One of the most significant recent developments in the fintech landscape is the announcement by the Prime Minister of Malaysia on the launch of a new Digital Asset Innovation Hub, unveiled as part of the Sasana Symposium 2025, with a particular focus on exploring the use of stablecoins in Malaysia.
Since the news broke, it has certainly made waves across the industry, as this comes at a time when the market has been paying close attention to regional regulatory momentum, particularly following the passing of the Stablecoin Bill in Hong Kong, and the Securities Commission Malaysia’s recent Public Consultation Paper on the Proposed Regulatory Framework for Offering and Dealing in Tokenised Capital Market Products.
Truth be told, industry players have been anticipating regulatory clarity on stablecoins in Malaysia. This is because, quite frankly, it is nearly impossible to have meaningful discussions around the tokenisation of capital market products or other real-world assets without addressing stablecoins because at its very core, stablecoin serves as the liquidity layer that powers and facilitates transactions on the blockchain, and its role is not only timely, but pretty much practically indispensable. This explains why the recent announcement has been so widely welcomed and is making significant headlines among digital asset players.
That said, for those not already involved in the digital asset or crypto space, the concept of stablecoins may still feel relatively foreign. Therefore, in this article, we aim to break it down what is a stablecoin, what are the different types of stablecoins in the market, and perhaps most importantly, how “stable” is a stablecoin really?
What is a Stablecoin?
Essentially, a stablecoin is a type of token minted on the blockchain with a stable or fixed value. Stablecoin is most commonly pegged to the value of a specific country’s currency. The core idea is that it is pegged 1:1 to that currency. Think of it as a digital twin of fiat currency, engineered to exist and operate entirely within the blockchain ecosystem.
A broad and commonly used example would be USDT or USDC, which are widely adopted by many digital asset players and companies for blockchain-based transactions. These tokens are minted on the blockchain and pegged to the US dollar on a 1:1 basis, and the same concept can apply to other currencies, not just the USD. In theory, and increasingly in practice, any national currency, be it the Ringgit, Euro, Yen or Pound, can also be mirrored on-chain through a stablecoin, as long as the peg is maintained.
Now, you might ask: Why do I need stablecoins? Why can’t I just transact on the blockchain using fiat currency?
The answer is relatively straightforward, and it lies in the architecture of blockchain itself. Blockchain networks, whether Ethereum, Solana, Polygon or others, are technically “closed” systems that cannot process fiat currencies in their native form. Given that Web 3 ecosystems are fully powered by blockchain, fiat currency cannot operate natively within that environment unless it is tokenised or converted into a digital asset. In essence, stablecoins act as the digital asset mirror twin of fiat currencies, designed to bridge traditional finance (TradFi) and the digital asset world by serving as a blockchain-native expression of fiat value.
Types of Stablecoins
Stablecoins can be thought of like a recipe, while the end product may appear similar, there are multiple variations that lead to different outcomes.
Broadly speaking, there are three primary types of stablecoins in the market today:
- • Fiat-backed stablecoins – fully backed 1:1 by a fiat currency such as USD.
- • Asset-backed stablecoins – collateralised by non-fiat assets like gold, commodities, or crypto.
- • Algorithmic stablecoins – governed by on-chain algorithms or smart contracts to manage supply and demand without traditional collateral.
- 1. Fiat-backed Stablecoins (The “Gold Standard” of Stability)
Fiat-backed stablecoins are currently regarded as the most trusted and stable form of stablecoin in the market. This model represents the purest type of stablecoin, as it is fully and wholly backed by actual fiat currency held in a treasury.
In this structure, for every 1 stablecoin minted on-chain, there is an equivalent 1 unit of fiat currency deposited and held in reserve, and this means the stablecoin is 100% fully backed by real-world fiat currency.
In the market, this model is widely accepted as the most robust and reliable form of stablecoin. In theory, the risk of a “bank run” is very low, because in the event of redemption, there should always be sufficient fiat currency available in the treasury to fulfil redemptions. In practical terms, this means that if 100 million stablecoins are in circulation, there should be 100 million units of fiat currency in reserve to support them, however, the reality is often slightly more complex.
Instead of keeping 100% of reserves in idle cash, which would earn almost no yield, issuers often deploy those reserves into low-risk, short-term instruments such as government bonds, U.S. Treasuries, or money market funds. While these are highly liquid and considered safe, the risk is not absolute zero. In an extreme black swan event, say, a sudden mass redemption request, the issuer might be forced to liquidate those positions prematurely, possibly at a loss, and even if the loss is marginal, it introduces operational stress and reputational exposure.
Nevertheless, this model remains widely accepted by regulators and institutional investors as the most legitimate and “institution-grade” form of stablecoin in today’s market. - 2. Asset-backed Stablecoins (Diversified, but Volatile by Nature)
Unlike fiat-backed stablecoins, asset-backed stablecoins derive their value from a portfolio of real-world or digital assets rather than a single fiat currency held in reserve. These assets can range from precious metals like gold and silver, to commodities such as oil, to even more diverse holdings like land, equity, real estate investment trusts, or a basket of digital assets, including BTC, ETH and others, depending on the issuer’s chosen composition and percentage allocation.
On paper, this diversification may appear as a strength, especially in bull markets where underlying assets may appreciate in value. But in practice, this model introduces a fundamental tension that the more volatile the basket of assets, the less stable the stablecoin becomes. Hence, while the word “stablecoin” implies price stability, it is undeniable that an asset-backed stablecoin is only as stable as the value of the assets backing it.
From a redemption perspective, this issue becomes particularly problematic because if users wish to redeem their stablecoins, the issuer must liquidate the underlying assets to generate sufficient fiat currency to honour the redemption request. If those assets have appreciated, the issuer may enjoy a surplus and even turn a profit. However, it is a double-edged sword because the opposite can just as easily occur, and if the value of the underlying assets declines, the issuer may fall short in redeemable funds, potentially triggering liquidity issues or even insolvency.
Even in scenarios where asset value is preserved, liquidity remains a concern as the ability to convert assets to cash quickly, especially under stress, can determine whether the stablecoin survives a sudden redemption event or collapses under pressure. This is especially true during black swan events, where a broad market downturn could simultaneously erode asset value and overwhelm redemption capacity.
This is why asset-backed stablecoins, while potentially offering upside through diversified holdings, carry higher risk exposure compared to fiat-backed models, particularly in stressed market conditions, as their viability ultimately hinges on the liquidity profile, asset allocation, market timing, and operational discipline of the issuer. - 3. Algorithmic Stablecoins (Code as Collateral)
From a conceptual standpoint, algorithmic stablecoins are perhaps the most technologically ambitious, as unlike fiat-backed or asset-backed models, these stablecoins do not rely on external collateral, instead, they leverage smart contracts and algorithmic protocols to automatically adjust the supply of tokens in circulation, either by minting new coins when demand increases or burning coins when demand drops.
On paper, the concept is elegant, with a self-regulating system that maintains a 1:1 peg without the need for fiat or tangible asset backing. However, the challenge lies in the fact that the entire structure depends solely on the effectiveness of the algorithm, and while the theory may sound sophisticated, the risks become very real when the algorithm fails to operate as intended.
Those who have been in the digital asset and crypto space long enough will almost immediately recall a now-infamous example, without even naming it, that triggered one of the most catastrophic collapses in the history of crypto. The failure of that algorithmic stablecoin not only led to its complete collapse but also plunged the entire market into a prolonged crypto winter.
Of course, one failed example should not be taken to mean that all algorithmic stablecoins are doomed. There are new models and more resilient algorithmic mechanisms being developed, and some are actively being tested in the market, however, unlike fiat-backed or asset-backed stablecoins, algorithmic stablecoins rely entirely on the strength of their code and design logic, hence, their stability is only as good as the algorithm that governs them.
As a result, investor and market confidence in algorithmic stablecoins remains fragile. Many participants, including the authors of this article, continue to exercise caution, as the memory (as well as scars) of the previous collapse is still fresh and serves as a stark reminder of the potential risks involved.
Conclusion
At this stage, it remains a matter of “wait and see” as to how stablecoins will eventually be regulated in Malaysia. However, if we read between the lines, and observe how other jurisdictions have approached this space, it is clear that regulators will prioritise investor protection and financial stability over experimental innovation. After all, we are not just dealing with technology, we are dealing with people’s actual savings and financial assets.
If and when stablecoin regulation is introduced in Malaysia, the most likely outcome is that we will see preference given to fiat-backed stablecoins, particularly those that are fully and transparently backed 1:1 by real-world currency reserves, as these models offer the clearest path to stability, accountability, and consumer trust.
Until then, the market will continue to evolve, but the direction of regulatory travel is becoming increasingly clear.
The Technology Practice Group at Halim Hong & Quek regularly advises clients on a broad spectrum of fintech matters, including RWA tokenization, DeFi, P2P, digital asset custody, stablecoin issuance, and payment system. Should your organisation require assistance in fintech and digital asset matters, we would be pleased to assist, please feel free to contact our team.
Our Technology Practice continues to be recognised by leading legal directories and industry benchmarks. Recent accolades include FinTech Law Firm of the Year at the ALB Malaysia Law Awards (2024 and 2025), Law Firm of the Year for Technology, Media and Telecommunications by the In-House Community, FinTech Law Firm of the Year by the Asia Business Law Journal, a Band 2 ranking for FinTech by Chambers and Partners, and a Tier 3 ranking by Legal 500.
About the authors
Ong Johnson
Partner
Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”),
Fintech, TMT Disputes, TMT Competition, Regulatory
and Compliance
johnson.ong@hhq.com.my
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Lo Khai Yi
Partner
Co-Head of Technology Practice Group
Technology, Media & Telecommunications (“TMT”), Technology
Acquisition and Outsourcing, Telecommunication Licensing and
Acquisition, Cybersecurity
ky.lo@hhq.com.my.
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