Stablecoins and Financial Stability: Innovation’s Bright Promise—and Its Shadow
Stablecoins rose to solve crypto’s volatility problem, but their explosive growth now poses bank‑run‑like liquidity threats, operational headaches, cross‑border capital shocks, and fresh challenges for central‑bank policy.
This article unpacks how they work, why they matter, where they have already failed, and what regulators around the world—including Korea—are doing next.
1. Opening a New Financial Frontier
Crypto’s early promise—borderless, 24/7 money—hit a wall when Bitcoin and Ether swung 10 percent in an hour. Stablecoins emerged as the fix.
Market share tells the story: In December 2017, stablecoins powered just 7.9 percent of crypto trades. By May 2025 that share had exploded beyond 84 percent. They now anchor DeFi loans, power cross‑border remittances, and serve as the default parking spot for traders worldwide.
But every innovation casts a shadow. Central banks (the Bank of Korea among them), BIS, and the FSB have all warned that a large‑scale “coin run,” cyber breach, or dollar‑linked capital flight could ricochet into the real economy.
This post lays out (i) how stablecoins actually stay “stable,” (ii) the four systemic risks officials fear most, (iii) real‑world blowups from Terra‑Luna to SVB, and (iv) the fast‑moving policy response in the U.S., EU, Japan, and beyond.
2. Back to Basics—What Makes a Stablecoin Stable?
2.1 Purpose
Stablecoins peg their price—usually to the U.S. dollar—to become a unit of account, medium of exchange, and store of value inside crypto markets and, increasingly, outside them.
2.2 Stablecoins vs. Bitcoin
| Stablecoin | Bitcoin | |
|---|---|---|
| Price target | Fixed (≈ $1) | Free‑floating |
| Supply rule | Elastic—mint/burn to hold peg | Inelastic—21 million cap |
| Trust anchor | Asset collateral or algorithm plus confidence in issuer/design | Purely cryptographic/PoW consensus |
| Typical use | Payments, liquidity buffer | Speculation, digital gold |
2.3 Four Design Camps
Fiat‑backed (USDT, USDC) — 1:1 dollars or Tbills in a bank/trust account. Simple, liquid, but centralized.
Crypto‑collateralized (DAI) — Users lock volatile crypto worth ≈ 150 % of the stablecoins they mint. Transparent, decentralized, but capital‑hungry.
Commodity‑backed (PAXG, XAUT) — Token represents a gram of gold, a barrel of oil, or other real‑world asset (RWA). Brings new liquidity, needs secure storage and auditing.
Algorithmic (UST—now infamous) — No collateral; smart‑contract math expands or contracts supply to hold the peg. Elegant in theory, disastrous under stress.
Each model juggles the trilemma of stability ↔ decentralization ↔ capital efficiency. Lean too far in one direction and another weakens.
3. Four Interlocking Financial‑Stability Risks
Coin‑Run Risk (Liquidity Spiral)
A whiff of doubt—about reserves, governance, or a regulator’s subpoena—can trigger “bank‑run” dynamics. Investors rush to redeem; issuers must dump reserve assets (often short‑term U.S. Treasuries). That fire‑sale pressure feeds back into traditional markets.
Payment & Operational Risk
Bugs in smart contracts, oracle failures, or plain‑old hacks have already frozen billions. Add weak internal controls at issuers and you have a recipe for accidental de‑pegs—or intentional fraud. The same high‑speed rails also move illicit funds; Chainalysis put 63 percent of crypto‑based illicit flows through stablecoins in 2025.
FX & Capital‑Flow Risk
In high‑inflation economies, dollar‑pegged coins function as de facto savings and payment instruments. That “digital dollarization” can hollow out local‑currency demand, drain FX reserves, and short‑circuit capital controls.
Monetary‑Policy Transmission Risk
If households prefer stablecoins to bank deposits, banks create fewer loans and central‑bank rate moves reach the real economy more weakly. The issuer’s own balance sheet becomes a shadow bank large enough to move bond markets.
These risks interlock: a cyber hack (operational) can spark a redemption wave (coin‑run) that forces Tbills onto the market (spillover) while driving capital overseas (FX shock).
4. When Theory Meets Reality—Case Studies
4.1 Terra‑Luna’s Death Spiral (May 2022)
A single wallet dumped UST on Curve; the peg slipped to $0.99. Anchor Protocol’s 20 % yield crumbled, sparking mass withdrawals. The algorithm printed LUNA to buy UST, ballooning supply, but confidence evaporated. In days, a $40 billion ecosystem collapsed, proving algorithmic pegs can fail at light speed.
4.2 USDC & the SVB Weekend (March 2023)
Circle held $3.3 billion of reserves at Silicon Valley Bank. When SVB fell into FDIC receivership on a Friday, USDC traded down to $0.87. Contagion hit DAI and other coins using USDC as collateral. Only a late‑Sunday U.S. Treasury guarantee restored parity—an implicit public backstop for a “private dollar.”
4.3 Tether’s Transparency Question Mark
USDT dominates liquidity but long ran on a cloudy mix of commercial paper and repo. The CFTC fined it $41 million in 2021 for misstating reserves. Today most assets sit in Tbills, yet S&P still rates it “4 (restricted)” for opacity and legal‐entity risk.
4.4 Digital Dollarization in Argentina & Turkey
When pesos or lira dive, local traders flock to USDT. Chainalysis shows Argentine stablecoin volume surges almost tick‑for‑tick with inflation headlines. Capital controls leak as dollar coins slip across borders at the speed of the internet.
5. The Regulatory Wave
| Jurisdiction | Key Statute | Design Philosophy |
| United States | GENIUS Act (draft) | Opens issuance to banks and qualified fintechs but mandates 1:1 high‑quality liquid assets, bans pure‑algorithmic pegs for 24 months, and layers AML/KYC duties. Goal: protect consumers while buttressing dollar primacy. |
| European Union | MiCA (in force 2024) | Creates “EMT” (single‑currency) and “ART” (basket) classes. Requires licensing, daily reserve segregation, & on‑demand redemption. Effectively outlaws algorithmic coins without tangible backing. |
| Japan | Amended Payment Services Act (2023) | Only banks, trust banks, or licensed money transmitters may issue. Separates issuance from distribution, folds coins into existing e‑money rules—“same activity, same risk, same regulation.” |
Expect Seoul to blend these approaches: issuer licensing, real‑time reserve attestation, and a sandbox for won‑pegged coins alongside its pilot CBDC.
Conclusion
Stablecoins began as crypto’s answer to volatility but have grown into trillion‑dollar plumbing that links blockchains to Wall Street—and to Main Street. Their promise of cheaper payments and programmable finance is real; so is their capacity to short‑circuit monetary policy and spark liquidity fires.
For policymakers, the mission is clear but delicate: capture the upside without importing the downside. That means hard‑edged rules on reserves, audits, governance, and redemption—paired with an innovation sandbox where the next generation of safer, smarter digital money can emerge. Korea, with its tech‑savvy population and fast payments infrastructure, is poised to lead—if it moves quickly and collaboratively.