Stablecoins are increasingly being used for cash management and liquidity optimization, acting as a substitute for traditional money market instruments. Their main advantage is the faster settlement times and the ability to access liquidity globally, 24/7. We hold stablecoins like USDC or USDT as flexible reserves, which allows us to tactically rebalance or temporarily park funds between trades. This strategy enhances our operational efficiency and responsiveness to market shifts.
Stablecoins can also be used in decentralized finance (DeFi) protocols to generate yield through lending platforms or liquidity pools. This approach has the potential to offer returns that exceed those of traditional cash equivalents. However, it carries notable risks, including smart contract vulnerabilities, platform failures, and counterparty exposure. Therefore, careful selection of protocols and effective risk management are essential to balance potential gains with security and stability.
Holding stablecoins pegged to non-USD currencies, such as EURS or XSGD, enables portfolio diversification and effective currency hedging. This strategy allows access to foreign markets while minimizing foreign exchange conversion costs and operational complexity. Investors can maintain exposure to multiple currencies on-chain, which improves flexibility and reduces reliance on the US dollar.
Additionally, stablecoins can enhance cross-border transfers and operational efficiency, especially for treasury operations and asset movements across jurisdictions. They provide significant cost savings compared to traditional international payment systems and enable near-instant settlement, regardless of banking hours or regional constraints.
Stablecoins in Portfolio Management
Asset Allocation
From an asset allocation perspective, stablecoins can function as a modern “cash proxy” and be included in a portfolio’s “liquid alternatives” or “cash” segment. Their price stability, combined with the efficiency of blockchain technology, makes them suitable for maintaining liquidity without the volatility usually associated with crypto assets. This allows investors to allocate capital on-chain while preserving flexibility for rapid redeployment.
In risk-balanced portfolios, stablecoins can also play a strategic role within volatility-targeted frameworks. Holding stablecoins during times of heightened market uncertainty or systemic stress helps reduce overall drawdown risk and maintain portfolio stability. The presence of stablecoins acts as a buffer, enabling tactical responses to changing market conditions while preserving capital.
Managing Rebalancing
Stablecoins are effective tools for managing rebalancing within a portfolio. As buffer assets, they provide a stable holding area during transitions between asset classes, helping to reduce timing risk and exposure to market volatility. When moving in or out of positions, holding stablecoins allows for more strategic trade execution, without the pressure to immediately redeploy capital under unfavorable conditions.
Moreover, stablecoins serve as “dry powder” for opportunistic entries. By keeping a portion of the portfolio in stablecoins, we can quickly capitalize on market dislocations, undervalued assets, or trend reversals. This liquidity reserve enables swift action without relying on external funding or transfers.
Liquidity Tiering
When incorporating stablecoins into a portfolio, applying a liquidity tiering framework helps manage risk and optimize deployment. We classify stablecoins based on key factors such as issuer credibility, blockchain infrastructure, and redemption mechanisms.
Issuer risk is a primary consideration. For instance, USDC is often preferred over USDT due to its greater transparency and alignment with regulatory standards. In contrast, some stablecoins have faced scrutiny for their opaque backing and governance structures, which increase counterparty risk.
The reliability of the underlying blockchain network is also critical. Stablecoins issued on more established chains, such as Ethereum or Solana, typically benefit from stronger security, liquidity, and ecosystem support. In contrast, chains with lower throughput or less adoption may expose users to higher transaction costs and execution delays.
Redemption mechanisms also play an essential role in liquidity planning. Stablecoins that offer clear, direct redemption for fiat through regulated partners or custodians enhance investor confidence and ease of conversion. Conversely, those with complex or restricted redemption processes may pose risks during periods of market stress. We recommend that our clients tier their stablecoins accordingly to manage liquidity more effectively.
Sample Asset Allocation
| Asset Class | Allocation | Purpose |
| Equities | 40% | Growth |
| Bonds | 20% | Income & stability |
| Stablecoins | 10% | Liquidity reserve, rebalancing tool |
| DeFi Exposure | 5% | Yield generation |
| Alternatives | 25% | Diversification |
Risk Management
It is crucial to closely monitor regulatory risk, which includes evolving frameworks such as the Markets in Crypto-Assets (MiCA) regulation in the EU and guidance from the SEC in the U.S. The rules governing stablecoins can vary significantly by jurisdiction.
To address counterparty risk, choose stablecoins that have transparent and fully-backed reserves. Options like USDC and GUSD are preferable because they provide regular audits and regulatory oversight, instilling greater confidence in their underlying collateral and redemption processes.
Smart contract risk is a concern when using stablecoins in DeFi environments. To mitigate this risk, it is advisable to rely on well-audited protocols and consider using custodial DeFi platforms, which enhance security and operational controls.
Depegging risk, which refers to the possibility of a stablecoin losing its peg to fiat currency, can be managed by setting firm limits on your exposure and diversifying across multiple issuers and blockchain networks. This strategy helps avoid over-reliance on any single asset.
Liquidity risk should be continuously assessed both on-chain and off-chain. Ensuring access to deep, stable markets while avoiding overconcentration in illiquid stablecoins can improve resilience and trade execution during stressful market conditions.
In addition to these risks, operational and compliance considerations are essential when managing stablecoins within a portfolio. Accurate auditing and reporting practices are vital for tracking the impact of stablecoin holdings on net asset value and for transparently disclosing any yield sources. For tax purposes, stablecoins should be treated as fiat equivalents where possible, or gains and losses must be recorded at the time of disposal.
Past Three Years vs. Next Three Years
Over the past three years, the adoption of stablecoins has accelerated significantly, especially among institutional players. Key drivers of this trend include faster settlement speeds, improved liquidity management, and the rise of blockchain-native treasury operations. For example, BlackRock has utilized USDC for tokenized funds, while JPMorgan has launched JPM Coin for on-chain settlements. As a result, stablecoins are becoming essential components of corporate treasury strategies and investment fund infrastructure.
At the same time, there has been strong growth in on-chain payments and remittances. Stablecoins are now being used in real-world applications like cross-border transfers, payroll, and gig economy payments. Companies such as Stripe, Visa, Circle, and Revolut have integrated stablecoin systems into their operations.
Regulation surrounding stablecoins has also evolved, albeit in a fragmented manner. In the U.S., lawmakers are moving toward specific legislation, such as the Clarity for Payment Stablecoins Act, while the EU’s MiCA regulation categorizes stablecoins under e-money rules. Meanwhile, jurisdictions like Singapore and Hong Kong in Asia are establishing regulatory sandboxes. This divergence has created varying levels of trust based on the issuer’s transparency and the oversight provided by different jurisdictions.
The collapse of TerraUSD (UST) in 2022 prompted a flight to quality, leading investors to favor fully backed and regulated stablecoins such as USDC and GUSD. In response, the market has placed increased emphasis on audited reserves and fiat collateralization.
Stablecoins have also become a bridge between decentralized finance (DeFi), centralized finance, and traditional finance. They are widely used as collateral in lending protocols, for margin in derivatives trading, and within liquidity pools. Their role is expanding further into the tokenization of real-world assets.
Over the next three years, stablecoins are expected to integrate more deeply into mainstream financial infrastructure. They will likely be used for T+0 securities settlement, repo markets, and tokenized deposits, effectively replacing traditional intermediaries in payment and clearing processes.
The emergence of programmable money will enable businesses to automate complex cash flows, such as revenue sharing, royalties, and licensing. Smart contracts with embedded payments will streamline operations and reduce administrative overhead.
In parallel, stablecoins are expected to support the settlement of tokenized treasury and government bonds. Franklin Templeton is already issuing on-chain bond funds, which creates demand for yield-bearing stablecoin alternatives like sDAI or tokenized treasury bills.
As de-dollarization trends continue, non-USD stablecoins such as EURS, XSGD, and BRZ are likely to see growth, supporting domestic trade, foreign exchange hedging, and regional DeFi ecosystems.
We also anticipate consolidation around regulated issuers. Tier-1 banks may launch their own branded stablecoins, while regulatory bodies enforce stricter reserve and redemption disclosures. Ultimately, transparent and compliant issuers are expected to emerge as the market leaders.