The Tool Desk
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What “stable” does—and does not—mean
A stablecoin is designed to track a reference value, often a fiat currency such as the U.S. dollar. Its peg is a target supported by an arrangement—such as reserves, collateral, or another stabilization mechanism—not a promise that every holder can always sell or redeem at the target price.
Two different things matter: the token’s price on a trading platform and the holder’s ability to redeem it through the issuer or another authorized channel. A token may trade below its target when confidence or market liquidity weakens, even if some eligible customers can still redeem directly. Conversely, a stated redemption policy does not guarantee that every wallet holder qualifies for direct redemption or can access it promptly during disruption.
Stablecoins also differ in design. A fiat-backed arrangement relies on assets held in reserve; other designs use crypto collateral or algorithmic mechanisms. Evidence about bank deposits and traditional financial reserves applies most directly to reserve-backed arrangements and should not be treated as a complete account of every design.
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How stablecoin risks arise
Reserve quality, liquidity, and custody
For a reserve-backed stablecoin, the assets intended to support the peg matter as much as the stated target. Their value, credit quality, maturity, and liquidity affect whether they can support redemptions. If many holders seek cash at once, assets that cannot be sold quickly at or near their expected value can create pressure; large-scale sales may deepen losses and undermine confidence.
Custody creates another connection. Reserves may be held with banks or other institutions, so trouble at a concentrated custodian or bank can affect confidence in the issuer. Stress at the issuer can also affect the institutions holding its deposits. The Federal Reserve and International Monetary Fund have described these market, liquidity, credit, and interconnection risks. A reserve report or attestation can provide information about assets, but it is not by itself a guarantee of immediate redemption for every holder.
Redemptions, runs, and temporary depegs
If holders doubt that an issuer can meet redemptions, they may try to exit at the same time. That can turn uncertainty into a run: redemption demand rises just as confidence and access to liquidity are under strain. If direct redemption is unavailable to some holders or delayed, they may instead sell on secondary markets, where the price can fall below the peg.
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The Financial Stability Board’s 2023 recommendations for global stablecoin arrangements call for clear and robust legal claims, clear redemption rights, timely redemption at par for single-fiat-referenced arrangements, and appropriate stabilization and prudential safeguards. These are policy recommendations, not proof that every stablecoin follows them or that a run cannot occur.
Operational and service-provider failures
A token’s day-to-day use can depend on more than its issuer: banks, reserve custodians, exchanges, market makers, wallet providers, settlement systems, and other service providers can all affect access or trading. An outage, cyber incident, or breakdown in one part of that chain may make it harder to transfer, trade, or redeem a token even if the underlying reserve has not changed.
The Financial Stability Board identifies cybersecurity, privacy, financial integrity, consumer and investor protection, and market integrity among the concerns for stablecoin arrangements. Federal Reserve staff have also noted that more complex links between issuers and service providers, vertical integration, and retail distribution through digital-wallet partnerships can introduce or amplify vulnerabilities.
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Legal, regulatory, and cross-border uncertainty
A holder’s rights depend on the instrument’s legal terms, the issuer and intermediaries involved, and the jurisdiction that applies. International standards and recommendations do not create a universal consumer guarantee. A rule or remedy available in one country or for one product structure may not apply to another.
In an October 16, 2025 speech, Federal Reserve Governor Michael S. Barr discussed the U.S. GENIUS Act framework, implementation work, and consumer-protection gaps. That dated speech is not a substitute for checking the current law and terms applicable to a particular token, issuer, and location. The Financial Stability Board has separately highlighted additional challenges for emerging and developing economies, including cross-border activity and foreign-currency-pegged global stablecoins.
What the 2023 USDC episode shows
The March 2023 Silicon Valley Bank episode illustrates how bank exposure, confidence, and redemption operations can interact. Concern about Circle’s deposits at SVB prompted USDC redemption requests. Primary-market operations were disrupted over the weekend, and USDC traded below its dollar target on secondary markets. The IMF’s December 2025 paper reports a temporary low of about $0.88 before the FDIC guaranteed all deposits at SVB.
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A separate Federal Reserve analysis, published December 17, 2025, reports that Circle cash held at U.S. financial institutions fell from $11.5 billion on March 6, 2023, to $3.7 billion on March 31, 2023. Those are reported cash balances, not total reserves, customer losses, or the value of redemptions. The episode is a specific historical case, not a typical loss estimate or a forecast for other stablecoins.
Stablecoins are not bank deposits
Do not assume that owning a stablecoin makes you a depositor at the issuer’s reserve bank. The token may be a claim under different legal terms, and the holder’s rights can differ from those of the issuer or an eligible direct customer. Federal Reserve Governor Barr’s October 16, 2025 remarks note that stablecoin issuers in the market he described do not have deposit insurance or access to central-bank liquidity.
Barr said: “Stablecoins will only be stable if they can be reliably and promptly redeemed at par in a range of conditions, including during stress in the market that can put pressure on the value of even otherwise liquid government debt, and during episodes of strain on the individual issuer or its related entities.” The practical point is to check the actual redemption and legal terms rather than infer protection from the word “stable.”
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How to assess a stablecoin before holding it
Compare the specific token and the channel through which you intend to hold or use it. These checks do not eliminate risk, but they help identify where a loss of value or access could come from.
- Reserve composition and liquidity: Find out what assets support the arrangement, their credit quality and maturity, and whether they could be liquidated under stress.
- Custody and concentration: Check where reserves are held and whether the issuer depends heavily on one bank, custodian, or other provider.
- Redemption eligibility and timing: Establish who can redeem directly, what minimums or other conditions apply, how long redemption may take, and whether fees or stress-related restrictions are disclosed. Do not assume that a secondary-market holder has the same rights as an eligible direct customer.
- Legal claim and jurisdiction: Read the terms to identify who owes what to you, which law applies, and what remedies may be available where you live.
- Transparency and governance: Review reserve disclosures, reporting practices, conflicts, and who is accountable for the arrangement and its controls.
- Operational resilience: Consider whether redemption, custody, transfers, and settlement rely on services that could be unavailable during an outage or cyber incident.
These comparison dimensions reflect Financial Stability Board recommendations and Bank for International Settlements regulatory analysis. The sources do not establish a universally safest stablecoin, and a stronger reserve profile does not remove legal, market, operational, or counterparty risks.
Market size is not a measure of safety
Stablecoins have become large enough to matter to financial markets, but market size does not show how safe an individual token is. A Federal Reserve staff note published April 8, 2026, put aggregate stablecoin market capitalization at $317 billion as of April 6, 2026, more than 50% above early 2025. In an August 7, 2026 speech, the IMF described the market as around $300 billion and said it had nearly tripled between 2021 and 2025. These are differently dated and rounded descriptions, not one exact point estimate.
The same IMF speech attributed to the BIS an estimate of $390 billion in payment-related stablecoin flows in 2025. That is a flow measure, not market capitalization. None of these figures establishes a typical consumer loss, a failure rate, or how often stablecoins depeg.
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- Check what is unavailable. Determine whether the issue is a secondary-market price move, a platform or wallet outage, a transfer problem, or a suspension or delay in issuer redemption. These are different problems and may have different remedies.
- Read the issuer’s current notices and terms. Confirm whether direct redemptions are open to your account and location, and check any stated limits, timing, or conditions before relying on an exchange quote as a redemption price.
- Keep records. Save transaction identifiers, balances, timestamps, platform notices, and relevant account or redemption communications in case you need to raise a dispute with an intermediary or pursue a remedy under applicable rules.
- Do not assume a quick recovery. The 2023 USDC case shows that a temporary depeg can occur amid bank and redemption stress, but it does not predict how or whether a different token will recover.
A wallet can affect private-key custody, but using a different wallet does not remove an issuer’s reserve or redemption risk, restore a disrupted banking channel, or change the legal rights attached to the token.
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