This ‘Safe’ cryptocurrency promises stability — but that claim is on shaky ground

Even if stablecoins become common for buying everything from toothpaste to homes, these so-called “digital dollars” still come with major risks.

Stablecoins — often marketed as the safer alternative to cryptocurrencies like Bitcoin and Ethereum — are having a big moment. Since Congress passed the GENIUS Act last July, their combined market value has climbed past $300 billion, accounting for about 7% of all crypto in circulation.

Yet, despite the name, their stability is far from guaranteed. The security and reliability of stablecoins depend heavily on who issues them, and they offer limited real-world benefits for either crypto enthusiasts or traditional investors.

Why stablecoins are gaining popularity

With clearer regulations emerging and renewed interest in digital assets, investors are taking another look at stablecoins. Unlike traditional cryptocurrencies, stablecoins are pegged to the U.S. dollar, which makes them appealing to those seeking less volatility.

Proponents argue that stablecoins allow users to stay “on chain” — using digital wallets — without dealing with banks or their fees. They can also delay taxes until converting back to dollars and can be used for quick trades, similar to a digital money market fund.

Some investors even earn 3% to 8% annual returns by lending stablecoins to decentralized finance (DeFi) platforms. Because they’re digital, stablecoins can move across borders instantly, bypassing banking hours and systems.

To be fair, crypto has shown staggering gains over the years — Bitcoin averaged 49% annual returns in the last decade. But despite its popularity as “digital gold,” crypto has yet to fulfill its promise as a mainstream payment tool. It’s been more useful for illicit transactions and international remittances than for everyday purchases.

Stablecoins might change that narrative — but they’re not without serious risks.

The big risks behind “stable” coins

1. Regulatory uncertainty:
Stablecoins are inching toward bank-style regulation, but we’re not there yet. The GENIUS Act helped, but it didn’t cover every use case or clarify how international regulations fit in. The U.S. Commodity Futures Trading Commission (CFTC) and Securities and Exchange Commission (SEC) continue to wrestle for control. Even if they’ve declared a truce, policies can shift fast — and so can investor confidence.

2. Reserve risk:
For a stablecoin to stay stable, it must be backed by real money or equivalent assets. But not all issuers are transparent. Take Tether, one of the biggest stablecoins: it still hasn’t hired a major accounting firm for regular audits. That lack of oversight is alarming, especially after past crypto collapses like FTX.

3. Counterparty and platform risk:
“Smart contracts” — the backbone of DeFi — don’t always work as intended. The crypto world is littered with failures: Celsius went bankrupt in 2022, owing users $4.7 billion; TerraUSD and LUNA imploded the same year, wiping out $45 billion. Add scams and hacks, and the picture gets worse — the FBI reported $5.8 billion lost to crypto fraud just last year.

Proceed with caution

The question remains: who really wants to handle money outside traditional banking guardrails?

Financial scams and mismanagement aren’t unique to crypto, but history shows why regulators like the SEC, FDIC, and CFTC exist. Even “safe” investments, like mortgages through Fannie Mae and Freddie Mac, have proven fragile.

If you’re considering stablecoins, here are a few key questions to ask:

• What backs the coin? Look for audited proof that reserves are held in cash or U.S. Treasurys. Avoid coins backed by commercial paper or other cryptocurrencies.
  
• Who regulates it? Stick to U.S.-based issuers with reserves in bankruptcy-protected accounts and clear redemption guarantees.
  
• What’s the yield — and from where? Understand how returns are generated. What happens if the coin loses its peg or withdrawals are paused?
  

If those questions sound demanding, remember: when you keep a dollar in the bank, you already get these protections, plus FDIC insurance.

Some stablecoins are more trustworthy than others

Not all issuers are opaque. Circle Internet Group (USDC), for example, is audited by Grant Thornton, holds dollars and U.S. Treasurys, and is even exploring a banking license. PayPal and Gemini offer similar transparency and regulatory safeguards.

But even the most responsible issuers are still businesses — and they profit from interest on reserves and transaction fees. Their goal is to dominate the market and create self-contained ecosystems where they set the rules. In that sense, they’re not so different from banks — just without the same oversight.

The bottom line

Stablecoins might be here to stay. They promise fast, borderless, and digital finance — and for developers in DeFi, that’s a big deal. But for everyday investors and consumers, the risks likely outweigh the rewards.

Until the regulatory framework catches up and transparency becomes standard, the “stability” of stablecoins may be more illusion than reality. For most people, it’s still safer to stay on the sidelines — at least for now.