MW Stablecoins are a shaky proposition for investors: Here's what you need to know

By David Weidner

This so-called 'safer' cryptocurrency offers some advantages to investors. But can you trust the providers?

Bitcoin, ethereum and stablecoin USDT are promoted at a cryptocurrency store in Hong Kong.

Even if we use stablecoins to buy everything from toothpaste to homes, these digital dollars carry big risks.

Stablecoin, the purportedly "safer" version of cryptocurrency, is having its moment. On the heels of the GENIUS Act, which Congress passed last July, the value of all stablecoins is now more than $300 billion - roughly 7% of all crypto in circulation.

Stablecoin's run is even more impressive given that its stability is overrated. Safety and security as an asset vary widely by issuer, and stablecoins offer little benefit to crypto investors and almost nothing to non-crypto investors.

Because stablecoins now have a rough regulatory framework and crypto is in a hot phase, it's no surprise that investors are taking a hard look at this relatively new form of crypto investing. Unlike standard cryptocurrencies like bitcoin (BTCUSD) or ethereum (ETHUSD), stablecoin values are tied to the U.S. dollar DXY, favored by the current administration in Washington and traditional parts of the financial sector.

It's not hard to see why stablecoins have become popular. The evangelists say they keep investors "on chain" (using a digital wallet) without the volatility of traditional crypto. They avoid banking, and in doing so, avoid fees, can delay taxes (before converting to dollars) and can be used as dry powder for other investing opportunities. In some ways, it's like a digital money market without the physical money.

And stablecoins can yield returns. They can be loaned to decentralized finance (DeFi) platforms, with most paying between 3% to 8% for their use.

Because they're digital, stablecoins bypass banking hours and borders. Evangelists say they offer speed, transparency, and access. Though I'm a crypto agnostic, I acknowledge that the most well-known coins have been exceptional, if wildly volatile, investments over the past 15 years. Bitcoin produced 49% annual returns during the past decade.

Read: Why banks are afraid you're going to ditch them for stablecoins

Cryptocurrency is a widely held asset class and a hedge against inflation. It is digital gold, and there's value in that. But crypto hasn't been adopted in any meaningful way by the public. It has never lived up to the initial promise of replacing dollars, euros (EURUSD) or any currency. As a practical payment tool, it's been great for criminal activity and expats who want to send money home.

Stablecoins may prove to be different, but even if we're using them to buy everything from toothpaste to homes, these digital dollars carry big risks.

-- Regulatory uncertainty: Bank-like regulation is closer, but it isn't here yet. The GENIUS Act is a major step, but it doesn't fully address all of the intended uses and foreign regulatory regimes. There has been a crypto turf war between the Commodity Futures Trading Commission and the Securities and Exchange Commission. The leaders say the battle is over, but as with many policies these days, this could change fast. It's not too hard to imagine a clampdown or chaos.

-- Reserve risk: Stablecoins need to be supported by real money, and some of the biggest issuers can't fully explain how they'll do that. One of the biggest stablecoin sources, Tether USDTUSD , for instance, still hasn't hired a top-tier accounting firm to review its books regularly. This is a scary proposition considering one of the big wipeouts in the space: FTX.

-- Counterparty and platform risk: The so-called "smart contracts" don't always hold up, and the crypto industry is full of disasters. Celsius went bankrupt in 2022 and owes users $4.7 billion. The TerraUSD and LUNA blockchain imploded the same year, wiping out $45 billion. And that's a short list that doesn't include scams or hacks. Last year, investors lost $5.8 billion to crypto-investment fraud, according to the Federal Bureau of Investigation.

It sounds stable, but proceed with caution

Who wants to do business with someone without the trust of banking guardrails?

Scams, hacks, uncertainty and mismanagement aren't unique to the cryptocurrency world. All new - and many old - financial products have vulnerabilities. It's the reason we have the Securities and Exchange Commission, the Federal Deposit Insurance Corporation, and the Commodity Futures Trading Commission. Even mature investing instruments can go off course. Take a look at the history of Fannie Mae and Freddie Mac if you think mortgages are simple, solid and well-regulated.

How do investors proceed with stablecoin? Here's what I would ask:

-- What backs the coin? Is there audited proof? Good: U.S. Treasurys, cash. Regular full reporting with an auditor. Not good: commercial paper or other crypto assets. Investors should shop for assurance that the stablecoin is truly tied to a hard-currency asset.

-- Who's the regulator? Offshore companies have been the source of multiple crypto disasters. Stay in the U.S. Make certain the reserves are in a bankruptcy-proof account. Get as close to a guarantee as possible that you can redeem in case of a failure.

-- What do I get and why? Is it just 1:1 to the dollar (which might be fine to park money after cashing out)? Or will there be a yield? If so, where is the yield coming from? To whom does the stablecoin provider lend? What happens if the coin breaks the peg or if redemptions are halted? How close can I get to the holy grail: FDIC protection? The issuer should clearly spell out the terms on its website.

If seeking these safeguards sounds unreasonable, I would argue that it's what anyone gets with a dollar in the bank. Fed moves, inflation, government spending, balance sheets, Treasury sales and prices - transparency. You can invest in a high-yield savings account and redeem with the assurance of FDIC protection.

Read: You've got less than 5 years to rescue your money from AI and stablecoins. Here's what to do.

This isn't to say there's no place for stablecoin and there aren't issuers who offer good answers to these questions. Circle Internet Group Inc. (CRCL), for instance, is audited by Grant Thornton, holds dollars and U.S. Treasurys (reported monthly for reserves and is exploring a banking license. PayPal Holdings Inc. (PYPL) and Gemini Space Station Inc. $(GEMI)$ have similar safeguards. As public companies, they also have reporting requirements.

But even for the most responsible issuers, stablecoins aren't altruism; they're deposits. The reserves earn interest, and fees are charged. The issuers are trying to corner the market and create their own ecosystem. They are making the rules, and the rules could change. In many ways, that's no different from the banking system.

It's that last part that makes one wonder: Why have a stablecoin at all? Being "on the chain" allows users global access and avoidance of regulatory rails or settlement delays. But how many people really need that? It does offer DeFi developers opportunities to build financial products without a banking license. But again, who wants to do business with someone without the trust of banking guardrails?

Ultimately, stablecoins are probably here to stay. But unless you're deep into crypto and DeFi, it may be better to stay away, for now.

David Weidner writes about markets, money and the stories behind them. His work has appeared in MarketWatch, The Wall Street Journal, McKinsey Quarterly, The Deal and American Banker.

More: Stablecoins aren't the threat to your money that the banking industry would have you believe

Plus: You're just getting scraps from the stock market. Here's where the big money is made.

-David Weidner

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October 28, 2025 09:00 ET (13:00 GMT)

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