When a bank failure hit a stablecoin: a run case study

A stablecoin is a token that aims to hold a steady value against a national currency, and its stability rests on reserves kept by the issuer. In March 2023, according to a central bank staff note, one large issuer disclosed that a portion of its reserves was held at a bank that was then failing. The news did not change the design of the token, but it changed what holders believed about the assets behind it. Within days, redemption requests surged. The episode is a useful case study because it shows a classic bank-run pattern appearing in a new setting, driven by doubt about where backing assets were kept. No one had to prove that the reserves were lost. It was enough that nobody could quickly show they were all within reach.

To see why doubt can spread so fast, follow the mechanism. An issuer takes in money, issues tokens and holds reserves, such as bank deposits and short-term government debt. Approved customers can ask the issuer to redeem tokens for currency, which is called primary redemption. Everyone else sells to other holders on trading venues, which is the secondary market. Holders depend on the issuer's reports and on the custodian that keeps the reserves. When part of the reserves sits at a failing bank, nobody outside can tell immediately how much is reachable. Each holder knows that the first to redeem is likelier to be paid in full, so each has a reason to hurry. That incentive also drives a run on an ordinary bank, and it pulls in even holders who think the reserves are fine.

Picture a made-up holder named Priya who uses a stablecoin to pay a contractor abroad. One day she reads that some of the issuer's reserves are stuck at a bank in trouble. The issuer has not said how much, and its latest report predates the news. Priya notices that the token is trading slightly below its usual value on the open market. She asks to redeem, and finds that redemptions are paused for a time. Meanwhile, other holders are selling on trading venues, so the market price moves on rumor. She decides to wait and delays her payment by a few days, because the issuer's next step is unclear. When the bank's problem is resolved, the price returns toward its usual level and her worry fades.

The case shows several weak points. First, location of reserves matters: assets held at one institution carry that institution's risk. Second, a pause on primary redemptions can leave holders with only the secondary market, where the price can drift below the intended value. Third, reports from the issuer are only as current as their last date, so a gap between reports leaves room for rumor. Fourth, the label on the token, such as a claim of one-to-one backing, does not prove that the assets are easy to reach, or that the issuer could sell them quickly if many holders asked at once. An IMF discussion paper makes the same point: reserve quality, custody and disclosure matter more than the peg label.

A reader who wants to assess any stablecoin can ask several questions using public documents. Where are the reserves held, and are they spread across several institutions? What do they consist of: deposits, short-term government debt or something less liquid? Who is the custodian, and is it separate from the issuer? How often are reserve reports published, and does an independent party review them? Who may redeem directly, and under what conditions can redemptions be paused? Is there a written plan for the case where a reserve bank fails, and has the issuer explained it in plain words before any trouble starts? International recommendations from the Financial Stability Board ask for clear disclosure and redemption at par for large single-currency arrangements.

This page describes one event as reported by official sources and does not predict whether it will recur. Facts about the episode come from the central bank note, the IMF discussion paper and the Financial Stability Board report listed below, and any figures should be read there. Rules for stablecoin issuers differ between places and change over time, so what applies to a given token depends on where it is issued and used. Nothing here is a view on any token or issuer, and a single case cannot show how another token would behave under stress. Readers who want the full account should go to the primary documents. This page is general education about how reserves create run risk, not legal, financial or investment advice.

• A stablecoin is only as steady as the reserves behind it and where those reserves are kept
• Doubt about reserves can start a rush to redeem even when the token's design has not changed
• Reserve quality, custody and disclosure say more than the word stable in a token's description