From Par to Pressure

Fiat-backed stablecoins are expanding, and their issuers may attain systemic relevance as reserve portfolios grow and as they become increasingly intertwined with financial markets. This paper analyzes the resulting risks and the design choices that can mitigate them. A detailed financial-economics discussion forms the core of the paper. It is paired with a model that captures the feedback loop between a systemic stablecoin and financial markets: redemptions deplete reserves, may prompt asset sales, depress bond market prices, thereby erode a stablecoin issuer’s solvency, and in turn amplify further redemptions. The model links design dials—capital and liquidity buffers, reserve composition, redemption gates, and others—to outcomes such as run frequency, fire sale intensity, and bond market volatility. The economics discussion and model analysis conclude that robust prudential design can substantially stabilize stablecoins and their surrounding market environment.