The market for stablecoins is surging, with bullish forecasts pointing to a transformative role in the future of finance. Citibank projects that stablecoin supply could reach $1.6 trillion by 2030, with a bull-case scenario hitting $3.7 trillion, driven by institutional adoption, regulatory clarity, and increasingly virtuous use cases (Citi GPS Report, Blockchain, Digital Dollar, 2025).
This growth isn’t just about market cap. It means a far larger amount of money will flow into and out of stablecoins. Every fiat-to-coin and coin-to-fiat conversion adds to total transaction volumes, with stablecoins often acting as an intermediary between payment rails.
Stablecoin Risks: As Stablecoins Go Mainstream
Despite their growing promise, stablecoins carry risks that traditional payment systems don’t. Fraud, illicit flows, and operational failures become harder to control when transactions are near-instant and irreversible. These risks are amplified as adoption accelerates, making pre-transaction checks such as Know Your Payee (KYP) vital to building trust.
Unlike traditional account-to-account (A2A) payments, stablecoins introduce new A2A money movement flows, particularly:
- Stablecoins can be used as a new payment rail between traditional fiat accounts, hence representing a new form of 2 in A2A. This scenario is also known as the sandwich, where a fiat currency is converted to stablecoin (on-ramp) and then converted from stablecoin to fiat currency (off-ramp).
- Stablecoins can be a new form of Accounts in A2A, where traditional fiat accounts are replaced by wallets representing stablecoins on the blockchain.
These flows aren’t inherently riskier, but their speed and finality make them more fragile without trust built into the process. Fraud spiked when faster payment systems launched; stablecoins may follow this trend. Trust and security are likely to lag behind transaction volume growth.
Stablecoin Regulation 2025: Catching Up, But is Not Comprehensive Enough
Recent regulatory initiatives offer some comfort however most initiatives are silent on fraud and illicit flows. There is a presumption of safety because of the rapidly liberalising regulatory environment.
- The US Genius Act (July 2025) introduces federal licensing for stablecoin issuers.
- Hong Kong’s Stablecoin Licensing Regime, known as the Stablecoin Ordinance (August 2025) sets capital and incorporation rules.
- Singapore’s Payment Services Act has also introduced a robust regulatory framework for stablecoin issuing including minimum capital requirements and local incorporation.
- MiCA (Markets in Crypto-Assets) regulation in the EU is also setting guardrails for stablecoin issuers across member states, including licensing, disclosure, reserve requirements, and other MiCA stablecoin requirements designed to increase transparency.
In general, these moves are critical for legitimising stablecoin issuance and operator accountability. But they largely do not (intend to) address payment-side risks such as illicit money flows and payments scams and fraud. These areas remain largely unaddressed.
The “Stablecoin Sandwich” Problem: Top, Bottom, Filling
The most vulnerable points in a stablecoin transaction lie in what appears to be a simple sandwich structure, with fiat in and fiat out. But in practice, it's often more of an “open sandwich”, with wallet-to-wallet hops in between, making identity verification and source-of-funds traceability much harder.
Let’s break down the risk layers:
- Fiat-to-Coin (on-ramp): On-ramp providers must clearly identify the initial ordering customer and initial ordering financial institution. At this point, Know Your Payer (KYP) protocols can apply, enabling the on-ramp provider to confirm that the funding source is legitimate and expected. On-ramp risks can be managed when the stablecoin sandwich transaction is funded from a known and verified bank account, where the payer can be clearly identified. Additionally, beneficiary verification, or Know Your Payee (KYP) protocols helps built trust that the intended final recipient is who they purport to be.
- Wallet-to-Wallet Movements (middle): Once value is tokenised into a stablecoin, it can move between wallets and reach the off-ramp provider. Is a transaction between wallets on the blockchain riskier than a message from one traditional interbank payments to another? It doesn’t have to be. To scale as a major global payment rail, the stablecoin sandwich will need to guarantee transparency on all actors in the payment chain and build processes to handle payment recall despite the finality of transactions on the blockchain.
- Coin-to-Fiat (off-ramp): This is the final redemption stage where stablecoins like USDC (by Circle) or USDT (by Tether) are exchanged back to fiat. Off-ramp providers can also leverage Know Your Payee (KYP) protocols to verify the existence and identity of the recipient account, hence proactively detecting potentially fraudulent or illicit transactions.
So, Stablecoin, Stable risk? Not So Fast!
- Verify and Trust: A2A transactions settled via the stablecoin sandwich are near-instant, final, to and from anywhere in the world. This is a unique value proposition for financial institutions customers… but also for scammers. Institutions should strengthen payee verification to prevent payments from being sent to scam accounts and protect customers from fraud. Such payee verification will also prevent the operational issues of failed payments due to incorrect account details which may not be recalled as easily as for traditional A2A.
- Manage “Open Sandwich” Risk: Risks in the simple sandwich structure, with fiat in and fiat out, can be greatly mitigated with the use of KYP mechanisms to verify the source and destination of funds. But in practice, the structure may include many account and wallet-to-wallet hops in between. This makes identity verification, recipient and source-of-funds traceability much harder. In essence, to avoid part of the transaction going dark, it is essential to clearly identify the initial ordering customer, intermediaries and ultimate beneficiary of transactions in order to conduct the appropriate verification. Likewise, a growing number of stablecoin transactions terminate in a wallet and stay in USDC or USDT. Financial institutions offering such initiation services to their clients should also offer payee verification mechanisms. However, there is no direct equivalent of Confirmation of Payee (CoP) or Verification of Payee (VoP) in stablecoin despite some Travel Rule protocols mostly focusing on compliance with sanctions and AML rules. Further, un-hosted wallets largely escape pre-transaction verification mechanisms.
Do We Need New Rules To Protect Stablecoin Fraud & Scams? Start with FATF16
Countries like the UK, Australia, and those in the EU have adopted rules like CoP or VoP to prevent fraud in traditional payments. Should stablecoins follow suit? Possibly, but a practical starting point is implementing FATF16.
FATF Recommendation 16, also known as the Travel Rule, requires that originator and beneficiary information accompany cross-border crypto transactions. It defines where the payment chain starts and ends and was recently updated to mandate beneficiary name matching, a move that also applies to stablecoin flows.
Stablecoin Growth Needs Stable Trust
We cannot build a $3.7 trillion market on unstable rails. Pre-transaction verification is critical, not just to meet FATF16 requirements, but to prevent fraud and misdirected payments before they happen.
Markets like Singapore are already feeling the impact. In 2024, SGD 1 billion was lost to scams, with 25% linked to crypto, often involving offshore counterparties (Singapore Police Force Annual Scam Report 2024).
For financial institutions, verifying both payer and payee is essential. With Global Know Your Payee (KYP), institutions can answer three vital questions—before money moves:
- Who is actually funding this stablecoin transaction?
- Is the receiving wallet or bank account owned by the intended party?
- Can we verify this before the money moves?
Global Know Your Payee (KYP) is the missing layer in this stack. It doesn’t replace compliance. It enables trust. Want to see how KYP can bring trust to your payment flows?
