Full oversight |
Varies by jurisdiction |
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.
FAQs
Can stablecoins be used for everyday payments?
Yes, stablecoins can be used for everyday payments, especially in online environments. They offer price stability, fast settlement, and low fees—making them suitable for purchases, bill payments, and peer-to-peer transfers. However, their acceptance is still limited compared to traditional payment methods, and availability often depends on local regulations and payment providers.
How do stablecoins reduce the cost of cross-border payments?
Stablecoins eliminate the need for intermediary banks and currency conversions in cross-border transfers. Transactions can be processed directly between wallets on a blockchain in minutes, often with minimal fees. This makes them especially useful for freelancers, international payroll, and remittances.
Are stablecoin payments cheaper than credit card payments?
In many cases, yes. Stablecoin transactions typically involve lower fees than credit or debit card payments, which often incur interchange, scheme, and processing charges. This makes them attractive to merchants looking to reduce overheads and improve cash flow through faster settlements.
Which stablecoins are most commonly used for payments?
The most widely used stablecoins in payments are:
• USDC (USD Coin) – regulated and popular with fintechs and PSPs
• USDT (Tether) – high liquidity, widely supported across exchanges
• DAI – decentralised and used in DeFi-based payments
• EUROe and EURS – euro-pegged stablecoins growing in use within the EU
Support may vary depending on region, provider, and use case.
What are the risks of using stablecoins for business payments?
Key risks include:
• Depegging – when a stablecoin loses its 1:1 value with its backing asset
• Regulatory uncertainty – especially in countries with unclear crypto laws
• Custodial and security concerns – if businesses hold large balances in digital wallets
• Blockchain network fees – can vary based on network congestion
Businesses should use reputable stablecoins, compliant wallets, and secure infrastructure to minimise risk.
Can stablecoins be integrated with existing payment systems?
Yes, several payment providers are building APIs and tools to integrate stablecoins with traditional systems. Some card networks like Visa and Mastercard are exploring stablecoin settlement. Crypto-friendly payment processors also offer plug-ins for ecommerce platforms, allowing merchants to accept stablecoins directly or convert them to fiat at checkout.
Do stablecoin payments require KYC or AML compliance?
Yes, particularly when using centralised platforms or handling large transactions. Stablecoin users must comply with Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations in many jurisdictions. This is especially important for businesses and PSPs, which may also need to meet Travel Rule requirements for crypto payments.
Will stablecoins replace traditional payment methods?
Stablecoins are unlikely to replace traditional payment methods entirely but are expected to coexist and complement them. They are particularly well-suited to cross-border payments, digital commerce, and decentralised platforms. As regulation and infrastructure improve, stablecoins will likely play a larger role in the global payments landscape.
