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Why the stablecoin revolution won’t come to institutional FX just yet
Stablecoins are grabbing headlines right now, and no wonder. These digital assets promise to combine the efficiency and programmability of cryptocurrencies with the stability of fiat money, potentially revolutionizing payments, trading, and treasury operations.
However, their future trajectory – particularly in the wholesale foreign exchange market – remains uncertain. While there may be a lot of hype around USD-pegged, reserve-backed stablecoins right now, their growth will be shaped by a complex interplay of regulatory, technological, and geopolitical forces. Emerging regulatory frameworks may support broader adoption, but when it comes to institutional FX, stablecoins face a reality check on their true value proposition – at least for the foreseeable future.
Stablecoin optimism
Like Bitcoin or Ethereum, stablecoins are digital assets issued on a blockchain. But while cryptocurrencies are notoriously volatile, stablecoins aim to maintain a fixed value relative to a fiat currency like the US dollar.
Stablecoins are a core feature of decentralised finance, allowing traders to move easily in and out of crypto positions, and serving as a bridge between crypto and traditional money. Increasingly, their relative stability has drawn interest from payments providers, fintechs, and investment banks that see potential for faster settlement, 24/7 operations, and automated transaction flows.
While their share of total market activity remains marginal, growth is unmistakable. Global stablecoin capitalisation reached USD300 billion in October 2025. Momentum has been reinforced by regulatory developments, as governments introduce dedicated legal frameworks and aim to integrate stablecoins safely into the broader financial system.
Is wholesale FX ripe for revolution?
In wholesale FX, similarly, advocates argue that stablecoins could deliver faster, cheaper and more transparent settlement and facilitate near-instant cross-border transfers.
Yet while stablecoins are gaining traction in parts of institutional finance, their promise of transforming FX remains remote for now. Wholesale market participants already operate within a globally integrated ecosystem designed to support high-volume trading and settlement.
Against this backdrop, stablecoins face structural, operational and regulatory barriers that limit their immediate appeal:
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Fragmentation: Stablecoins are issued on blockchains, which are not necessarily interoperable. Tokens issued on one chain may not easily move to another, leading to fragmented liquidity and the need for cross-chain bridges, which are often vulnerable to hacks and operational failures
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Accounting and regulatory issues: Stablecoins are not yet universally recognised as cash equivalents under accounting standards. This lack of clarity affects how they can be held and reported on balance sheets, complicating adoption by regulated financial institutions.
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Lack of elasticity: Unlike central or commercial bank money, stablecoins cannot expand or contract liquidity in response to market demand. This rigidity makes them less suited to support large payment flows, especially during periods of stress or volatility.
In other words, wholesale FX market participants are already optimised for existing fiat infrastructure that is regulated, integrated, and familiar.
Consider one commonly discussed model for the use of stablecoins in cross-border FX transactions, the so-called “stablecoin sandwich”. Under this setup, fiat currency is converted into a stablecoin, transferred to another country, and then converted into the local fiat currency on the receiving side. This can, theoretically, streamline international transfers, sidestepping the complex correspondent banking network.
Some payments providers are already using this model for retail remittances and smaller-scale transfers. However, it’s less practical for wholesale FX. One reason is that the “sandwich” depends on real-time instant gross settlement, requiring counterparties to fully pre-fund the transaction, tying up capital that could be deployed elsewhere.
Wholesale FX markets, by contrast, benefit from established bi- and multilateral netting mechanisms that free up considerable liquidity for the FX market. CLS’s payment-versus-payment (PvP) service, for example, reduces the total funding required by 96% on average.
Bilateral netting also plays a significant role in mitigating risk, a priority that remains high on the agenda of joint public and private sector initiatives. While stablecoins may achieve faster settlement of individual transactions, that speed does not eliminate risk. If liquidity or convertibility issues arise on the receiving end, for example, settlement can still fail.
Reality check
Digital assets promoters often frame stablecoins as inevitable disruptors of global payments and FX. Yet traditional structures are not static and continue to evolve - through upgrades to real-time gross settlement systems, for instance. These developments are to some extent closing the gap that stablecoins claim to bridge.
For now, institutional FX players have limited motivation to adopt blockchain solutions, as their benefits have not yet been demonstrated at scale.
First published in e-forex.net, November 2025.