The "Unholy Trinity" of stablecoins: When banking giants collide with the essence of Bitcoin

Original Title: Stablecoins: Depegging, fraudsters and decentralization

Original author: Merav Ozair

Original source:

Compiled by: Daisy, Mars Finance

With the entry of large banks and payment giants, stablecoins are regaining development momentum, but issues such as their stability, regulatory framework, and risks of centralization and fraud remain unresolved.

Stablecoins are now everywhere - and this time, the leaders are traditional financial institutions. Bank of America and Standard Chartered are considering launching their own stablecoins, joining the ranks of JPMorgan Chase. The latter previously launched JPM Coin (later renamed Kinexys Digital Payment) to provide trading services for institutional clients on its blockchain platform Kinexys (formerly Onyx).

Mastercard plans to partner with the crypto startup Bleap Finance to bring stablecoins into the mainstream, aiming to enable direct on-chain consumption of stablecoins (without the need for conversion or intermediaries) and seamlessly integrate blockchain assets into Mastercard's global payment network.

In early April 2025, Visa joined the Global Dollar Network (USDG) stablecoin alliance, becoming the first traditional financial institution to join the alliance. In late March 2025, Intercontinental Exchange (ICE), the parent company of the New York Stock Exchange, announced that it was exploring the application solutions for using the USDC stablecoin and US Yield Coin in its derivatives exchange, clearinghouses, and data services markets.

Why are stablecoins regaining popularity?

Clear regulation and market acceptance

Recent actions by European and American regulatory agencies have established clearer guidelines for the use of cryptocurrencies. The U.S. Congress is considering legislation to establish formal standards for stablecoins to enhance the confidence of banks and fintech companies.

The EU's "Regulation on Markets in Crypto-assets" requires domestic stablecoin issuers to comply with specific financial standards, including special reserve requirements and risk mitigation measures. UK financial authorities plan to establish stablecoin usage rules through public consultation to further promote its adoption.

Executive Order 14067 by the Trump administration, titled "Strengthening America’s Leadership in Digital Finance," explicitly states that it "supports and promotes the development of globally legitimate dollar-backed stablecoins," while simultaneously "prohibiting the establishment, issuance, circulation, and use of central bank digital currencies (CBDCs) within the United States." Following the issuance of this order, World Liberty Financial, a company under Trump, promptly launched a stablecoin named USD1, marking the arrival of an era dominated by dollar-pegged stablecoins.

Do we need more stablecoins?

The current status of the stablecoin ecosystem

Currently, over 200 existing stablecoins are mostly pegged to the US dollar. Among them, two major traditional stablecoins dominate the market: Tether (USDT), launched in 2014, and USDC, which emerged in 2018, leading the market with market cap shares of 65% and 28% respectively — both adopt a centralized fiat collateral model.

The newcomer USDe, set to launch in February 2024, ranks third with approximately 2% market share. Its operational mechanism is unique: it achieves price anchoring through derivatives in the crypto market. Although it operates based on Ethereum DeFi protocols, it still exhibits centralized characteristics due to its reliance on centralized exchanges holding derivative positions.

Three Core Mechanisms of Stablecoins

Centralized fiat collateral: Reserves are held by centralized companies in banks/trusts (currency) or vaults (gold), and tokens (i.e., stablecoins) corresponding to the assets are issued.

Decentralized crypto asset staking: Backed by other decentralized crypto assets. For example, MakerDAO's DAI stablecoin, although pegged to the US dollar, fully embodies the characteristics of decentralization, and there is no single entity to control its issuance.

Decentralized and Uncollateralized: Token supply is controlled by smart contract algorithms to maintain value stability. To some extent, this is similar to the operation of central banks—who also do not rely on reserve assets to maintain currency value stability. The difference is that central banks like the Federal Reserve publicly formulate monetary policies based on clear parameters, and the identity of fiat currency issuers provides credibility to their policies.

Decoupling risks and fraud traps

Stablecoins are supposed to maintain stability, and their original intention was to overcome the natural volatility of cryptocurrencies. Maintaining stability requires meeting two main conditions: (1) anchoring to stable assets; (2) having an effective mechanism to maintain the peg.

If stablecoins are pegged to volatile assets such as gold or electricity, they are unlikely to be a low-risk option. For example, USDe maintains its peg to the US dollar through Delta hedging, generating an annualized return of 27% from futures long and short positions—far exceeding the average return of 12% from other dollar-pegged stablecoins. However, derivative positions themselves carry high-risk attributes, which contradicts the original design intention of stablecoins.

In the more than ten years since the development of stablecoins, there has not been a major decoupling crisis apart from the Terra incident. The collapse of Terra was not due to insufficient reserves or mechanism flaws, but rather the result of fraud and manipulation.

TerraUSD (UST) was originally designed with an arbitrage mechanism between UST and LUNA tokens: burning LUNA generates UST. To attract traders, the Terra team offered a staking yield of 19.5% through the Anchor protocol (i.e., deposit interest). Such a high interest rate is clearly unsustainable—there must be borrowers paying an equal or higher rate for lenders to receive a 19.5% return. An analysis in January 2022 showed that the Anchor protocol was already in a state of loss. In the lawsuit against the founder of Terraform Labs, a key allegation is that the Anchor protocol is essentially a Ponzi scheme.

In March 2025, Galaxy Digital reached a $200 million settlement with the New York Attorney General over undisclosed conflicts of interest in promoting the LUNA token. In January of the same year, Terra founder Do Kwon was found guilty of securities fraud and faces multiple charges in the U.S. for telecom fraud, commodity fraud, and more. If regulators want to prevent similar incidents, the focus should be on how to stop fraudsters from issuing or manipulating stablecoins.

Decentralization: Reigniting the Original Intention of Bitcoin

Most stablecoins adopt a centralized asset collateral model controlled by enterprises. This may lead to customer funds being misappropriated or false claims of sufficient reserves. To prevent such behavior, regulatory agencies need to closely monitor and establish securities-like regulations.

Centralized stablecoins contradict the philosophy of blockchain and the original intention of Bitcoin. When Bitcoin was created, it was envisioned as a decentralized payment platform that is not controlled by corporations, banks, or governments—a decentralized mechanism governed by the people.

If stablecoins adopt a centralized model, they should be subject to the same regulation as other centralized assets. Perhaps now is the time to reignite the original intention of Bitcoin in a more "stable" manner: to develop algorithmically decentralized stablecoins that are not controlled by any corporation, bank, or government, truly revitalizing the core spirit of blockchain.