Stablecoins are crypto assets that aim to maintain a stable value relative to a specified asset or a pool or  basket of assets.1 To achieve stability, assets backing stablecoins are usually held.2 These can be fiat  currencies, bank deposits, short-term market instruments, and even other crypto assets. There are  various types of stabilizing mechanisms, some of which are vulnerable to risks in a stressed market  environment. So far, stablecoins have been issued by nonbanks, which are lightly regulated or  unregulated. This paper focuses on stablecoins with a face value denominated in a monetary unit of  account, such as the US dollar, and backed by financial assets, such as high-quality bonds. 

Stablecoins have experienced periods of rapid growth, which also accelerated links between  traditional finance and the crypto ecosystem. In 2021, the market value of stablecoins quadrupled in  conjunction with the rise of decentralized finance (DeFi), although it has since fallen in line with the  broader crypto market. Dollar-denominated stablecoins are growing in popularity in emerging market and  developing economies as a potential store of value and hedge against inflation and exchange rate  volatility, raising risks of dollarization and cryptoization. The involvement of large financial institutions in  areas like reserve management, custody, and issuance has the potential to rapidly generate new risks. In  addition, higher volatility correlation has been observed between stablecoins and stock markets,  especially during recent market stress periods. Without proper regulation, contagion risks between  traditional finance and crypto ecosystem will increase. 

Comprehensive, consistent, and coordinated global standards are required to achieve effective  crypto regulation and supervision, especially for stablecoins and their broader ecosystem. While sectorspecific global standards are useful, cross-sectoral coordination is essential to achieve an effective  regulatory framework for the crypto ecosystem, particularly stablecoins. The Financial Stability Board  (FSB) is well placed to take the lead in coordinating and establishing global standards to support national  regulation of crypto assets, including stablecoins, and their ecosystem (or “arrangements”), taking into  account sector-specific standards developed by other standard setters.