Systemic Risks of Stablecoins: Implications for Global Financial Stability and Central Bank Policy

The stablecoin market has surged to a staggering $300 billion in market capitalization as of Q3 2025, doubling since 2023 and capturing 7.5% of the broader cryptocurrency market according to Goodwin. This growth, driven by U.S. dollar-backed stablecoins and regulatory frameworks like the GENIUS Act, has positioned stablecoins as a cornerstone of digital finance. However, the rapid expansion has also exposed systemic vulnerabilities that could destabilize global financial systems and challenge central bank policies.

The Run Risk: A Looming Shadow

Stablecoins, by design, promise stability, but their very structure makes them susceptible to "runs" when trust erodes. The European Systemic Risk Board (ESRB) has warned that large-scale shifts of bank deposits into stablecoins could reduce liquidity for real economy lending according to Goodwin. This risk is amplified by the concentration of U.S. dollar-backed stablecoins, which now dominate 99% of total market volume. For example, Tether (USDT) and Circle (USDC) alone account for over $210 billion of the $260 billion U.S. dollar-backed stablecoin market. If a major issuer were to face reserve transparency issues or operational failures, the resulting panic could trigger a cascade of redemptions, straining reserves and destabilizing financial markets.

The October 2025 liquidation event-where $19 billion in crypto futures positions were wiped out in a single day-illustrates the fragility of leveraged positions tied to stablecoins according to Galaxy. While this event was driven by crypto price volatility, it underscores how interconnected stablecoin ecosystems are with broader financial markets. A stablecoin run could exacerbate such cascading failures, particularly if reserves are not fully diversified across institutions, as the ESRB has recommended.

Regulatory Lags and the GENIUS Act

Regulatory frameworks have struggled to keep pace with stablecoin innovation. The ESRB has criticized the fragmented oversight of cross-border stablecoin operations, noting that joint issuances between EU and third-country entities create supervisory blind spots. For instance, multi-function groups offering crypto-asset services alongside traditional finance lack clear accountability, increasing systemic risk as noted by the ESRB.

The U.S. has taken a more proactive approach with the GENIUS Act, enacted in July 2025. This law mandates monthly audits and public disclosures, and criminal liability for executives misrepresenting reserve adequacy. While the Act has brought stability to the U.S. market-legitimizing institutional participation and accelerating adoption-it also highlights regulatory lags elsewhere. For example, the ESRB urges the European Commission to prohibit joint stablecoin issuance under the MiCAR framework until safeguards are in place according to ESRB guidance. Such delays risk creating a patchwork of regulations that could hinder global financial stability.

Implications for Central Banks and Global Stability

Central banks face a dual challenge: fostering innovation while mitigating systemic risks. The concentration of stablecoin reserves in U.S. Treasuries, as noted in market intelligence, mandated by the GENIUS Act, could distort the yield curve by creating artificial demand for short-term debt. This raises questions about how central banks will manage monetary policy in an era where stablecoins compete with traditional banking systems for liquidity.

Moreover, the ESRB warns that nonfinancial companies issuing stablecoins could pose material risks to the banking system according to Brookings research. For example, if a tech giant or fintech firm issues a stablecoin with opaque reserves, it could siphon deposits away from banks, reducing credit availability for businesses and consumers. Central banks must therefore ensure that stablecoin issuers-regardless of their background-adhere to stringent reserve and transparency requirements.

Conclusion: Balancing Innovation and Stability

The stablecoin market's $300 billion valuation is a testament to its transformative potential, but it also demands urgent attention to systemic risks. Run risks, regulatory lags, and cross-border contagion remain unresolved challenges. While the GENIUS Act represents a critical step toward accountability, global regulators must collaborate to close supervisory gaps and enforce consistent standards.

For investors, the key takeaway is clear: stablecoins are not risk-free. Diversification, transparency, and regulatory alignment will be critical to ensuring that stablecoins fulfill their promise as a bridge between digital and traditional finance without destabilizing the global economy.