Keeping Stablecoins Stable is Complicated: Why CFOs Need to Pay Attention

Stablecoins couldn’t have chosen a better name. Compared to other, more volatile cryptocurrencies that have traditionally defined crypto markets, stablecoins have positioned themselves as a trusted, e.g. stable, and comparatively safe avenue for digital asset exploration.

But while stablecoins offer a bridge between traditional finance and the burgeoning world of digital assets, the stability of this bridge is inextricably linked to the reserves that underpin it. Unlike previous market cycles where stablecoins were largely tied to crypto trading activity, there is now a focus on real-world utility, including cross-border payments and corporate treasury management. 

This makes understanding who safeguards these reserves, the composition of assets backing leading stablecoins, as well as the inherent operational and financial risks, crucial for stakeholders navigating this financial landscape.​

Tether, for example, is the third-largest cryptocurrency by market cap. Its stablecoins represent 70% of the market, yet its reserve composition has come under scrutiny. Historically, Tether claimed that each USDT was fully backed by U.S. dollars; however, subsequent disclosures revealed a more diversified reserve, including commercial paper, secured loans and other investments. This revelation has led to debates about the quality and liquidity of these assets, especially during market stress.

As a result of the European Union’s landmark Markets in Crypto-Assets Act (MiCA), Tether pulled issuance and operational support for its euro-pegged stablecoin, EURT, in the region.

From the point of view of payments professionals, CFOs and treasury teams, stablecoins sit at the center of crypto’s potential within enterprise and corporate finance applications. Therefore, understanding how stablecoin reserves work sits at the center of their decision-making.

Read also: The Stablecoin Market Is $220 Billion. Are Businesses Actually Using Them?

By analyzing transparency, reserve composition and redemption mechanisms, users can assess the reliability of a stablecoin and its issuer. For example, a stablecoin backed by cash and bank deposits is highly liquid and secure, while stablecoins backed by corporate debt and commercial paper are riskier but may offer higher yields.

The lack of standardized disclosures regarding reserve compositions can obscure the true backing of stablecoins. Reserves comprising less liquid or higher-risk assets may not provide the stability users expect, particularly during periods of market volatility.​

Events such as the collapse of Silicon Valley Bank in 2023, which impacted Circle’s reserves, highlight vulnerabilities that can lead to temporary de-pegging.

“The short answer is … Stablecoin deposits aren’t protected by any government-backed institutions. Some coins, like USDC, claim to be backed 1:1 with reserves like cash or short-term treasuries, but the reality is much more complex. Some stablecoins also include commercial paper or other financial instruments in their reserves,” Lissele Pratt, co-founder at Capitalixe, told PYMNTS in an interview.

“The risk of this is that it falls on the issuer. If something goes wrong, like with TerraUSD for instance, users are left holding the bag, and regulators usually step in too late to prevent significant losses. This is why trust in the issuer is crucial, but as recent events have shown, trust can be a fragile thing,” Pratt added.

The evolution of stablecoins is at a crossroads. Lawmakers face the challenge of crafting policies that safeguard consumers, and the broader financial system, without stifling technological advancement.

In the U.S., the Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act was introduced in the Senate by Sen. Bill Hagerty of Tennessee; Sen. Cynthia Lummis of Wyoming; Sen. Kirsten Gillibrand of New York; and Senate Committee on Banking, Housing and Urban Affairs Chairman Tim Scott of South Carolina. The bill is headed to the full Senate after being advanced by an 18-6 vote in the Senate Banking Committee.

The GENIUS Act proposes a regulatory balance between state and federal oversight that allows smaller issuers to operate under state supervision while placing larger stablecoin providers under federal jurisdiction, among other requirements, PYMNTS reported March 7.

See more: The Payment Professional’s Guide to Stablecoins

PYMNTS reported Monday (March 10) how the world’s biggest banks and FinTechs are scrambling to roll out their own stablecoins, including companies like Stripe and PayPal, which have already gotten into the stablecoin business.

“Stablecoin adoption will only grow if inefficiencies in usage are solved,” Tanner Taddeo, CEO and co-founder of Stable Sea, told PYMNTS’ Karen Webster. “When businesses want to move enterprise-grade money across borders — typically north of $500,000 — they run into three major pain points: limited liquidity for large transactions, long settlement times and complex integrations.”

Blockchain-based cross-border solutions, particularly stablecoins, are being increasingly embraced by firms looking to find a better way to transact and expand internationally, according to PYMNTS Intelligence research.

“This isn’t about replacing existing systems. It’s about providing an additional option. Where stablecoins offer superior benefits, customers will naturally gravitate toward them,” Miles Paschini, CEO at FV Bank, told PYMNTS. “As more banks integrate blockchain capabilities, customers will have greater choice in transferring value.”

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