The Next Chapter for Stablecoins: Built-In Confidentiality using FHE

Over the past 15 years, crypto has delivered two major wins: Bitcoin as a store of value and stablecoins as a game-changer for money. That’s undeniable.

Today, stablecoins serve two key roles. First, they provide dollar-like stability in countries facing high inflation—just look at USDT on Tron. Second, they act as the “cash leg” for both centralized exchanges (CEXs) and DeFi, powering trading, leverage, and lending on platforms like Uniswap, Aave, and Morpho.

These use cases have pushed stablecoins to a $225 billion market cap—and it’s still growing. Even Stripe sees the potential, acquiring stablecoin startup Bridge for $1.1 billion and spotlighting stablecoins in their latest report.

Some Context on Tokenizing Money

Stablecoins are tokenized money—currency issued on a decentralized blockchain, secured by cryptography, with built-in property rights. Today, the total money supply (M2) sits at around $21 trillion, while stablecoins account for just $225 billion—barely over 1% of all money tokenized.

That’s a tiny fraction. Yes, $225 billion is a big number in crypto, but in the grand scheme of things, it’s just the beginning. To realize the full potential of stablecoins, we need to think bigger and take the long view.

Why Only $225 Billion?

Obviously regulation.

So why aren’t stablecoins bigger? The biggest hurdle is regulation—far more than any technical challenge. Governments are tightening the rules, from Europe’s MiCA to the U.S ongoing uncertainty over what stablecoins even are. This regulatory fog scares off major players and keeps banks locked into their legacy systems, where they’ve already invested billions. For them, switching to blockchain isn’t just a technical shift—it’s an expensive, messy transition they’d rather avoid.

Scaling is solved.

Then there’s scaling. Blockchain used to struggle with handling high transaction volumes—leading to slow speeds and insane fees. But after years of research and billions poured into scaling solutions, things are finally improving. We’re close. Different approaches are emerging: Solana prioritizes speed but leans toward centralization, while Ethereum takes a more decentralized route with its Layer 2 ecosystem.

Lack of confidentiality.

But beyond regulation, the biggest missing piece is confidentiality—a fundamental flaw in the current system.

Confidentiality in the context of stablecoin isn’t just one thing; it’s two:

Identity—hiding your credentials and the social graph of transactions.
Metadata—things like amounts and total supply.

Both matter, and both are completely exposed today.

In their current form, stablecoins fail at one of money’s core functions—payments, especially for businesses. The problem? Companies need transaction privacy to operate effectively. No manufacturer will pay a supplier in stablecoins if it means exposing purchase details—that’s economic suicide.

Public blockchains reveal everything: who’s paying whom, transaction amounts, even total supply. AI-powered data firms scrape onchain activity, linking pseudonymous addresses to real-world identities with alarming accuracy. There’s an entire industry built around this.

For corporate payments, that’s a dealbreaker. But it’s not just businesses—most personal financial activities also collapse without confidentiality. Think salaries—no one wants their income and spending history public. Or collateralized loans for unlisted companies—hiding the rate and amount is essential (read more about how to onbboard the next trillions in DeFi with confidential lending using Fully Homomorphic Encryption). Even using stablecoins as a personal bank account is a non-starter if every transaction is fully exposed.

For banks, privacy isn’t optional—it’s the foundation of trust. At Zama, we believe stablecoins won’t scale to trillions without built-in confidentiality for both identity and amounts.

Enter Confidential Stablecoins

At their core, stablecoins are just ERC-20 tokens—a ledger tracking IDs and amounts, like an online bank account. That’s where Fully Homomorphic Encryption (FHE) changes the game. We’re pioneering confidential ERC-20s (which we’re standardizing as a new ERC) to bring true onchain privacy to stablecoins.

What does that mean in practice?

Only the sender and receiver see who’s involved and how much is moved.
Anyone checking a block explorer? All they see is an encrypted blob—no social graph, no metadata leaks.

Here’s the breakthrough: with FHE, identities stay encrypted onchain while keeping full composability. Smart contracts can still enforce rules—like verifying if someone is a qualified investor or a U.S. citizen—without revealing their identity. Pair that with encrypted amounts, and you get end-to-end confidentiality: who’s transacting and what’s being sent, all fully encrypted.

And because it’s FHE, access control is built right into smart contracts. Need a regulator to have read-only access for compliance? Done. Want your accountant to see the books? No problem. It’s programmable, compliant confidentiality—fully onchain, with the same composability as regular DeFi.

Let’s Create a Better Financial Stack

Crypto’s mission is to clean up the messy, outdated IT of global finance—starting with the most liquid assets: currencies. Public blockchains have already delivered huge wins—programmability, ownership, instant settlement—things bank IT teams have dreamed about for decades.

But to get here, we traded business secrecy and privacy for full transparency—a necessary compromise for consensus. Now, with Fully Homomorphic Encryption (FHE), we don’t have to choose. It’s like how SSL added encryption to HTTP, making the internet safe for commerce.

Confidential stablecoins can do the same for blockchain. And the timing couldn’t be better. Most assets still to be tokenized—stocks, private credit, debt, alternative investments—fit perfectly into ERC-20 and similar standards. They also desperately need confidentiality.

Stablecoin issuers, banks, asset managers—let’s talk, you can contact us here. It’s time to bring the world onchain, without giving up privacy, starting now with Zama’s fhEVM.