The landscape for payment infrastructure is ever-changing, and one future scenario is a multi-rail landscape, where traditional card schemes co-exist alongside account-to-account payments, closed loop ecosystems, central bank digital currencies as well as stablecoins as a an alternative payment infrastructure.
According to a recent analysis by McKinsey, the existing infrastructure processes USD 5-7 trillion daily, yet remains characterized by settlement lags, opaque routing and high costs. Against this backdrop, stablecoins, namely cryptocurrencies pegged to real-world assets such as fiat currencies have emerged as a candidate for as an alternative payments rail.
The question is whether stablecoins can truly serve as alternative payment rails at scale, and if so, what is their viability? While the underlying technology addresses many of the legacy pain-points, bringing stablecoins into mainstream payment infrastructure brings a host of technical, regulatory, operational, and economic challenges that must be managed.
Characteristics of Stablecoins
Stablecoins are digital tokens issued on blockchain or distributed ledger networks and designed to maintain a stable value by being pegged to an external asset, most often the U.S. dollar. For example, a stablecoin issued 1:1 against U.S. dollars means that each token corresponds to one U.S. dollar of backing. This stabilization is typically achieved through fiat reserves, short-term Treasuries or other collateral. However, the quality of the underlying collateral has come into questions on numerous occasions.
A key characteristic is that transactions can occur on-chain, across public or permissioned networks, thus allowing value to move globally, 24/7, with settlement potentially in minutes rather than days. Programs such as embedded smart-contract logic can enable programmability (for example automated settlement, conditional transfers or escrow functions). These traits provide several advantages over traditional rails: near-instant settlement, lower intermediary cost, and compressed time-zones constraints.
At the same time, stablecoins inherit the characteristic risks of blockchain systems, such as private-key custody, network throughput, and interoperability across chains as well as unique aspects around reserve-management, transparency and redemption rights.
Stablecoins from theory to practice
There are multiple real-world instances where stablecoins are being used as payment rails, either in consumer-facing payments, business settlement, or cross-border flows. One prominent example involves Visa, where Visa announced expansion of its settlement platform to support additional USD-backed stablecoins, including those issued by Paxos Trust Company (e.g., PayPal USD or PYUSD) and other chains, alongside networks such as Ethereum, Solana, Stellar and Avalanche. This shows stablecoins being used not just for retail transfers, but as institutional settlement rails between issuers and acquirers.
In the consumer space, PayPal launched its fiat-backed stablecoin in 2023 as a token for transfers among PayPal and Venmo users, redeemable on external wallets and designed for payments. PayPal has later on expanded PYUSD to also run on the Solana blockchain, promising faster and cheaper transfers for consumers.
This year, Stripe also rolled out stablecoin-based accounts in over 100 countries, allowing clients to send, receive and hold USD-denominated stablecoins such as USD Coin (USDC) and USDB. Stripe also supports payouts in stablecoins via its Connect platform, enabling businesses to pay recipients globally in stablecoins rather than traditional fiat bank transfers.
While still early relative to global payment volumes, these real deployments illustrate that stablecoins are being used not merely as speculative assets, but as rails for value transfer and settlement in live systems.
For the banking sector, the turning point came from two directions: the United States, where the GENIUS Act established a federal framework for dollar-backed stablecoins, and Europe, where the Markets in Crypto-Assets Regulation (MiCAR) now defines how digital tokens can be issued, backed, and supervised.
While European banks have been lagging behind their US counterparts, two separate consortiums have been launched this fall. First out, a consortium of leading European banks announced that they are forming a new company to launch a euro-denominated stablecoin, a move they hope will help counter U.S. digital market dominance.
Shortly after, a pan-Atlantic consortium consisting of Bank of America, UBS, Barclays, Citi, BNP Paribas, Santander, Deutsche Bank, Goldman Sachs, and TD Bank announced that they will work together to explore creating blockchain-based assets pegged to G7 currencies.
Challenges and Risks to Using Stablecoins as Payment Infrastructure
Despite the promising use-cases, deploying stablecoins at scale as payment rails carries significant challenges and risks. From a regulatory and compliance perspective, stablecoins sit in a grey zone. Depending on jurisdiction, they may be classified as e-money, securities, or commodities. Licensing requirements, AML/KYC obligations, and compliance sanctions impose burdens on issuers and intermediaries.
At the global level, the Bank for International Settlements (BIS) has called out stablecoins for failing fundamental criteria of “singleness, elasticity and integrity,” warning of risks to monetary sovereignty if privately issued stablecoins scaled unchecked. BIS is joined by Bank of England, who also warns about privately issued stablecoins as a risk to financial stability.
On the operational infrastructure side, while blockchain settlement can be fast, legacy fiat rails and on-chain networks still need to interoperate. Custody of private keys, management of wallets, bridging across chains, and ensuring 24/7 settlement capacity present non-trivial technical complexity.
System fragmentation (many networks, wallets and token standards) complicates interoperability and integration for payment service providers (PSPs) and might end up creating unnecessary levels of technical complexity.
Economically and financially, stablecoins depend on the credibility and liquidity of their reserve backing. If reserves are illiquid or transparency is weak, redemption confidence may erode, leading to run-risk. The fact that stablecoins do not inherently provide credit creation (“elasticity”) as banks do also limit their role as full money substitutes in crises.
From a user-experience and business model perspective, mass adoption requires that UX match the simplicity of existing rails (cards, bank transfers), that merchants accept the tokens, and that on-ramps/off-ramps into fiat are frictionless. Also, the characteristics of blockchain-based payments where the transaction is immutable, namely that it cannot be reversed once confirmed eliminates traditional chargebacks as seen with credit cards. While this may be solved otherwise through smart contracts, it disrupts common user flows that we associate with making a payment today.
Lastly, jurisdictional fragmentation and fragmentation across chains, wallets, and token standards add strategic risk. Payment providers may face duplicates in compliance and monitoring across fiat and crypto rails. In summary, while stablecoins offer promise, the operational, regulatory and trust ecosystems required to support them at scale are still evolving, and their adoption as core rails must navigate these headwinds.
Future outlook
In conclusion, stablecoins represent a compelling technological tool for modernizing payment infrastructure: they bring potential for faster settlement, lower cost, global reach and programmability. Real-world adoption is already ongoing through several initiatives.
However, for stablecoins to serve as core payment rails across the economy, several enablers must mature and be in place. Clear regulatory frameworks, institutional grade reserve management and transparency, seamless interoperability with traditional banking systems, and user- and merchant-friendly environments.
If regulatory and operational architecture aligns, stablecoins could become a viable and broadly used payment infrastructure, but the path requires meticulous design, regulatory alignment and institutional trust.
However, they are unlikely to fully replace core national payment systems or central-bank money in that timeframe because of monetary-sovereignty, regulatory and systemic-risk constraints. Instead, a likely outcome is a fragmented landscape where traditional payment rails co-exist with a plethora of underlying rails, where stablecoins might be one of those rails for certain types of payments.
Stablecoins are arguably one of the most interesting innovations among cryptocurrencies besides Bitcoin. Tether, being the first and by all measures the leader among stablecoins, was launched on the Bitcoin blockchain already in 2014. Not mentioning Tether here is an omission that misses one of the most interesting benefits of stablecoin: access to USD for people mainly in the global south. People that otherwise will have no possibility getting their hands on USD, and whose daily struggle is such that they cannot stomach the volatility of bitcoin, can benefit greatly from access to stablecoins.
We should not be surprised that banks (and BIS) are not happy with stablecoins. They don’t like the troublesome competition emerging. With stablecoins “narrow banking” makes a return, banking services focusing exclusively on payments and making these as efficient as possible. The question therefore is whether stablecoins need to integrate into the ordinary financial system. With the GENIUS act the US has increased their already big lead in the crypto space. EU regulation (mainly MiCA) on stablecoins has made it all but impossible to operate an efficient service in Europe in this area.
Finally, regarding the solidity and security of stablecoins the GENIUS act requires operators in the US to hold 100 % of their reserves in liquid instruments, mainly cash and short-term T-bills. That way stablecoin operators in the US are way more liquid than ordinary banks that for comparison hold around 30 % of their assets in risk-free instruments. Of course, not all stablecoin providers are registered in the US and should be treated thereafter. Also worth noting is that holdings in stablecoins are not protected by the government (FDIC in the US) and that stablecoins are 100 % centralized. The centralized aspect means that the term “immutability” is mostly a joke. Stablecoin issuers will freeze or undo questionnable transactions at the request of governments.
For further reading on stablecoins I suggest Nic Carter (Castle Island Ventures) and his many articles and reports: https://niccarter.info/papers