The global stablecoin market has expanded at a pace that is beginning to concern regulators, even as broader financial markets appear calm on the surface. According to the latest Financial Stability Report released by the Reserve Bank of India on December 31, the total market capitalisation of stablecoins has nearly tripled to around $300 billion over the past two years. The RBI warns that this rapid growth, driven by privately issued digital money, could intensify financial stability risks and undermine monetary sovereignty across both advanced and emerging economies.

The surge in stablecoins comes against a fragile global financial backdrop. While equity and credit markets have remained resilient and volatility indicators subdued, the RBI notes that underlying vulnerabilities remain elevated. High public debt levels, stretched asset valuations, increasing dependence on non-bank financial intermediaries, and deeper links between traditional finance and crypto markets have created conditions where sudden corrections could have outsized effects.

Within this environment, stablecoins have emerged as a core pillar of the crypto ecosystem. Pegged to fiat currencies such as the US dollar or the euro, they are marketed as low-volatility digital instruments designed for payments and value storage. Regulatory clarity in major jurisdictions between 2023 and 2025 has further accelerated adoption, lending a degree of legitimacy to what was once a niche market.

The scale and structure of the stablecoin market have shifted rapidly. The RBI report highlights that the number of active stablecoins rose from around 60 in mid-2024 to more than 170 by mid-2025. Over the same period, market capitalisation jumped from approximately $120 billion to $300 billion.

Despite this apparent diversity, the market remains highly concentrated. Nearly 99 percent of stablecoins are denominated in US dollars, and two issuers Tether and Circle together account for about 85 percent of total market value. This concentration, the RBI notes, creates systemic exposure, as stress at a handful of issuers could ripple across the broader crypto and financial ecosystem.

Although branded as “stable,” these instruments have repeatedly shown vulnerability to volatility and confidence shocks. Algorithmic stablecoins, in particular, have struggled to maintain their pegs. Past episodes such as the collapse of TerraUSD in May 2022 and price dislocations during the US banking turmoil in March 2023 underscore the fragility of such arrangements.

More recently, S&P Global Ratings downgraded Tether, citing higher exposure to risky reserve assets and shortcomings in disclosure. These developments reinforce regulators’ concerns that the perceived safety of stablecoins may not hold under stress.

Currently, stablecoins are used predominantly within the crypto ecosystem itself. They account for over 80 percent of trading volumes on major centralised crypto exchanges, functioning largely as a bridge for buying and selling other digital assets and for providing liquidity. Real-economy applications remain limited, though cross-border payments are often highlighted as a potential growth area.

The RBI draws a clear distinction between the promise of stablecoins and their proven utility. While advocates argue that stablecoins can lower costs and speed up cross-border transactions by bypassing correspondent banking networks, policymakers caution that many of these benefits arise from underlying blockchain technology rather than from stablecoins themselves.

A more serious concern flagged in the Financial Stability Report is the risk of “digital dollarisation.” In economies facing inflation, currency volatility, or capital controls, dollar-pegged stablecoins can become an attractive store of value. Unlike traditional dollarisation, however, stablecoins can spread rapidly through digital platforms and network effects, weakening monetary policy transmission and eroding domestic monetary sovereignty a risk particularly acute for emerging and developing economies.