Cross-border settlement has long been burdened by delays, high transaction costs, and exposure to foreign exchange (FX) volatility. Stablecoins have emerged as a potential solution, promising near-instant settlement and reduced friction in international transfers.
Yet, as institutional adoption grows, managing risk becomes just as important as speed and efficiency. Two areas stand out for scrutiny: foreign exchange exposure and counterparty risk.
Foreign Exchange (FX) Risk in Stablecoin Settlement
Stablecoins are typically pegged to fiat currencies like the U.S. dollar. For global institutions transacting in multiple currencies, settlement risk still exists when exchange rates fluctuate. A European bank settling with a dollar-pegged stablecoin, for example, may face losses if the euro weakens against the dollar before conversion.
Hedging this exposure requires integrating FX risk management tools directly into stablecoin settlement processes. Popular approaches include:
- Forward Contracts:Institutions can lock in exchange rates for future transactions, reducing volatility between trade execution and settlement.
- Currency Swaps:These allow counterparties to exchange cash flows in different currencies, helping balance exposure in multi-jurisdictional transactions.
- On-Chain Hedging Instruments:Emerging decentralized finance (DeFi) protocols are experimenting with tokenized derivatives designed for FX hedging, providing transparency alongside flexibility.
The World Economic Forum reported that global businesses lose an estimated $3.7 trillion annually to FX inefficiencies. Stablecoin-based settlement, paired with proper hedging, could substantially reduce that burden.
Counterparty Risk in Stablecoin Settlement
Another challenge lies in counterparty reliability. Traditional settlement often relies on central clearinghouses or correspondent banks, but stablecoin transactions move across blockchain networks, where responsibility shifts to custodians, issuers, and smart contract systems. If a stablecoin issuer lacks adequate reserves or fails to meet redemption requests, institutions face significant counterparty risk.
Mitigation strategies include:
- Diversification Across Issuers:Instead of relying on a single stablecoin provider, institutions distribute settlement activities across multiple issuers to reduce dependency.
- Independent Audits of Reserves:Engaging with stablecoins backed by transparent, regularly audited reserves improves confidence in redemption capability.
- Smart Contract Risk Controls:Automated safeguards, such as collateral triggers or circuit breakers, can minimize settlement disruption in case of liquidity shortages.
In a recent report, Chainalysis noted that over $12 billion in settlement delays stemmed from counterparty issues across digital asset transactions. Risk frameworks tailored for stablecoins will be crucial in addressing these weaknesses.
The Role of Compliance and Regulatory Oversight
Institutions also must align their stablecoin settlement practices with evolving regulatory frameworks. The European Union’s Markets in Crypto-Assets (MiCA) regulation and U.S. initiatives like the Stablecoin TRUST Act highlight the importance of transparent reserve management and redemption standards. Risk management frameworks, particularly for FX and counterparty exposure, must be designed in parallel with compliance to ensure both operational resilience and regulatory alignment.
Looking Ahead
Stablecoin settlement has the potential to reshape international payments. But its promise depends on how effectively institutions can identify and hedge risks. By combining traditional hedging instruments with blockchain-enabled transparency, firms can mitigate FX and counterparty risk without losing the efficiency advantages of stablecoins.
Partner with Kenson Investments
At Kenson Investments, we focus on delivering clarity where institutions face complexity. Our research examines how stablecoin settlement is evolving across jurisdictions and what tools risk teams can use to adapt.
From monitoring FX hedging models to assessing counterparty safeguards, our digital asset management consultants provide data-driven insights to help you understand and navigate institutional adoption responsibly.
For a deeper look into how stablecoin settlement practices are maturing in 2025 and beyond, connect with Kenson Investments today.
Disclaimer: The information provided on this page is for educational and informational purposes only and should not be construed as financial advice. Crypto currency assets involve inherent risks, and past performance is not indicative of future results. Always conduct thorough research and consult with a qualified financial advisor before making investment decisions.
“The crypto currency and digital asset space is an emerging asset class that has not yet been regulated by the SEC and US Federal Government. None of the information provided by Kenson LLC should be considered as financial investment advice. Please consult your Registered Financial Advisor for guidance. Kenson LLC does not offer any products regulated by the SEC including, equities, registered securities, ETFs, stocks, bonds, or equivalents”
