Stablecoin markets face broader financial risks from potential run dynamics

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Stablecoin market financial risks

Highlights

Moody’s recorded 609 stablecoin depegs among major tokens over six months in 2023, highlighting frequent pressure prior to potential market runs.
USDC fell to 90 cents after $3.3 billion of reserves were tied up in Silicon Valley Bank, with prices stabilizing only after U.S. government intervention.
If institutional settlement with stablecoins grows post-Genius Act, runs could trigger concentrated Treasury sales by issuers, risking direct stress transmission to mainstream financial markets.

Reserve structures and run mechanics

As reported by Financial Times, debate over stablecoin stability is shifting toward the consequences of a large-scale run rather than brief deviations from the intended $1 peg. The article argues that these tokens are used mainly as collateral for crypto loans or as a temporary store of funds between crypto trades, not primarily as a consumer payment tool.

Stablecoins are backed by reserves of real-world assets intended to preserve a fixed value, usually $1 per coin, yet they frequently trade below that level. Moody’s documented 609 depegs among large stablecoins in a six-month period in 2023, underscoring how often pressure emerges even before a full run takes hold.

USDC provided a recent example when selling pressure intensified after it emerged that $3.3 billion of its reserves were held at the failing Silicon Valley Bank. Its price fell as low as 90 cents, and the stress eased only after the U.S. government guaranteed all of the bank’s deposits.

Congress passed the Genius Act almost a year ago, and U.S. banking regulators have proposed implementing rules that would require U.S.-registered stablecoins such as USDC to hold cash, Treasuries and other relatively safe assets in reserve. Even so, the article notes that Tether USDT, the largest stablecoin, is issued outside the U.S. and is not subject to those requirements, while rapid liquidation of even high-quality assets may still impose losses and market strain.

Potential spillover into mainstream finance

The broader risk depends on how widely stablecoins are adopted and how deeply they become embedded in financial transactions. The article says legal recognition alone may not be enough to drive consumer use, which helps explain disputes in the U.S. between crypto and banking interests over whether users can be rewarded for holding stablecoins even if issuers cannot pay interest directly under the Genius Act.

That incentive structure may encourage consumers to move funds away from bank accounts, but without government-backed deposit insurance they may rush to exit at the first sign of trouble. The article also notes that many retail holders may not have a contractual right to redeem directly with issuers, leaving them dependent on volatile secondary markets if prices fall sharply.

Instead, analysis of severe runs should focus on large institutional holders that do have direct redemption rights. If the push to tokenise traditional financial assets gathers pace and institutions begin settling blockchain-based transactions with stablecoins legitimised by the Genius Act, sensitivity to any break from the dollar peg may increase substantially.

Under that scenario, turmoil in crypto or tokenised asset markets could trigger large-scale unwinds and force concentrated sales of Treasury holdings by stablecoin issuers. Because sovereign bonds sit at the core of the global financial system, such fire sales could transmit stress into a wide range of other markets and increase the likelihood that official support measures return to the table.

Our earlier article on Kevin Warsh’s Federal Reserve communications reset explained how stripping back forward guidance—such as omitting key statement language and downplaying dot-plot signaling—can raise uncertainty for investors. We noted that reduced transparency may lift risk premiums and increase Treasury-market volatility, with knock-on effects for borrowing costs and broader financial conditions.

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