Stablecoin Regimes and Their Interoperability Problem

Why Regulatory Interoperability Is Needed

In 1858, $1 from a Missouri bank did not equal $1 in Manhattan. During America's Free Banking era, thousands of banks issued their own notes, but few held their value. It took the National Banking Acts (1863–64), 26 years into the era, to make a dollar truly equal a dollar. National banks had to accept each other's notes at par, collateralised by US government bonds. A note's discount priced two things, namely the cost of redemption, which grew with distance from the issuer, and the risk of default. That episode anchors the most common criticism of stablecoins: that they threaten the singleness of money, the principle that a dollar is a dollar in every form it takes, at all times, without cost of conversion.

Before discussing policy, it is important to understand how fiat-backed stablecoins maintain their peg. First, each token is redeemable for $1 of reserves, so any discount creates an arbitrage opportunity that pulls the price back to par. Second, liquidity keeps the market price at par because 99% of holders trade stablecoins, as most holders cannot redeem directly with the issuer and trade in secondary markets instead. In essence, deep secondary markets absorb selling with minimal price impact. Depegging only occurs when liquidity breaks down faster than the redemption mechanism can restore the peg. For example, in March 2023, USDC temporarily depegged to 87 cents due to the collapse of Silicon Valley Bank, which held a large chunk of Circle's reserves. Arbitrageurs would not buy USDC near par because the redemption that justifies the trade was itself in doubt.

Of the two mechanisms, redemption can be supplied on day one, since reserves can be bought as issuance grows. Liquidity, however, is a network good, supplied by every trader willing to hold the coin at a discount and compounded by use: the more a token trades, the cheaper it is to trade, and the tighter its peg holds. Therefore, liquidity is a major barrier for new issuers, and this is where regulation comes in.

When countries adopt incompatible rules, a stablecoin approved in one jurisdiction cannot be freely traded or redeemed in another. This fragments the arbitrage that keeps prices aligned, confining liquidity and redemption within jurisdictions. Large incumbents can absorb this fragmentation because they already have deep, global liquidity. Indeed, regulatory fragmentation strengthens their position by raising the cost of entering multiple markets. New issuers face the opposite problem: without cross-border liquidity, they struggle to reach the scale needed for a stable peg. A country that designs bespoke rules to promote a domestic stablecoin therefore risks achieving merely a shallow, siloed market. For instance, even within the EU, the stablecoin market is only about 0.2% of the global market. A jurisdiction that confines a stablecoin to a smaller market should expect even less.

There is one important difference from 1863. The National Banking Acts were imposed by a Congress that could tax rival notes out of existence, and did. No such authority exists between countries. Governments with interests of their own have to negotiate the modern equivalent, and the question is whether they ever will.

Why Convergence Is Realistic

Basel III, the set of common banking standards agreed after the 2007–08 crisis, when politicians, banks, and regulators collaborated to rebuild the world financial system, remains a leading example of how cross-jurisdiction collaboration can succeed. A paper by Finance Watch, however, argues that without a crisis, regulation becomes a way to compete, resulting in siloed regimes.

Felix Haynes, International Policy at Coinbase, accepts that jurisdictions, regulators, and politicians will have different mandates; some promote innovation, while others protect financial stability. "But it also doesn't take a crisis to identify common interests," he argues. Stablecoins and tokenisation promise cheaper, faster cross-border payments; policymakers and financial institutions are starting to see the opportunity. In his view, "shared interests between jurisdictions are enough to make stablecoin regulation work internationally, even if compromises have to be found on certain issues."

Most jurisdictions want stablecoins in their own currencies, but isolated coins lack the liquidity needed for adoption. Liquidity is itself a moat, and for countries seeking monetary sovereignty through a domestic stablecoin, openness and cross-market access are the winning combination, allowing local currency stablecoins to compete globally. Open access allows liquidity to aggregate across markets, giving local currency stablecoins a path to global relevance while strengthening the broader stablecoin ecosystem's ability to compete with traditional financial rails. For individuals, a locally denominated stablecoin lets users hedge FX risk, settle rent, payroll, and B2B invoices in local currency, and rely on clearer legal standing than an unregulated USD stablecoin offers.

Outside stablecoins, initiatives such as Project Agorá, led by the Bank for International Settlements with 7 central banks and more than forty financial institutions, show how far cooperation can extend. The prototype illustrates how unified ledgers can fix the slow, costly, and opaque nature of wholesale cross-border payments.

Even the GENIUS Act allows foreign issuers to rely on comparable home-country rules, while the UK plans to permit overseas stablecoins with clear disclosures rather than duplicate regulation. Fragmentation may protect incumbents in the short term, but it does not strengthen currencies whose influence depends on global use. A closed system invites others to build alternatives, and dollar stablecoin dominance cannot be assumed as more globally accessible coins emerge. On the other hand, in an open system, access to foreign stablecoins brings users greater liquidity and choice, while making reciprocal access for domestic issuers easier to achieve.

What Regulatory Interoperability Actually Looks Like

None of this requires identical rules. Haynes argues that "no regulated sector sees completely identical rules in every jurisdiction, and I don't believe this should be the bar for stablecoins." Haynes continues by saying that agreement on core principles is sufficient to justify non-duplicative regimes, allowing access across markets to coexist with genuine consumer protection. However, if two regulators impose different reserve requirements or redemption deadlines on the same issuer's global operations, complying with both concurrently becomes close to impossible, even where the regulators want the same outcomes. Avoiding those clashes has to come first in any regime built for international business.

Mutual recognition and substituted compliance can reduce regulatory friction by allowing firms that meet rules in one country to operate elsewhere without unnecessary duplication. Countries are generally choosing between two models: requiring local versions of global stablecoins to operate alongside foreign-issued ones, or relying on regulation in another jurisdiction where standards are considered comparable. Either approach can work, but countries should avoid overlapping requirements. If they set their own rules, they should not require extra equivalence agreements, and if they rely on foreign rules, they should not add duplicate local requirements. Open blockchain infrastructure also supports global interoperability by allowing different systems to connect without forcing everyone onto a single closed platform.

The best regimes will set clear, principled standards and leave room to adapt as the technology does. The EU has begun discussing what changes MiCA may need, and the focus appears to be on making Europe an attractive place to issue and build, without cutting it off from the liquidity of global markets. The Free Banking era ended when a note's value stopped depending on where it was issued. Singleness can only be achieved with the help of proportionate regulatory systems, and if true regulatory interoperability is achieved, stablecoin adoption will only accelerate.