On Tuesday, Bitcoin slid from its 30-day line at $82.8k, dipped to retest the 50-day line at $81.1k, then bounced back to hover near the 30-day line. Off stage, though, a report from an international regulatory body pushed a stablecoin market now worth over $300 billion back into the spotlight on safety.

On October 12, the Financial Stability Board (FSB) published a report warning that stablecoins could face a redemption crisis under market stress. What makes the warning special is precisely that it targets the well-reserved ones: even with full reserves, a run is not guaranteed survivable.[1]

The logic is not all that complicated. The FSB points out that some stablecoins are issued jointly by affiliated issuers spread across multiple countries — the same token shares redemption liability among several parties, yet each holds its own reserves. Holders can redeem from any participating party, regardless of where the coin was originally issued. When panic arrives, redemption demand can pile onto a single entity while most of the collateral sits on the books of another country, and the mismatch appears.[1]

Normally this is not a problem; moving reserves from one place to another takes only a few days. But in a market panic, banking limits, settlement delays, and differences in each country’s regulatory stance all make the speed of those transfers uncontrollable. Stablecoins flow globally around the clock, yet the Treasuries and bank deposits behind them obey local market hours and settlement schedules. The gap in speed and the mismatch in timing can be violently amplified in a panic.[2]

Once redemptions fall behind, the spreading panic means holders who cannot wait will dump their coins at a discount on secondary markets, and the dollar peg loosens. If the run is large enough, the issuer, in meeting redemptions, sells reserves and pulls bank deposits — and the risk spills through the pipes into the traditional financial system.[1] FSB Chair Andrew Bailey stated plainly that international regulatory coordination remains immature, and countries still lack a mature playbook for handling the failure of a cross-border stablecoin.[2]

Circle, the issuer of the well-known stablecoin USDC, is a handy reference point. Under its redemption policy updated in September, USDC in the European Economic Area is co-issued by its French entity, while the rest of the market is covered by its US entity. When the two entities cannot complete a reserve rebalancing, the French entity may adjust or even defer some redemption requests during a defined stress event — including temporary redemption caps on European crypto-asset service providers. The principle of par-value redemption still stands, but conditions are attached to its exercise; these clauses themselves are prepared for the failure of cross-border reserve transfers.[3]

The regulators’ worries go further. The FSB concedes that on-chain transactions carry a pseudonymous character, and issuers sometimes cannot say clearly who actually holds their coins. Bankruptcy laws differ from country to country, so when something goes wrong, who governs and how remaining reserves are split have no ready answers. An earlier FSB assessment also found widespread gaps among countries in implementing its global stablecoin recommendations.[1]

These measures are non-binding, built on the 2023 recommendations, and adoption is entirely voluntary. On October 15, G20 finance ministers and central bank governors will receive the report as part of the financial-stability agenda. As for cross-jurisdictional resolution procedures, the FSB has given no timetable.[2]

Step back and look at what a stablecoin is meant to be, and a more fundamental contradiction emerges. A stablecoin wants to be digital cash — money that is always withdrawable, available the moment you ask. Yet what it really mimics is a bank deposit: you put money in, I allocate it into interest-bearing assets, and you can come take it out anytime. This model is born with maturity mismatch and liquidity mismatch, and the reason banks are not run on every day comes down to three lines of defense: the central bank as lender of last resort, deposit insurance, and a mature settlement system. Stablecoins promise the on-demand withdrawal of a bank, yet they lack the ultimate backstop of a central-bank lender of last resort; their deposit insurance and settlement systems are far less mature than a bank’s. Walter Bagehot’s lender-of-last-resort theory, set down in Lombard Street, tamed the panic of banks; but when a stablecoin faces a run, no one is its lender of last resort.[4]

This brings to mind Silicon Valley Bank, which blew up in early 2023 from a maturity-mismatch-driven run, and the 1998 episode when speculators led by Soros’s Quantum Fund attacked the Hong Kong dollar, then pegged to the US dollar. In crypto’s history of less than two decades, stablecoins that imploded overnight for one reason or another are not rare. Even the top products, even with full reserves, cannot be called 100% reliable. Perhaps they have simply not yet met the Soros of their own destiny.

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