Stablecoins have the potential to become mainstream in financial markets, but further clarity is needed to achieve wider adoption and avert potential regulatory hurdles, according to a Coalition Greenwich report.

The global supply of stablecoins — a form of cryptocurrency designed to maintain a stable value by being pegged to a currency or commodity — has already reached $120 billion. However, the question remains as to whether they are truly "stable" and represent innovation before central bank digital currencies, or CBDCs, become available. Potential red flags by regulators or the broader market could also lead to stablecoins remaining in the "digital backwater" of finance, said Coalition Greenwich, an S&P Global-owned analytics company.

Coalition's survey of 108 market participants working on implementing blockchain solutions for capital markets found that the rapid transaction settlement of stablecoins was billed as the top benefit. Among respondents at tech companies, its transparency and auditability ranked as its second-biggest benefit, while its ability to earn yield ranked third among respondents on the buy side, according to the report.

In terms of use, respondents from banks, brokers, exchanges, market infrastructures and tech companies value stablecoins' settlement mechanism the most, while those from other organization types view the exchange between the cryptocurrency and traditional financial systems as its biggest use. Participants on the buy side, meanwhile, view both use cases similarly.

As for the main disadvantages of the digital currency, 88% of respondents from tech companies cited having centralized private organizations managing most stablecoins, while the majority of respondents from other segments view regulatory uncertainty as their top concern.

Furthermore, all respondents overwhelmingly prefer stablecoins that are 100% backed by fiat currency, with 81% of respondents on the buy side ranking this as the most appealing stablecoin framework. The Circle-USD Coin was seen as the most promising stablecoin by all respondents.

Increasing engagement between major stablecoin issuers and regulators is necessary amid calls for oversight of the market. "A divergence may soon come where certain stablecoins are adopted across decentralized markets, while others focus more on mainstream market adoption and institutional acceptance," Coalition Greenwich said.