The Systemic Risks of Stablecoins and the Case for Prudent Investment in Regulated Digital Assets

The rise of stablecoins has introduced a paradigm shift in global finance, offering unprecedented speed and accessibility in cross-border transactions. However, their systemic risks—rooted in structural fragility and regulatory ambiguity—demand a reevaluation of investment strategies. Central banks, as stewards of macroeconomic stability, are now at the forefront of addressing these challenges, with the U.S. GENIUS Act and the European Union’s Markets in Crypto-Assets (MiCA) framework serving as pivotal case studies. This article examines the interplay between stablecoin innovation, central bank oversight, and the imperative for prudent investment in regulated digital assets.

Systemic Risks: A Triple Threat to Monetary Stability

Stablecoins, despite their name, are inherently unstable when subjected to the BIS’s three tests of monetary viability: singleness (universal acceptance at par), elasticity (liquidity resilience), and integrity (resistance to financial crime) [1]. Unlike central bank reserves, stablecoins lack the settlement guarantees required for large-value transactions and are vulnerable to exchange rate volatility. For instance, a sudden loss of confidence in a stablecoin’s peg could trigger a fire sale of its underlying assets, destabilizing broader financial markets [5]. The BIS warns that such scenarios could amplify tail risks during crises, particularly in emerging markets where stablecoins are increasingly used as a hedge against inflation [6].

The U.S. GENIUS Act, enacted in July 2025, attempts to mitigate these risks by mandating 1:1 reserve backing with fiat USD and short-term Treasuries, alongside stringent capital and liquidity requirements [3]. Yet, even with these safeguards, stablecoins could inadvertently reshape monetary policy transmission. By altering liquidity dynamics, they may heighten sensitivity to interest rate fluctuations, complicating central banks’ ability to manage inflation and employment [4].

Central Bank Responses: A Global Race for Regulatory Supremacy

The U.S. and European Union have adopted divergent approaches to stablecoin regulation, reflecting broader geopolitical tensions. The GENIUS Act’s emphasis on federal oversight has accelerated the growth of dollar-backed stablecoins, which now dominate global markets. However, this dominance raises concerns for the European Central Bank (ECB), which fears that widespread adoption of dollar-denominated stablecoins could erode the euro’s competitiveness in cross-border transactions and undermine monetary sovereignty [4].

In contrast, the EU’s MiCA framework prioritizes financial stability and consumer protection, requiring stablecoin issuers to undergo rigorous compliance checks [4]. The ECB has also proposed a digital euro to counteract the risks of unintended dollarization, particularly in non-dollarized economies where stablecoins could displace local currencies [6]. Meanwhile, the BIS has underscored the need for global coordination, warning that fragmented regulatory regimes could create arbitrage opportunities and uneven risk environments [1].

Macroeconomic Implications: Dollarization, Sovereignty, and Contagion

The proliferation of stablecoins poses a dual threat to emerging markets. On one hand, they offer a lifeline for individuals and businesses in inflationary economies, enabling wealth preservation and remittance flows. On the other, they risk displacing local currencies, weakening central banks’ control over monetary policy [6]. For example, Nigeria and Indonesia have seen significant adoption of stablecoins for cross-border transactions and DeFi applications, respectively [6]. While this fosters financial inclusion, it also exposes these economies to external shocks, such as sudden capital outflows from local banking systems.

Moreover, the integration of stablecoins into traditional financial infrastructure—such as custody arrangements and derivative markets—introduces new channels for contagion. A collapse in a major stablecoin’s peg could trigger cascading failures across interconnected systems, akin to the 2008 financial crisis [1]. This underscores the urgency of robust oversight, particularly as tokenization efforts by the BIS aim to unify central bank reserves, commercial money, and government bonds on programmable platforms [1].

The Case for Prudent Investment: Balancing Innovation and Stability

Investors must navigate the tension between innovation and systemic risk by prioritizing regulated digital assets. The GENIUS Act’s institutional-grade verification systems, for instance, enhance transparency and trust, making U.S.-backed stablecoins a safer bet compared to algorithmic or non-collateralized variants [1]. Similarly, MiCA-compliant stablecoins in Europe offer a framework for cross-border payments without compromising regulatory standards [5].

However, prudence demands vigilance. The BIS’s warning about the fragility of stablecoin pegs [2] and the Conference of State Bank Supervisors’ concerns over regulatory fragmentation [4] highlight the need for adaptive strategies. Investors should diversify exposure across jurisdictions with strong oversight and avoid assets lacking clear reserve backing.

Conclusion

Stablecoins represent a double-edged sword: a tool for financial inclusion and efficiency, yet a source of systemic vulnerability. Central banks are racing to establish frameworks that balance innovation with stability, but the path forward remains fraught with challenges. For investors, the lesson is clear: the future of digital assets lies not in speculative bets on unregulated tokens, but in strategic allocations to regulated, transparently backed stablecoins. As the BIS aptly notes, the next-generation monetary system will be defined by its ability to pass the tests of singleness, elasticity, and integrity [1]. Those who heed this lesson will be best positioned to navigate the evolving landscape of digital finance.

Source:
[1] III. The next-generation monetary and financial system [https://www.bis.org/publ/arpdf/ar2025e3.htm]
[2] New BIS report raises concerns with stablecoins [https://www.icba.org/newsroom/news-and-articles/2025/06/25/new-bis-report-raises-concerns-with-stablecoins]
[3] The stablecoin moment [https://www.statestreet.com/content/statestreet/jp/ja/insights/stablecoin-moment]
[4] From hype to hazard: what stablecoins mean for Europe [https://www.ecb.europa.eu/press/blog/date/2025/html/ecb.blog20250728~e6cb3cf8b5.en.html]