What is a stablecoin, and how is it different from other crypto?

A stablecoin is a crypto-asset designed to hold a steady value by referencing an external asset, usually a traditional fiat currency such as the Euro or the US dollar. Unlike volatile crypto-assets such as Bitcoin, whose price moves with the market, a stablecoin aims to stay at or near a fixed value. That stability is what makes it usable for payments and settlement rather than speculation.

How a stablecoin holds its value

A stablecoin keeps its value by being backed or referenced against something stable. The most common design is a token that references a single fiat currency and is backed by reserves held for that purpose, so each token can be redeemed for its reference value. The reserve and redemption model is what separates a credible stablecoin from a token that merely claims to be stable.

Stablecoins compared with volatile crypto-assets

The difference that matters for a business is price behaviour:

• A volatile crypto-asset such as Bitcoin has a market price that can move sharply in either direction, which makes it hard to use for pricing, invoicing or settlement.
• A stablecoin is designed to stay at a predictable value against its reference currency, so it can carry value through a payment without the amount changing along the way.

A stablecoin is still a crypto-asset, and how it is treated for accounting and regulatory purposes depends on its structure and the applicable rules. The practical point is that it is built for stability of value, not for speculation.

The main types of stablecoin

Most stablecoins fall into a few designs:

• Fiat-referenced: references a single official currency and is backed by reserves. This is the most common type used for payments.
• Asset-referenced: references a basket of assets or several currencies.
• Algorithmic: attempts to hold value through supply mechanisms rather than reserves. These have a weaker track record and carry different risks.

For business payments, fiat-referenced stablecoins are the relevant category.

Why businesses use stablecoins

Businesses use stablecoins because they combine the stability of a reference currency with the speed and reach of blockchain settlement. Value can move quickly across borders, settle outside legacy banking hours, and reach corridors that correspondent banking serves slowly. With regulated infrastructure, a business can work with stablecoin and fiat balances through accounts and APIs while a provider handles the underlying assets and custody. This is the basis of stablecoin infrastructure.

How stablecoins are regulated

In the European Union, stablecoins fall under the Markets in Crypto-Assets regulation, known as MiCA. Stablecoins used for payments in the EU are generally issued as e-money tokens, which reference a single official currency. Crypto-asset services and payment services are provided under separate regulatory frameworks and often through different entities. Always check which entity and regulator cover a given service and asset.

Frequently asked questions

What is a stablecoin in simple terms?

It is a crypto-asset designed to hold a steady value by referencing a currency such as the euro or the US dollar, so it can be used for payments rather than speculation.

How is a stablecoin different from Bitcoin?

Bitcoin has a market price that can move sharply. A stablecoin is designed to stay at a predictable value against its reference currency, which is what makes it usable for settlement.

Are stablecoins regulated?

In the European Union they fall under MiCA, and stablecoins used for payments are generally issued as e-money tokens. Crypto-asset and payment services are delivered under separate frameworks and entities.

What backs a stablecoin?

A fiat-referenced stablecoin is typically backed by reserves held so that each token can be redeemed for its reference value. The strength of a stablecoin depends on the quality of that backing and the redemption right.

Disclaimer

This article is for information purposes only and does not constitute financial, investment, tax or legal advice. Crypto-assets and stablecoins are high risk. Their value can go down as well as up and you may lose the full value. Stablecoins, including e-money tokens and asset-referenced tokens, may lose their peg, and redemption rights are generally against the issuer, not Damex. Crypto-asset services are not covered by deposit guarantee or investor compensation schemes. In the EEA, crypto-asset services are provided by Damex Digital Ltd, authorised by the Malta Financial Services Authority as a CASP under MiCA (EU) 2023/1114. Crypto-asset services and payment services are provided under separate regulatory frameworks. Availability depends on your jurisdiction and is set out in the relevant terms and conditions.