Stablecoin

A stablecoin is a privately issued token promising a stable value against a reference, nearly always one US dollar. Run the five questions over it and the answer is stark. It is a liability of a private issuer. It promises redemption at par, but on the issuer's terms, minimum sizes, whitelisted counterparties, banking-hours processing, often a contractual right to suspend. Its creation expands the issuer's balance sheet. It settles on a blockchain, with finality determined by consensus rules rather than law. And its backstop is nothing, no deposit insurance, no central-bank facility, no lender of last resort. It is a narrow bank without a backstop: fully reserved in name, with a liability redeemable instantly and reserve assets that cannot be.

The three families. Fiat-reserve tokens hold cash, Treasury bills and repo against tokens outstanding, the systemically relevant family, and the rest of this section. Crypto-collateralised tokens are over-collateralised by volatile crypto in smart contracts with automated liquidation triggers. Algorithmic designs attempted to hold a peg by mint-and-burn arbitrage against a companion token with no external reserve; the May 2022 collapse of one such system, extinguishing roughly $40 billion of nominal value in days, is why the design is effectively dead and legislatively disfavoured.

How do the BIS tests judge stablecoins?

The BIS's three tests beat any list of pros and cons, because they let you evaluate any proposed private money. In Annual Economic Report 2025, Chapter III, the BIS argues a monetary system must deliver singleness, money issued by different institutions accepted at par with "no questions asked," achieved by settling against a common safe asset, central-bank reserves; elasticity, money supplied flexibly to discharge obligations without gridlock; and integrity: resistance to financial crime. Its assessment: stablecoins fail or partly fail all three, since they "often trade at varying exchange rates, undermining singleness"; "any additional supply of stablecoins thus requires full upfront payment by its holders, ie a strict cash-in-advance setup," the negation of elasticity; and they enable pseudonymous transfer, with issuers often unable to know whether holders have verified identities. Agree or disagree; be able to state the test.

How are stablecoins regulated?

The regulatory frame. In the United States the GENIUS Act (S.1582, 119th Congress) was signed on 18 July 2025: issuance restricted to permitted issuers, a 1:1 reserve in a defined list of high-quality liquid assets (cash, insured deposits, short-dated Treasury bills, short-dated Treasury-collateralised repo, government money market funds), monthly public reserve disclosure examined by a registered public accounting firm, and (the provision with the largest economic consequence) a prohibition on paying interest or yield to holders. In the EU, MiCA regulates "e-money tokens" and "asset-referenced tokens" with reserve, redemption-at-par and disclosure obligations. In India, private stablecoins are not legal tender, sit outside any dedicated securities framework, and are captured by the Virtual Digital Asset tax and PMLA regimes (AL1.03 owns the detail); the RBI's stated preference is the e₹ route. Read the statutes, not the summaries.

How does a stablecoin reserve compare with a money market fund?

The comparison that settles the argument: a stablecoin reserve versus a US government money market fund. These are the two closest things in modern finance (both a claim on a pool of short-dated government paper, both promising a stable dollar value, both redeemable) regulated on different planets.

Worked Example 7 runs a synthetic issuer through this table with numbers, and produces three findings that are the crown insight of the section.

Is a fully reserved stablecoin safe from runs?

First, fully reserved is not the same as liquid. A token that is 100.0000% reserved (80% Treasury bills, 14% overnight repo, 6% bank deposits) fails both of Rule 2a-7's liquidity tests: daily liquid assets of 20.00% against a 25% floor, weekly of 25.00% against 50%. A structure can be fully reserved and illiquid at the same time, and "it's fully backed, so it can't break" confuses solvency with liquidity, the oldest error in banking, and the one that killed every bank that ever failed while solvent.

Second, a depeg decomposes into known impairment plus run premium. When a bank holding 4.00% of the reserve fails, the arithmetically justified NAV is $0.9600; if the token trades at $0.8780, the market has priced an extra 8.54% of the surviving reserve as loss. That extra is the price of redemption uncertainty during the hours when redemptions are suspended and the chain trades on. It is exactly the shape of the real reference case: on 10–11 March 2023 Circle disclosed that $3.3 billion of USDC reserves remained at Silicon Valley Bank, and USDC traded to roughly $0.87–0.88 before recovering when the deposits were made whole (Circle pressroom, March 2023; BIS Working Paper No 1164, Public information and stablecoin runs).

Third, and this is the one nobody expects, the fire-sale market risk is negligible and the calendar risk is everything. Meeting a 25% same-day redemption forces the sale of $3,600 million of 45-day bills at, say, a 15 basis-point concession: a price hit of 0.0015 × 45/360 = 0.0001875 = 0.018750%, or $675,000: 0.17 basis points of tokens outstanding. What is not trivial is that those bills settle on a banking-day calendar while the tokens trade twenty-four hours a day on a chain that does not close for a weekend. A stablecoin does not break because its assets are worth less; it breaks because its liabilities can run at 3 a.m. on a Sunday and its assets cannot be sold until Monday. That timing mismatch, not credit, not duration, is the risk, and it is why Rule 2a-7's liquidity floors exist and why their absence from a 1:1 reserve rule matters.

Who earns the interest on the reserve?

Finally, follow the money. At a 4.30% reserve yield a $40 billion reserve earns $1,720.0 million a year: $0.0430 per token per year, and under the GENIUS Act's prohibition the holder receives none of it. A government MMF passing 4.05% net would pay shareholders 94.2% of that gross carry; $10,000 held ten years compounds to $14,873.76 in the fund and stays $10,000.00 in the token. Whatever else a stablecoin is, it is a machine converting the float of its holders into the income of its issuer, and any analysis that does not say so is incomplete.

{
  "skill": "Auditing a stablecoin, fund or issuer disclosure that you did not write",
  "use": "Use AI to parse a long reserve attestation, monthly report or Form N-MFP filing into a structured table — instrument, amount, maturity, counterparty — so you can run the liquidity and maturity tests yourself, quickly, on a document you would otherwise skim.",
  "tools": ["Document/PDF AI over the issuer's own attestation PDF or the SEC N-MFP filing", "Chat assistants for structuring the extracted table", "A spreadsheet or Python for the actual liquidity/WAM computation — never the model's arithmetic"],
  "prompt": "From this reserve report, extract every reserve line into a table with columns: instrument type, issuer/counterparty, amount, remaining maturity, and whether it is same-day liquid. Then state the AS-OF DATE of the report, the exact scope of the accountant's engagement (attestation/agreed-upon-procedures/examination/audit), and quote the wording of any limitation of scope. Do not compute any ratios; return only what the document says, with page references.",
  "verify": "Compute daily-liquid-assets, weekly-liquid-assets and WAM yourself from the extracted table, then tie the extracted total back to the reported total to the dollar before trusting the extraction. Confirm the as-of date is a point-in-time snapshot and say so; confirm the engagement type against AICPA attestation standards — an attestation on management's assertion at ONE date is not an audit of financial statements over a period. Cite the page for every number you carry forward (Guardrail 1-5).",
  "diy": "You must already know Rule 2a-7's liquidity and maturity tests and be able to apply them by hand (this section and Worked Example 7). AI can read a hundred pages in a second; only you can decide the ratio it implies is unacceptable.",
  "market": "US"
}