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What is stablecoin: Risks and opportunities for financial institutions

Terri Luttrell, CAMS-Audit, CFCS
October 10, 2025
Read Time: 0 min

Understanding stablecoins and their purpose

Stablecoins are digital assets designed to maintain a consistent value, often by pegging their price to a fiat currency like the U.S. dollar. By reducing the volatility typically associated with digital assets, stablecoins offer a bridge between traditional finance and cryptocurrency.

There are three primary types of stablecoins, each with its own structure and risk considerations:

  1. Fiat-backed (collateralized)

These are the most common type of stablecoin. Each token is backed 1:1 by fiat currency or short-term government debt, with reserves typically held in regulated financial institutions. Transparency and regular audits are key components of trust in this model.

Examples: USDC, USDT (Tether), TrueUSD
Key traits:

  • Simple to understand and widely used
  • Considered lower risk, though reliant on issuer compliance and reserve verification
  1. Crypto-backed

Backed by other cryptocurrencies such as ETH, these stablecoins are often over-collateralized to account for the price volatility of the underlying assets. Collateral is held in smart contracts rather than traditional banks.

Examples: DAI, sUSD
Key traits:

  • Decentralized structure
  • Increased complexity and risk due to market volatility and smart contract exposure
  1. Algorithmic (non-collateralized)

These stablecoins use code, not reserves, to maintain price stability. Algorithms automatically expand or contract token supply based on market conditions. While the goal is price stability, this model remains largely experimental.

Examples: Frax (partially algorithmic), TerraUSD (defunct)
Key traits:

  • Offer decentralization
  • High risk and prone to failure during periods of stress

Other models to be aware of:

  • Commodity-backed: Pegged to assets like gold (e.g., Pax Gold)
  • Hybrid models: Combine multiple elements from the categories above to balance stability and decentralization

Understanding these categories can help financial institutions assess which stablecoins, if any, align with their risk tolerance, regulatory obligations, and long-term strategy.

Why financial institutions should care

Stablecoin’s steady value makes it a more practical option for everyday transactions than other cryptocurrencies, which are known for volatility. It combines the efficiency of blockchain technology, such as rapid settlement and lower transaction costs, with the financial stability that businesses and consumers expect from a medium of exchange.

In a historic move, the Senate Banking Committee recently passed a bipartisan stablecoin bill, known as the GENIUS Act. Signed into law in July, this law sets guidelines for stablecoin issuers and could make stablecoins common for digital payments and investments.

The legislation introduces a plan for regulating stablecoin use, requiring 1:1 backing in cash or U.S. Treasuries and giving the Federal Reserve supervisory authority over large issuers. State regulators would oversee smaller issuers, preserving their role in overseeing regional financial institutions. This legislation is the most concrete sign yet that policymakers are preparing to bring stablecoins into mainstream payments, and compliance expectations are quickly materializing.

Stablecoin has the ability to offer faster settlement, greater accessibility, and new customer engagement opportunities. Examples include cross-border transfers, payroll, merchant payments, and decentralized (DeFi) platforms. With acceptance on the rise, financial institutions should understand how these products may intersect with their operations and risks, particularly in payments and compliance.

Risks and opportunities for financial institutions

Stablecoin has emerged as a key focus in the digital asset space, offering a less volatile alternative to traditional cryptocurrencies. The stablecoin market grew to approximately $159 billion in 2024 and has surged to more than $255 billion this year. With U.S. lawmakers signaling support and growing adoption across both consumer and institutional channels, now is the time for financial institutions to assess how stablecoins could impact their digital payment strategies.

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FinCEN guidance on Stablecoin regulation

The Financial Crimes Enforcement Network (FinCEN) considers stablecoin a type of convertible virtual currency (CVC). As such, any financial institution facilitating stablecoin transactions must comply with Bank Secrecy Act (BSA) requirements and implement anti-money laundering/countering the financing of terrorism (AML/CFT) measures. This includes customer due diligence, suspicious activity reporting, and transaction monitoring.

Fraud guidance

In its guidance, FinCEN has warned that digital assets, stable or not, can still be exploited for money laundering, sanctions evasion, and fraud. Financial institutions must be prepared to identify and mitigate these risks, particularly as digital payment methods become more integrated with traditional banking.

Key risks financial institutions should consider

As stablecoins move closer to mainstream use, they bring new risks that banks and credit unions must be ready to manage:

Liquidity pressure during high redemptions

Even stablecoins that are fully backed by reserves can face problems if customers lose confidence and try to cash out all at once. This kind of “run” can create short-term cash flow challenges for institutions holding or processing these assets.

Risk tied to third-party partners

Working with outside stablecoin issuers or fintech providers means relying on their financial health and operational practices. Institutions should carefully vet these partners and have clear agreements in place about who is responsible for safeguarding assets, processing redemptions, and managing risks.

Compliance uncertainty and reputation concerns

The rules around stablecoins are still developing. Moving too fast, or not fast enough, can put a financial institution at risk. Engaging in stablecoin activities without a strong compliance program could lead to regulatory issues or damage customer trust.

Challenges detecting financial crime

Some stablecoin transactions are harder to trace than traditional payments. Without the right tools and processes, institutions might miss signs of suspicious activity. To stay compliant, AML and fraud monitoring programs should be able to track and evaluate blockchain-based transactions effectively.

Stablecoin carries many of the same risks as other financial instruments, plus some new ones. From AML/CFT compliance to liquidity planning, community financial institutions must treat stablecoin not just as a trend, but as a potential risk area that should be analyzed and managed.

What financial institutions should do now

Financial institutions have an opportunity to proactively position themselves as innovators and trusted providers of secure digital services. Whether or not your institution is engaging directly with stablecoin, these actions will help strengthen your position:

  1. Reassess your AML/CFT program: Ensure your risk assessment and AML/CFT compliance program can monitor for stablecoin risks, including identifying typologies related to stablecoin transactions.
  2. Monitor federal and state developments: Stay informed on legislative updates, particularly as the Senate bill advances. Look for guidance from FinCEN, the OCC, the NCUA, and the Federal Reserve on expectations for banks and credit unions.
  3. Engage internal stakeholders: Involve compliance, risk management, IT, and product development teams early. The more coordinated your approach, the better equipped you’ll be to assess opportunities and risks.
  4. Build fintech risk assessment processes: If partnering with a fintech or stablecoin issuer, apply enhanced due diligence measures and ensure service-level agreements clearly define responsibilities around compliance, custody, and data security.
  5. Educate your customers and your board: Help board members, executives, and customers understand how stablecoins work and the steps your institution is taking to protect their funds and data.

Looking ahead: Stability through preparation

Stablecoins have the potential to change how money moves, but they also bring new responsibilities for financial institutions. While this form of digital asset offers faster and more efficient payments, it also raises questions about oversight, risk, and readiness. With regulators beginning to set clearer expectations, now is the right time to get ahead of the curve. Banks and credit unions have succeeded by earning trust and adapting early, and preparing for stablecoin activity is a natural extension of that strength.

Stay ahead of stablecoin-related threats with proactive monitoring.

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About the Author

Terri Luttrell, CAMS-Audit, CFCS

Compliance and Engagement Director
Terri Luttrell is a seasoned AML professional and former director and AML/OFAC officer with over 20 years in the banking industry, working both in medium and large community and commercial banks ranging from $2 billion to $330 billion in asset size.

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About Abrigo

Abrigo enables U.S. financial institutions to support their communities through technology that fights financial crime, grows loans and deposits, and optimizes risk. Abrigo's platform centralizes the institution's data, creates a digital user experience, ensures compliance, and delivers efficiency for scale and profitable growth.

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