Financial Stability and Systemic Risk in Stablecoins

Abstract

The rapid growth of stablecoins has introduced novel forms of systemic risk to the global financial system, fundamentally challenging traditional notions of financial stability. This perspective paper examines the conditions under which stablecoins may become “too big to fail” and analyzes the unique risks posed by algorithmic and decentralized autonomous organization (DAO)-based models. Through comprehensive examination of the Terra Luna/TerraUSD (UST) collapse, Silicon Valley Bank's impact on USDC, and other significant stablecoin failures, we identify critical thresholds for systemic importance and propose an enhanced framework for assessing systemic risk in digital currency ecosystems. Our analysis reveals that traditional metrics of systemic importance inadequately capture the interconnectedness, velocity-driven risks, and reflexive mechanisms inherent in algorithmic stablecoin systems .