Stablecoins refer to digital assets that aim to provide stability in value through pegs typically to fiat currency, commodities, or other assets. There are three main types of stablecoins: fiat-backed stablecoins, or stablecoins that are backed by reserves in fiat currency (e.g., USDC, USDT); crypto-collateralized stablecoins, or stablecoins that are backed by other digital assets, such as cryptocurrencies (e.g., DAI); and algorithmic stablecoins, or stablecoins that are not backed by either reserves or collateral but use algorithms to maintain stability.

In California, stablecoins are governed by the Digital Financial Assets Law (DFAL), which establishes licensing requirements for vendors and entities that issue or facilitate stablecoin transactions. A stablecoin issuer must maintain adequate reserves for every stablecoin issued, have regular audits performed by an independent third-party, and provide disclosures to users about their redemption rights and risk factors. The California Department of Financial Protection and Innovation (DFPI) enforces the DFAL to protect consumers and ensure the disclosure of financial products is done in a fair and transparent way.

At the federal level, stablecoin regulations and enforcement are carried out by United States agencies such as the Securities and Exchange Commission (SEC) and the Commodity Futures Trading Commission (CFTC) based on whether a stablecoin is a security or commodity. One mandatory compliance obligation is for businesses offering stablecoins to abide by laws and regulations related to Anti-Money Laundering (AML) and the Know Your Customer (KYC) identification process to prevent financial crimes. Similarly, the European Union (EU) has introduced a regulatory framework through the MiCA (Markets in Crypto-Assets) regulation that has strict reserve and governance requirements on stablecoins. The Bank for International Settlements (BIS) has also called for improving the regulation on stablecoins, opposing the current regulation for bank deposits instead.

Nevertheless, there are still challenges. The regulatory classification of stablecoin products is constantly evolving and creates legal ambiguity, and the fear of overregulation may stifle innovation. Companies must be careful in their assessment of compliance obligations to maintain operational stability while expanding digital asset growth.