BTRM Faculty Opinion 

Stablecoin Payment Networks: When Stable Meets Stress

“Liquidity is a coward. It disappears at the first sign of trouble.”

–  Barton Biggs

I am returning to this topic to address what is, for the practising bank treasurer, perhaps the most consequential question of all: what happens to liquidity when stress materialises?

The implications are twofold. First, stablecoins interact directly with the money markets in which banks conduct their own liquidity management. Second, as stablecoins achieve greater adoption in payments and collateral chains, their failure modes become transmission mechanisms for broader financial stress.

The Liquidity Promise and Its Fragility

The foundational proposition of a fiat-backed stablecoin is deceptively simple: one unit is redeemable for one unit of the reference currency, at par, on demand – a liquidity guarantee.

Treasury professionals will recognise the parallel: this is the same promise made by demand deposits and stable-NAV money market funds. The critical question is: what backs it?

Reserve Composition and Liquidity Stratification

The reserve portfolios of major stablecoin issuers typically comprise the following asset classes:

Asset Class	Typical Allocation	Liquidity Profile	Stress Behaviour
US Treasury bills (< 90 days)	60–80%	High (normal markets)	Flight-to-quality asset; may appreciate
Overnight reverse repo	10–25%	Very high	Stable; dependent on counterparty access
Bank deposits	5–15%	Medium-high	Subject to bank credit risk and concentration
Commercial paper	0–5% (declining)	Medium	Spread widening; potential illiquidity
Money market fund units	Variable	Medium-high	Subject to fund-level gating provisions

 

On the surface, these portfolios appear conservative. The comparison, however, is misleading for three reasons. First, stablecoin issuers have no access to central bank standing facilities – no lender of last resort. Second, holders have no deposit insurance; their only guarantee is the issuer’s capacity to honour redemptions. Third, unlike bank deposits with diversified retail bases, stablecoin redemptions can be executed programmatically, instantaneously, and in unlimited size by sophisticated holders monitoring reserves in real time.

The architecture looks sound in fair weather. The question – as with every liquidity structure in the history of finance – is what happens when the weather turns.

Stress Scenarios: The Ways It Breaks

Drawing on established frameworks from the Basel Committee’s liquidity risk principles, the BIS’s work on payment system stress, and the intellectual lineage of Diamond and Dybvig’s model of bank runs, we can identify four distinct stress scenarios relevant to stablecoin liquidity. These scenarios are not equally probable, nor are they independent. They exist on a spectrum of likelihood and severity and critically, they compound.

Scenario 1: Idiosyncratic Issuer Stress

A single issuer faces a loss of confidence – perhaps due to an attestation failure, regulatory action, or counterparty default. Redemptions accelerate; the issuer must liquidate reserve assets at pace.

The critical distinction from a traditional fund is speed. A fund confronting an attestation delay has days before investors react; a stablecoin issuer confronts redemptions executing in minutes via smart contracts with pre-programmed triggers. No portfolio of Treasury bills can be liquidated at that pace without market impact.

Transmission mechanism: Forced selling depresses T-bill and money market prices, tightening conditions for all participants. If the issuer holds significant bank deposits, rapid withdrawal may trigger concentration risk at the custodian. The speed differential between programmatic redemption and orderly liquidation is the structural vulnerability – and it widens when markets are already strained.

Scenario 2: Sector-Wide Contagion

Stress at one issuer triggers a generalised loss of confidence. Holders across multiple stablecoins seek simultaneous redemption – analogous to the contagion that followed the Reserve Primary Fund’s failure in September 2008.

The dynamic is sharpened by a feature absent in 2008: fungibility across issuers on shared infrastructure. In 2008, fleeing investors moved to Treasury – only funds on different rails. In stablecoin markets, a holder fleeing USDC does not necessarily exit to fiat; they may rotate into USDT or DAI, concentrating redemption pressure on the weakened issuer. The result is not a flight to safety but a cascade of sequential stress tests, each resolved only if the next issuer’s reserves prove adequate under the very market conditions that the prior issuer’s liquidation has worsened.

Transmission mechanism: Aggregate liquidation creates correlated selling pressure in short-term government securities – the very assets constituting HQLA under the LCR. Even issuers with adequate reserves face elevated volumes as the market conducts a real-time audit of the entire sector.

Scenario 3: Market Infrastructure Failure

Blockchain network congestion, smart contract failure, or the failure of a critical bridge prevents orderly redemption. Holders who cannot redeem sell on secondary markets at a discount, creating a de-peg that accelerates panic.

Consider a concrete instance: in May 2022, as TerraUSD collapsed, Ethereum gas fees exceeded $200 per transaction. Holders of other stablecoins wishing to redeem could not do so at economically rational cost. A two-tier market emerged: institutional holders with direct issuer relationships exited at par; retail holders were forced into secondary markets at a discount. This is a demonstrated failure mode that worsens precisely when it matters most.

Transmission mechanism: This scenario highlights the FMI misalignment discussed in the second article in this BTRM series. The absence of recovery and resolution frameworks means infrastructure stress and credit stress compound. Unlike regulated payment systems required to maintain capacity under extreme conditions, stablecoin infrastructure has no obligation to remain functional at peak demand – and no fallback when it fails.

Scenario 4: Exogenous Money Market Stress

A stress event originating outside the stablecoin ecosystem – a sovereign debt scare, a repo market seizure, or a sudden policy tightening – impairs reserve asset value. The stablecoin issuer faces the prospect of honouring par redemptions against a portfolio marked below par.

The arithmetic is instructive. Tether’s reserves have a weighted average maturity of approximately 45 days. A 50bp parallel shift implies a duration-approximated mark-to-market loss of roughly 6bp on the T-bill portfolio alone-which is manageable in isolation. But the relevant question is the tail scenario where rate movements coincide with credit events in commercial paper or repo markets, forcing simultaneous write-downs and liquidity impairment. The issuer then chooses between honouring par redemptions (crystallising losses) or gating redemptions (destroying the peg). Neither outcome is stable.

Transmission mechanism: This is the scenario least discussed in stablecoin discourse I believe. This is the classic asset-liability mismatch: short-duration liabilities redeemable at par on demand, backed by assets whose value is uncertain under stress. Its danger lies in its ordinariness – it requires merely the kind of rate volatility that occurs several times per decade.

The Compound Case: When Scenarios Collide

In practice, the scenarios above do not present in isolation. The most dangerous liquidity events in financial history – Northern Rock in 2007, Lehman Brothers in 2008, the gilt market crisis of September 2022 – involved the simultaneous materialisation of credit stress, funding stress, and infrastructure strain.

For stablecoins, the compound case could run as follows: a market-wide rate shock (Scenario 4) triggers mark-to-market losses; on-chain observers flag reserve inadequacy; redemption infrastructure is overwhelmed (Scenario 3); secondary market de-pegging triggers cross-issuer contagion (Scenario 2). Each layer accelerates the next.

When Transparency Becomes the Trigger

A feature peculiar to stablecoins, and distinct from traditional money market instruments, is the reflexive interaction between on-chain observable data and holder behaviour. In traditional banking, limited real-time visibility provides some buffer against self-fulfilling runs. In stablecoin markets, this asymmetry is eliminated: on-chain analytics firms publish real-time data on supply changes, large holder “whale” movements, exchange flows, and secondary market pricing.

This transparency, often celebrated as a feature, is in fact a liquidity risk accelerant – enabling holders to observe early redemption pressure and act pre-emptively, transforming manageable outflows into catastrophic runs.

Implications for Practitioners

The interconnection between stablecoin reserves and the markets in which banks manage their own liquidity creates several strategic considerations:

Shared Asset Pool Competition: as stablecoin reserves grow – Tether and Circle alone hold well in excess of $150 billion in short-dated US government securities – they become material participants in the very markets that banks rely upon for HQLA and liquidity buffer management. A forced liquidation event by a major issuer would not be a contained, crypto-native problem; it would be a Treasury market event.

Custody and Deposit Concentration: banks acting as custodians or deposit-holders for stablecoin reserves face concentrated, behaviourally unstable funding. A stablecoin issuer’s deposits are not analogous to retail or even wholesale corporate deposits – they are reserve assets that will be withdrawn precisely when the issuer faces stress. This is the worst possible correlation structure from a bank liquidity management perspective.

Collateral Chain Contamination: as stablecoins are increasingly used as collateral in both centralised and decentralised lending markets, their de-pegging or illiquidity triggers margin calls, forced liquidations, and collateral shortfalls that propagate through interconnected platforms. For banks with exposure to digital asset markets – whether directly or through prime brokerage clients – this represents a contagion vector that is difficult to model and challenging to hedge.

Until stablecoin issuers are held to the same liquidity risk management standards as systemically important payment systems – including requirements for qualified liquidity providers, stress testing under extreme but plausible scenarios, and prefunded liquidity facilities – the gap between their liquidity promise and their liquidity capacity remains unresolved.

Conclusion with a Risk Hat on

The opening observation about the cowardice of liquidity applies with particular force to stablecoins. These instruments offer a liquidity guarantee that is, under normal conditions, effortlessly honoured – and under stress conditions, structurally fragile. The absence of lender-of-last-resort access, the reflexive dynamics of on-chain transparency, and the correlation between stablecoin reserve portfolios and systemic money markets create a risk profile that demands serious attention from bank treasurers, regardless of whether their institutions are directly engaged in digital asset markets.

The liquidity illusion – the belief that because redemptions are easy today, they will always be easy – is the oldest trap in finance. Stablecoins have not escaped it; they have merely dressed it in new technology.

This article forms part of a series on stablecoin risk published by the BTRM.