Systemic Risks in Digital Asset Custody: Governance and Transparency in Stablecoin Infrastructure

The digital asset ecosystem has reached a critical inflection point. By 2025, stablecoins-tokens designed to maintain a stable value relative to traditional currencies-have grown to a market capitalization exceeding $232 billion, according to an Elliptic risk assessment. Yet, beneath this veneer of stability lies a fragile infrastructure riddled with governance failures, transparency deficits, and systemic risks that threaten not only crypto markets but global financial systems. For investors, understanding these vulnerabilities is no longer optional; it is a prerequisite for navigating the next phase of digital finance.

Governance Failures: The BIS Report and the U.S. Legislative Vacuum

The Bank for International Settlements (BIS) has sounded the alarm, declaring that stablecoins fail to meet the "three key tests" of sound money: singleness, elasticity, and integrity, a CryptoNews report notes. This assessment underscores a fundamental flaw in stablecoin governance models, which often lack the centralized oversight and regulatory guardrails of traditional banking systems. The U.S. Senate's failure to pass the GENIUS Act in May 2025 exemplifies this governance vacuum. Despite bipartisan support for a federal framework to regulate payment stablecoins, the bill collapsed due to political divisions, leaving issuers like Circle and Tether operating in a legal gray zone. This legislative impasse has exacerbated uncertainty, pushing startups to relocate operations overseas and eroding U.S. competitiveness in global digital finance, according to Stablecoin Insider.

The collapse of the GENIUS Act also exposed deeper ethical concerns. As President Trump's involvement in crypto projects like USD1 and $TRUMP highlighted, stablecoin governance is increasingly entangled with political and corporate interests. This blurring of lines raises questions about accountability, particularly when stablecoin reserves-often opaque and unverified-form the backbone of global payment systems.

Transparency Deficits: Reserves, Audits, and the STABLE Act's Shortcomings

Transparency remains a persistent Achilles' heel for stablecoin infrastructure. Tether, the largest stablecoin by market capitalization, has faced relentless scrutiny over whether its reserves are fully backed by U.S. dollars. The absence of independent, real-time audits-a lesson from the 2022 Terra/LUNA collapse-has left investors vulnerable to sudden depegging events. The 2025 STABLE Act, intended to address these issues, has instead drawn criticism for its perceived weaknesses. Consumer Reports argues that the bill allows big tech firms to enter the stablecoin space without the same regulatory scrutiny applied to banks, risking monopolization and inadequate consumer protections.

For instance, the STABLE Act's provision permitting stablecoin reserves to be held in U.S. Treasuries could shift liquidity away from local banks, which traditionally fund small businesses. This shift not only undermines financial inclusion but also creates a new class of systemic risk: if stablecoin reserves are liquidated en masse during a "coin run," the ripple effects could destabilize traditional markets.

Systemic Risks: From Coin Runs to Cross-Chain Exploits

The fragility of stablecoin infrastructure is perhaps most evident in the growing threat of "coin runs." Unlike traditional bank runs, which require physical queues, stablecoin collapses can occur in seconds. The September 2025 exploit of Yala's YU stablecoin-where an attacker minted 120 million tokens and drained liquidity across multiple blockchains-illustrates this risk, as reported in an ECB blog post. Despite assurances that Bitcoin collateral was secure, YU's peg to the dollar was irreversibly lost, exposing the vulnerabilities of thin liquidity pools and cross-chain dependencies.

Algorithmic stablecoins, which rely on complex arbitrage mechanisms, are even more susceptible to systemic failure. The 2022 TerraUSD collapse demonstrated how a self-reinforcing depegging spiral can erase billions in hours. Meanwhile, smart contract flaws-such as the 2022 Beanstalk Farms exploit, where $182 million was drained in 13 seconds-highlight the technical risks inherent in decentralized governance models.

Regulatory Responses and the Path Forward

The fragmented regulatory landscape has only compounded these risks. While the U.S. House Financial Services Committee introduced the Stablecoin Transparency and Accountability Act in April 2025, global coordination remains elusive. The European Central Bank's warnings about stablecoin threats to monetary sovereignty and Singapore's proactive licensing framework contrast sharply with the U.S.'s legislative inertia. For investors, this patchwork of regulations creates compliance challenges and heightens exposure to jurisdictional arbitrage.

A coordinated global approach is essential. The BIS has emphasized the need for reserve transparency, real-time audits, and stress-testing of stablecoin pegs. Meanwhile, the 2025 STABLE Act's shortcomings suggest that regulatory frameworks must evolve to address the unique risks of digital assets, including cross-chain exploits and algorithmic instability.

Conclusion: Navigating the New Frontier

For investors, the stakes are clear. Stablecoins are no longer niche instruments; they are integral to global payment systems, decentralized finance (DeFi), and cross-border transactions. Yet their systemic risks-rooted in governance failures, transparency deficits, and technical vulnerabilities-demand rigorous due diligence.

The path forward requires a dual focus: advocating for robust regulatory frameworks while prioritizing investments in stablecoins with transparent reserves, auditable smart contracts, and decentralized governance models. As the BIS and global regulators continue to grapple with these challenges, one thing is certain: the next decade of digital finance will be defined by how well we address the fragility of its foundation.