In its October 2025 Financial Stability Review, the Reserve Bank of Australia (RBA) has issued a warning that stablecoins pose several financial stability risks to the Australian market and beyond.
The main driver of this concern is the rapid growth of stablecoins across the globe, as they have moved from specialised trading instruments to global payments and settlement tools.
“Stablecoin issuers are increasingly considering use cases that extend beyond the crypto ecosystem and there is significant interest globally in the potential for well-regulated stablecoins to enhance the efficiency and functionality of a range of payment and other financial services,” states the RBA.
“However, the growing use of stablecoins also presents risks, including to financial stability.”
Stablecoin adoption can’t be ignored
In its stablecoin focus topic, the RBA notes that the concern stems from the momentum and growth speed of stablecoins.
At the end of June 2025, stablecoin market capitalisation stood at US$250 billion. This is still a modest figure, as it represents around 3.3% of US money market fund (MMF) assets, but the growth has been by more than 50% in the last 12 months to June 2025. The capitalisation is expected to continue growing, with industry projections being US$500 billion by 2028 and US$4 trillion by 2035.
A major point to note here is that most of the growth of stablecoins has been fuelled by their use as a bridge in crypto asset trading. However, the use is now diversifying to cross-border payments, payments of goods and services, and as a store of value in countries where local currencies are unstable.
At the moment, USD-based stablecoins dominate the market. However, more stablecoins backed by various currencies are emerging following government regulations. In Australia, there are already four AUD-backed stablecoins in operation: UDM, AUDD, AUDF, and A$DC.
Concerns over a fragmented regulatory approach
The RBA has made it clear that one of the drivers of the financial stability risks posed by stablecoins is the current global landscape of fragmented regulation. As different jurisdictions create crypto and stablecoin-specific regulations, there’s a similarity in substance but significant divergence in policy preferences.
This lack of consistency enables stablecoin issuers to engage in regulatory arbitrage, where they may opt to operate from jurisdictions with weak oversight. This then leads to the export of potential risks and vulnerabilities to markets like Australia, and the G20’s Financial Security Board (FSB) had also warned of the same in October.
How stablecoins could affect financial stability
The fact that the largest stablecoins are USD-pegged means that they are exposed to similar conditions. Tether’s USDT is the largest, with US$162 billion in assets, with Circle’s USDC holding US$61 billion. Both hold most of their reserves in short-term US Treasury securities (T-bills), which, according to the RBA, raises several financial stability concerns.
Stablecoin reserves can affect the bond market
The fact that the major stablecoins hold most of their reserves in US Treasury bills risks concentration in the sector. As they continue to grow, their percentage in US T-bills will also grow and significantly influence the sector. But then, a sudden decline in sentiment towards stablecoins could trigger asset fire sales with the potential to affect other crucial US funding markets.
Money could shift out of bank deposits and into stablecoins
Stablecoin purchases mostly involve moving funds from banks to stablecoin reserves such as T-bills. This means that if the growth continues, it could affect liquidity management for banks, especially during periods of financial stress.
Technology failures can spill into payment systems
The RBA cautions that the complexity of the broader crypto and decentralised finance (DeFi) ecosystem introduces significant operational risks. If there’s a considerable cybersecurity breach or a smart contract failure, the interlinkage with banks means that the impact would be felt across the entire financial system.
What this means for investors
The various risks mean that investors need to make several considerations when dealing with stablecoins.
Prioritise local regulation and licensing
Pegging alone doesn’t guarantee security. Considering that licensing is also fragmented and there’s a risk of regulatory arbitrage, Australian investors are encouraged to prioritise AFS licences. ASIC has recently clarified that it views stablecoins as financial products under the Stored-Value Facility (SVF) framework, which ensures the same oversight as traditional financial products under the Corporations Act 2001.
Know what backs the stablecoin
The quality of the pegging is the security, not the peg itself. This means that investors need to avoid stablecoins that lack frequent, independent, and publicly available audits of their reserves. The highest standard is backing by liquid assets like cash and high-quality, short-term government securities (like T-bills).
Steer clear of algorithmic complexity
The financial stability risk identified by the RBA is highest in uncollateralised stablecoins, specifically algorithmic stablecoins. These only rely on code and market incentives to maintain their peg, complexity and ambiguity that the RFA is warning about. In fact, they’ve already demonstrated failure with the collapse of TerraUSD in 2022.
The RBA isn’t telling investors to avoid stablecoins. Rather, it’s urging that Australians treat them like a financial product with counterparty, market, and operational risk – not cash.
