Stablecoins and Systemic Risk: A Cautionary Outlook for Global Investors

Stablecoins have emerged as a cornerstone of the digital financial ecosystem, with their market capitalization surging to $250–260 billion by 2025 and daily transaction volumes averaging $15 billion—far outpacing Bitcoin’s $2–4 billion [3]. These digital assets, pegged to traditional currencies like the U.S. dollar, promise efficiency in cross-border payments and a hedge against inflation in volatile economies. Yet, their meteoric rise has exposed systemic vulnerabilities that demand urgent regulatory scrutiny.

The Bank for International Settlements (BIS) has sounded alarms about stablecoins failing three critical tests for a resilient monetary system: singleness (a single, unified form of money), elasticity (the ability to adjust supply in response to demand), and integrity (transparent, verifiable reserves) [1]. These shortcomings were starkly illustrated in the 2022 de-pegging of Tether and USDC, which triggered panic-driven runs and exposed opaque collateral structures [2]. The collapse of algorithmic stablecoins like TerraUSD further underscored the fragility of systems reliant on non-liquid reserves, leading to a $40 billion loss in a single week [2].

Regulators are now grappling with the dual challenge of fostering innovation while mitigating contagion risks. The U.S. Senate’s proposed GENIUS Act aims to establish a federal framework for stablecoin oversight, emphasizing transparency in reserve composition and redemption mechanisms [4]. Conversely, the European Union has prioritized sovereign control, seeking to prevent stablecoins from eroding the authority of central banks and national currencies [3]. This divergence reflects a broader tension between private-sector experimentation and public-sector stability mandates.

The macroeconomic implications of stablecoins are equally concerning. By siphoning deposits from traditional banks or, conversely, expanding access to unbanked populations, stablecoins complicate monetary policy transmission. Central banks risk losing control over interest rates and liquidity if stablecoins become a preferred store of value [2]. Moreover, the BIS warns that a large-scale run on stablecoins could trigger fire sales of safe assets, destabilizing global markets [3].

Illicit finance is another growing threat. Stablecoins now account for 63% of crypto-related illicit transactions, leveraging their speed and pseudonymity for money laundering and trade in illicit goods [3]. This not only undermines financial integrity but also exposes investors to regulatory crackdowns and reputational risks.

For global investors, the lesson is clear: while stablecoins offer transformative potential, their systemic risks demand a cautious approach. Diversification into traditional assets, hedging against regulatory shifts, and monitoring reserve transparency are essential strategies. As central banks explore tokenized monetary systems—integrating central bank reserves, commercial bank money, and government bonds on a unified ledger—the future of stablecoins may hinge on their ability to align with public-sector frameworks [1].

**Source:[1] III. The next-generation monetary and financial system [https://www.bis.org/publ/arpdf/ar2025e3.htm][2] Research Exchange: August 2025 [https://bpi.com/research-exchange-august-2025/][3] Stablecoins, Digitized Bank Deposits, and Future Banking Risk [https://www.aei.org/op-eds/stablecoins-digitized-bank-deposits-and-future-banking-risk/][4] The state of stablecoins in cross-border payments: 2025 [https://www.fxcintel.com/research/reports/ct-state-of-stablecoins-cross-border-payments-2025]