The Role of Stablecoins in Illicit Activities

• Stablecoins offer criminals a convenient tool for illicit transactions due to their price stability, speed, and wide acceptance across blockchain platforms.
• Global regulators are stepping up efforts to enforce stricter rules and improve transparency in stablecoin usage.

Origin of Stablecoins

Stablecoins made their debut in 2014. It aims to combine the steady value of fiat currencies with the openness and flexibility of blockchain technology. The first of its kind, BitUSD, was introduced in July 2014 as a credit-backed stablecoin on the BitShares platform.

Tether (USDT), which was based on fiat reserves and was pegged 1:1 to the USD, made its debut that same year. After that, the market diversified, with a focus on reserves and transparency in 2017 with MakerDAO’s DAI (crypto-backed) and in 2018 with USDC, TUSD, BUSD, and others.

Core Use Cases for Stablecoins

People use stablecoins every day — to buy coffee, pay employees, send remittances, trade assets, and store value. Moreover, they are faster, less expensive, and more convenient across borders.

1. Daily P2P Remittances and Payments

Sending money to friends and family abroad has become easier and more affordable with peer-to-peer transfers.

Workers in the United States can send USDT directly to people in other countries, skipping the traditional banking system and saving on fees.

2. Acquiring Products and Services

• E-commerce: Shopify and Overstock are two platforms that accept USDC or USDT, enabling customers to use cryptocurrency to buy both digital and physical goods.

Paying in person:

< Starbucks with USDC through the Bakkt app.

< Miami rent payments are made in USDT.

< Purchases made at the point of sale using stablecoin debit cards, such as WhiteBIT Nova

3. Financial Services and DeFi

• Trading and Hedging: Traders often shift between volatile assets and stablecoins to secure their gains. It’s an easy way to take profits while still staying involved in crypto.
• DeFi Lending and Borrowing: Stablecoins like USDC, DAI, and USDT play a major role in it. Platforms such as Aave, Compound, and MakerDAO let users earn interest on their holdings or use them as collateral to take out loans.

4. Store-of-Value in Volatile Economies

In countries like Venezuela, Lebanon, Argentina, and several across Africa, many people are now turning to dollar-pegged stablecoins such as USDT and USDC. These digital assets offer a way to shield their savings from the impact of local currency crashes and ongoing economic turmoil.

5. Business and Institutional Uses

• Payroll: Companies pay global freelancers and employees quickly with stablecoins—workers get funds almost instantly.
• Merchant Payments: Merchants are turning to crypto payment services like BitPay to accept stablecoins like USDC and USDT. These platforms offer faster settlements and lower transaction fees than traditional payment systems, making them a more attractive option for everyday business.
• Treasury Management: Companies are also starting to consider stablecoins as a smart way to manage their liquid reserves. They provide a quicker, more efficient method for moving funds, especially when dealing with transactions tied to tokenized real-world assets.

Regulatory Adoption and Legality

New regulations like MiCA in Europe and recent stablecoin laws in the U.S. are pushing stablecoins closer to everyday financial use. As more shops, businesses, and individuals begin to use them, stablecoins are gradually finding a firm place in the global economy, not just as a trend, but as a tool here to stay.

United States: Stablecoins are set to fall under new regulatory frameworks such as the STABLE Act and the GENIUS Act. To align with these upcoming rules, companies like Circle are actively pursuing national trust charters to make sure that they meet the necessary standards for operation.

European Union: Across the EU, the Markets in Crypto-Assets (MiCA) regulation demands strict transparency and proper custodianship. Issuers who comply, such as Circle and BUSD, are permitted to operate within the region under clear and defined legal guidelines.

Japan treats cryptocurrencies as property. Also, the exchanges operating there must register and follow the rules under the Payment Services Act.

In Singapore, crypto isn’t considered legal tender, but licensed exchanges can operate under the same Act.

Australia and Canada both recognize crypto as taxable and regulated, and the use of stablecoins is permitted.

Brazil allows the use of crypto for payments, with oversight provided by the central bank.

In South Korea, exchanges must be registered, and the use of privacy-focused coins is limited or restricted.

India imposes taxes on crypto transactions, but still doesn’t have clear regulations specific to stablecoins.

Stablecoins Fall Into Four Main Classes

• Fiat-backed stablecoins like USDT and USDC are tied to traditional currencies, with redemption processes handled directly on-chain.
• Crypto-backed options such as DAI are supported by excess cryptocurrency collateral to maintain their value.
• Algorithmic stablecoins, like the now-defunct TerraUSD, use smart contracts to control supply and demand, but often carry significant risk.
• Finally, bank-issued or tokenized deposit stablecoins are digital assets backed by reserves held at regulated financial institutions.

Illicit Use Cases Involving Stablecoins

Several key illicit behaviours now prominently include stablecoins:

• Money Laundering and Fraud

Chainalysis reports that stablecoins accounted for 63% of illicit crypto transaction volume. Criminals favour stablecoins for their low volatility and ease of moving value without leaving exchanges. Moreover, UNODC flagged that Tether on TRON has become popular for cyber-fraud, darknet marketplaces, and crime

• Sanctions Evasion and State-backed Misuse

A stablecoin called A7A5, pegged to the Russian ruble, has been introduced in Kyrgyzstan. It’s reportedly being used to process cross-border transactions tied to efforts aimed at bypassing international sanctions on Russia.

In addition, the FATF emphasizes stablecoins as a major vehicle for money laundering, terrorist finance, and drug trafficking.

DPRK IT workers have been identified using USDC rails to receive illicit payments, yet issuers like Circle haven’t systematically blocked them.

• Ransomware and Darknet Market Use

Though Bitcoin once dominated ransomware payments, stablecoins now comprise the bulk of illicit flows. Over $649 billion in stablecoin transfers in 2024 moved through high-risk addresses, representing over 5% of total stablecoin volume.

How It Works

Notably, criminals generally use stablecoins in illicit activities for a few key reasons:

Stable Value: Unlike other cryptocurrencies that swing wildly in price, stablecoins hold their value. This makes them ideal for preserving the power of purchasing.

Easy Transfers: Users can send it directly to one another without needing a traditional bank account. Also, it makes the peer-to-peer transactions simpler and discreet.

On-Chain Obfuscation: Mixers and chains complicate traceability.

Cross-border Utility: Ideal for smuggling large sums across borders quickly.

Issuer Freeze Power: Centralized issuers can freeze flagged accounts, but detection lags in real-time.

Restricting Illicit Use

Mitigating misuse requires a combined strategy:

1. Regulatory Oversight

FATF urges AML/KYC rules for stablecoin issuers (VASPs), notably FATF Recommendation 15.

BIS warns that stablecoins—if unmanaged—may destabilize finance and recommends central bank-backed alternatives

2. Issuer Control

Examples include Tether freezing $225 million in USDT tied to scams.

Circle froze $57 million in USDC following a U.S. court order.

3. International Cooperation

Sanctions evasion schemes like A7A5 require cross-border financial cooperation. Also, FATF calls for shared intelligence and harmonized licensing.

4. Central Bank Digital Currencies (CBDCs)

BIS supports maturing CBDC frameworks that preserve privacy while enabling granular oversight.

Types of Stablecoins: Current and Upcoming

• Current Varieties

USDT, USDC, BUSD, TUSD – Dominant fiat-backed tokens

DAI – Crypto assets back it, and a decentralized community governs it.

Algorithmic – TerraUSD collapsed and eroded trust in models.

• Emerging and Proposed

Retail stablecoins: Walmart and Amazon are exploring token launches for payments

Bank-issued tokens: NAB launched AUDN; the central banks may follow.

Commodity-backed: Pax Gold (PAXG) and others are paired with real assets.

Some of the early illicit uses are noted at around 2017–2018, where Tether grew from $10M to $2.8B in circulation. Further in 2022, TerraUSD collapsed and shifted focus to fiat-backed tokens.

Conclusion

Stablecoins were designed to stabilize and expand the utility of crypto. In addition, the predictable value and accessibility serve countless legitimate use cases. Just because stablecoins are centralized, globally accessible, and programmable, they draw the attention of bad actors looking to exploit these features.

Looking forward, the crucial factor will be finding the right balance, bringing smart regulation. In addition, better blockchain tracking tools and accountability from stablecoin issuers. At the same time, it’s just as important to protect the unique benefits that digital finance offers. As stablecoins move from being a niche product to becoming a key to global finance, getting this balance is more important.