What are Stablecoins? Types, Use Cases & Impact on Cross-Border Payments

If you sell across borders, you probably feel the pain of slow settlements, opaque fees, and cut-off times that do not care about your customers. Stablecoins promise a different path. They carry money as fast as the internet by keeping value steady, typically at one unit to one dollar, and they move 24/7 on public blockchains.

That mix of stability and always-on rails has turned stablecoins into a serious option for treasury, payouts, and B2B collections and not just for crypto traders. Let’s find out what stablecoins actually are, how they work, their types and how you, as a business, can make use of them to your advantage. 

A stablecoin is exactly what it sounds like, a crypto currency coin that offers stability. A stablecoin offers stability by pegging itself to a real-world asset. Most of the time, this asset is the US dollar. It could also be pegged to a commodity like gold.

With stablecoins you get the best of both worlds. They were made to give you benefits of blockchain technology and borderless transactions, without the price swings and unpredictability usually associated with other volatile crypto currencies. 

Stablecoins have to peg themselves onto real world assets to maintain their value. The asset that they are attached to also determines their stability mechanism and risk. 

Here are the four main types of stablecoins: 

1. Fiat-collateralized stablecoins

Fiat-collaterized stablecoins are backed by government-issued currencies like the US dollar, held in reserves by the issuer. This is the most common and popular type of stablecoin.

The mechanism behind this stablecoin is simple. For every coin that is minted, the company creating it promises to hold an equal amount of real currency or a highly-liquid asset in their reserves. This makes the coin very transparent and redeemable. 

Examples: Tether or USDT and USD Coin. 

2. Crypto-collateralized stablecoins

Crypto-collateralized stablecoins are backed by other cryptocurrencies instead of fiat money. Now, crypto currencies are usually very volatile. So, to compensate for this they use over-collateralization. 

What over-collateralization means is that you may have to pay $150 worth of a crypto to mint just $100 worth of the stablecoin. The extra $50 is your buffer and protects the value of your stablecoin even if the crypto drops suddenly. 

Example: Dai (DAI) governed by the MakerDAO protocol

3. Commodity-backed stablecoins

Commodity-backed stablecoins tap into physical assets to maintain their value. Gold is the most common asset used. In this case, owning a stablecoin represents owning a specific amount of the commodity it is pegged to.

The actual physical asset like gold is stored safely in audited vaults by a custodian. These stablecoins give you the chance to own physical assets without having to store it yourself. 

Example: PAX Gold (PAXG) and Tether Gold (XAUT) 

4. Algorithmic stablecoins

Algorithmic stablecoins have the most complex mechanism and also carry the highest risk as they do not depend on any direct collateral. They are a purely digital invention and maintain their value with smart contracts and algorithms. The system can automatically create or destroy tokens depending on price fluctuations to increase or decrease supply and regulate prices accordingly. 

Stablecoins maintaining their stability is an active, ongoing process. Each stablecoin has its own unique mechanism based on the asset that it is linked to. However, let’s try to understand the basics of how these work: 

1. A stablecoin starting point is when you deposit a certain amount of money with the coin’s issuer. 

2. The issuer will then digitally mint or create the equivalent stablecoins and record your transaction on the blockchain. They will also secure and hold on to equivalent collateral be it fiat money, crypto or gold. 

3. Once a coin has been minted, you can move it across global blockchain networks. It works 24/7 and anywhere in the world. 

4. In the final step of this process, arbitrageurs watch the prices closely and profit from any price deviations. For example, if a stablecoin's price drops below $1, they buy it on an exchange and redeem it with the issuer for a risk-free $1, which drives the price back up.

As a business, you can accept stablecoin payments and have a provider instantly settle the funds back to your base currency, allowing your accounting to remain in fiat while still leveraging the speed of blockchain technology. 

Let’s now look at some popular stablecoins that are in circulation:

Here's how stablecoin pricing works: 

1. The pricing process begins at a company or the issuer who is the custodian of real-world assets that stablecoins depend on. This company’s responsibility is to maintain a 1-to-1 reserve of that asset. This means that for every stablecoin they create, they should have assets of the same value in their reserve. 

2. Now, let’s say you want a stablecoin. You would have to send one real US dollar to this issuing company for one dollar worth of stablecoin. They would then mint or create a brand new stablecoin and send it to you. The US dollar that you paid them would go into their reserve. 

3. When you are ready to convert your stablecoin back into a dollar, you send it back to the issuer. They pull out your real dollar from their reserve and return it to you. The stablecoin is then burned or destroyed permanently. 

4. The market price of the stablecoin always stays at $1, because you can be sure that you have the guaranteed right to redeem it for a real dollar. If for any reason the price starts dropping to $0.99, the lower price will attract traders to buy it and immediately redeem it with the issuer for the promised $1 and make a penny in the process. 

This increased demand for the stablecoin will drive its price back up to $1. This buying activity is called arbitrage. 

As you just discussed above, the arbitrage mechanism is what drives stablecoin value. However, there are many other powerful external forces that can also contribute to the pricing mechanism and overall risk. 

1. Reserve quality and transparency: 

A stablecoin is only as good as what is backing it. Coins that are backed by actual US dollars or by short-term US treasury bonds are low risk and have high confidence. If the reserves are made up of murkier and riskier assets, the prices also won’t be stable. 

2. Regulation and legal clarity

If governments and regulatory bodies are able to provide a clear legal framework, they can legitimize the stablecoin. However, the reality is that, with stablecoins, there is a lot of regulatory confusion surrounding them which has also led to a higher amount of risk being associated with them. 

3. Market confidence and track record

Stablecoins that have proven that they can survive crypto market crashes and are known for always honoring every redemption request are bound to be more stable as fewer people will resort to selling them during times of panic. 

4. Liquidity and adoption

If a stablecoin has a large trading volume and is used everywhere, it means it has a massive pool of assets backing it. This is enough to quickly correct any price deviations through arbitrage and maintain stability. The liquidity of the asset also determines how quickly price wobbles are correct. The more liquid the asset backing it is, the more stable a stablecoin will be. 

5. Technical reliability

The entire stablecoin system depends on technology. If there is a smart contract bug, a network gets congested or the issuer halts redemptions, the arbitrage process breaks down and people cannot convert their stablecoins to fiat. If the $1 promise is broken, so is the stability of the coin. 

The biggest difference between a stablecoin and a traditional cryptocurrency is stability. Stablecoins always keep a steady value, usually $1. This means you can treat them like a cash equivalent. Traditional crypto like Bitcoin floats freely and the prices can fluctuate drastically based on their demand and supply.

Here’s how they differ: 

Stablecoins are private tokens redeemable with an issuer. CBDCs are digital liabilities of a central bank. Both can move value quickly, but governance, risk, and access differ.

Stablecoins give your business a currency that is stable in value while also being exceptionally fast due the blockchain technology it's built upon. This means you can use it in many different ways, especially in international operations. Here's how your business can use stablecoins:

1. Cross-border payments

With stablecoins you can send and receive money across borders in just seconds. You can use this to pay your suppliers, overseas employees and more. The fees for these transactions are also lower than most other international money transfer methods. 

2. Treasury management and capital protection

If your business operates in regions where the local currency is losing value maybe due to inflation, holding US dollar-backed stablecoins can protect your capital and help you maintain your purchasing power. 

3. Simplifying B2B collections

You can offer stablecoins as a payment option for your international clients. This way you can help them avoid dealing with complicated and often slow bank transfers. Clients can also pay you instantly, 24/7. This increases your cash flow and shortens your collection cycles. 

4. Enabling a global e-commerce strategy

If you have an online store, accepting stablecoins can lower your payment processing fees. You also do not have to deal with FX conversions when customers purchase from across borders. Now, let’s take a second to be realistic. While all of the use cases we discussed above are good and ideal, stablecoins aren’t yet universally accepted by banks, regulators and even most trading partners. 

If you are looking for the same speed and efficiency, while still maintaining regulatory compliance and bank acceptance, a solution like Xflow is a much better choice.

As an Indian business accepting payments from abroad using stablecoins, you will have to navigate quite a few challenges. 

Legal fog is one of the main challenges you’ll come across when trying to use stablecoin in India. The RBI has given stablecoins a cold shoulder. Though they haven’t been explicitly banned, there’s no clear legal guideline either. Instead, the RBI is currently focusing on building its own digital rupee.

Beyond legality, there are also some tax and operational roadblocks. There is a flat 30% tax on any income you make from transferring virtual digital assets like stablecoin. On top of that, there is also a 1% Tax Deducted at Source (TDS) on on the sale consideration of every transfer of a Virtual Digital Asset, applicable when the aggregate transaction value exceeds specified annual thresholds. Lastly, to convert your stablecoins to Indian Rupees you have to use domestic crypto exchanges, that is, Indian crypto exchanges registered with the Financial Intelligence Unit - India (FIU-IND). 

Many businesses also face reluctance from banks to process large deposits from these exchanges, as banks are cautious about their own compliance with Anti-Money Laundering (AML) and Know Your Customer (KYC) norms.

In the Indian context, the RBI has been clear that they view private cryptocurrencies as a threat to India's financial stability and their control over money supply. India's regulatory landscape for stablecoins is marked by a high degree of uncertainty. The Reserve Bank of India (RBI) has expressed significant caution, viewing private cryptocurrencies as a potential risk to financial stability and monetary policy. 

As of late 2025, there is no specific law regulating stablecoins. They are categorized as Virtual Digital Assets (VDAs) under the Income Tax Act, which means they are legal to hold and trade, but are not recognized as legal tender.

The U.S. has recently made significant progress with the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), which was signed into law in July 2025. This legislation provides a clear regulatory framework for dollar-denominated stablecoins. It mandates that issuers must hold 100% reserve backing with highly liquid assets, such as U.S. dollars or short-term treasuries.

The EU's Markets in Crypto-Assets (MiCA) regulation, which took full effect in mid-2024, provides a comprehensive and harmonized framework for stablecoins across all 27 member states.

In a country where stablecoins face significant regulatory hurdles and tax burdens, an Indian business needs a reliable and compliant solution for cross-border transactions. While the promise of stablecoins is attractive, the current reality of a 30% flat tax and a lack of a clear legal framework can transform a supposedly simple transaction into a complex and costly endeavor. 

We at Xflow understand these challenges intimately because our platform was built to solve them. We don't rely on unregulated digital assets. Instead, we've secured in-principle approval from the Reserve Bank of India (RBI) to operate as a cross-border payment aggregator. This means we are a fully compliant and regulated channel for your international payments.

With our system, you can receive funds from over 140 countries with complete confidence that all transactions will adhere to Indian regulations like FEMA and the various tax mandates. We also provide features like next-business-day settlements, automated documentation, and transparent, locked-in foreign exchange rates, so you know exactly how much INR will be credited to your account.

Ready to take control of your international payments and focus on growing your business? Get started with Xflow today.