Stable in Name Only? The Macro-Financial Risks of Stablecoins
In the beginning, Satoshi Nakamoto created Bitcoin.
This cryptocurrency was invented as a more trustworthy cash alternative due to its isolation from government interference.
However, time proved that Bitcoin could not function as a payment method for many reasons—most notably its volatility. On a normal day, Bitcoin can vary by more than 10%, impeding the completion of transactions for both consumers and sellers. Thus, stablecoins were created as a different type of crypto asset. In contrast, the largest stablecoin by market capitalization, Tether (USDT), typically varies by less than 0.10%.
Unlike traditional cryptocurrencies, most stablecoins are issued and controlled in a centralized manner by crypto firms or other financial institutions. These issuers promise a stable value in a set currency, frequently backing their coins 1:1 with short-term, liquid financial assets. Most often, they are pegged to more established fiat currencies, such as the U.S. dollar.
Stablecoins’ design relies on tokenization, representing them on distributed ledgers. Through this model, they can be held in crypto wallets and traded without interacting with traditional banking systems. As a result, transactions can be more accessible, cheaper, and more efficient—expanding access to digital finance. Their convenience applies in many situations. For example, cross-border transactions, such as remittances by migrants, are much easier to complete. Within crypto markets, they can be used like cash, providing an efficient way to convert between dollars and crypto when used as a trading pair.
Stablecoins are also growing rapidly, driven by promises of stability, efficiency, and accessibility. The two largest stablecoins by market cap increased their trading volume by 90% between 2023 and 2024. However, while their potential is exciting, the sudden expansion raises important macro-financial risks.
Runs and Fragile Stability
Stablecoins’ stability cannot be taken for granted, as they are all exposed to the risk of depegging. Their susceptibility to fluctuations results from the market, liquidity, and credit risk of the underlying asset. If the value of those assets declines, confidence in the stablecoin may correspondingly weaken.
Varying policies regarding redemption rights can also bolster a first-mover advantage: when skepticism appears, holders are encouraged to redeem early to avoid losses, increasing the likelihood of a run.
This dynamic was apparent during the 2022 run on TerraUSD (UST), a stablecoin backed by another cryptocurrency, LUNA. As crypto markets broadly declined, the value of LUNA fell, undermining UST and causing it to trade below its promised redemption value of $1. Withdrawals then accelerated and overwhelmed the stabilization mechanism. The blockchain’s inherent transparency—which allows users to monitor each other’s transactions in real time—set the next stage of the run. Once two large addresses withdrew a significant amount of UST, other investors noticed and rushed to redeem their holdings.
Reserve Assets Under Pressure
As adoption increases, the market function of a stablecoin’s reserve asset may be impaired, producing far-reaching consequences. The UST case proves that stablecoins are vulnerable when their backing asset crashes. Therefore, both assets are tied, and we should consider concerns about the reverse scenario.
Many stablecoins are tied to T-bills. While issuing more coins, issuers may buy amounts large enough to raise prices and compress yields. Conversely, if confidence declines, liquidating significant amounts may cause treasuries’ liquidity to decline, distort price signals, and increase yield volatility. An impairment of the Treasury bill market could also hinder the government’s ability to raise funds.
Decreasing Deposits for the Banking System
Two processes—stablecoins’ growing adoption and their increasing resemblance as an alternative to bank deposits—jointly jeopardize the banking system.
The comparative advantages banks once had are eroding. For example, issuers may now offer remuneration, as UST did, pushing stablecoins one step closer to becoming deposit-like instruments.
If the preference for stablecoins grows large enough, banks may experience a reduction in deposits, their stable and low-cost funding source. Lending availability and conditions may also be affected as banks must rely on more volatile and expensive financing. Ultimately, higher costs will be passed on to borrowers through more expensive loans and tighter credit conditions.
Still, the IMF expects banks and stablecoins could coexist if they provide sufficiently different services and use cases.
Contagion Through Financial Interconnections
Stablecoins’ interconnectedness with traditional financial institutions facilitates the spread of stress between their markets, banks, and payment systems.
For example, a loss of confidence in a major stablecoin may force issuers to immediately liquidate reserve assets or withdraw large deposits. The subsequent outflow may be large enough to create liquidity pressures, disrupt payment services, and affect banks’ other customers, transmitting stress beyond crypto markets. Asset concentration—many issuers placing their reserve assets in a few banks—only amplifies these consequences.
In this way, stablecoins may act as a new transmission channel through which shocks ripple across markets that were previously loosely connected.
Erosion of Monetary Sovereignty
One of the most significant risks posed by stablecoins is currency substitution—the weakening and depopularization of local currencies in favor of foreign ones.
In countries with unfavorable economic conditions, like high inflation, people may begin using foreign, dollar-denominated stablecoins in search of stability. Enough economic activity shifting towards foreign currency pegged stablecoins will impair the effectiveness of local monetary policy, as a foreign currency would be used for most transactions.
These scenarios are not unrealistic. Stablecoins are convenient in many contexts, mostly because of their extreme accessibility. They are a near-instant method for domestic and cross-border transactions with very low costs that never cease operation. Network effects—the efficiency and usefulness of a payment method increasing alongside its adoption—only incentivize currency substitution.
Changing Capital Movements
The simplification and amelioration of cross-border payments and exchanges may reshape international capital movements. These will be faster, more volatile, and less controllable, intensifying reactions to financial shocks.
A lack of regulation also allows stablecoins to bypass traditional Capital Flow Management (CFM) tools. Their design provides anonymity to users, complicating the management and monitoring of cross-border flows, and making CFM instruments less effective.
Conclusion
Stablecoins are often framed as innovative solutions for some difficulties faced by crypto markets and users. However, there are still risks that need to be assessed and addressed. They function like private money that lacks the same regulatory safeguards as the cash that supports conventional finance. This absence of governance introduces macro-financial vulnerabilities that scale alongside stablecoin adoption.
These consequences are not inevitable, nor do they affect all countries uniformly. The regulatory strength and scale of governance will determine the magnitude of these risks. Strong policy may create environments where stablecoins can coexist with traditional finance; elsewhere, they risk magnifying instability and eroding monetary sovereignty.
As stablecoins continue to expand, policymakers must balance the protection of financial stability with the encouragement of innovation.
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