By Owen Halberg
In the long history of money, reserves have been the ballast that steadies the system. Central banks hold gold or dollars to reassure markets that when turbulence strikes, redemption is possible. Yet a new form of “reserve” has been growing in the shadows: stablecoins, digital tokens pegged to the U.S. dollar and traded at lightning speed across global platforms.
Tether, USD Coin, and a handful of others now represent more than $150 billion in circulation. They promise a simple proposition: one coin, always redeemable for one dollar. To traders in crypto markets, they are the grease that keeps transactions flowing. To investors in emerging economies, they have become a lifeline—an unofficial dollarization for those wary of local inflation.
But behind this apparent stability lies fragility. Stablecoins are not backed by a central bank’s balance sheet. They are private promises, supported by opaque portfolios of short-term debt and cash equivalents. And unlike bank deposits, they are not insured.
The Mirage of Stability
The allure of stablecoins is their speed and accessibility. Anyone with a smartphone can bypass banks, wire transfer fees, and capital controls by swapping into tokens. For countries with volatile currencies—Argentina, Nigeria, Turkey—stablecoins serve as a parallel reserve system, circulating in WhatsApp groups and street markets as casually as small-denomination dollars once did.
Yet these tokens rely on confidence. If investors doubt the collateral of a stablecoin issuer, redemptions can spiral into a run. In 2022, TerraUSD collapsed within days, erasing $40 billion in value and rippling across the crypto ecosystem. While Terra was algorithmic, not reserve-backed, it demonstrated how quickly trust evaporates when redemption is in doubt.
Off-Balance-Sheet Risk for States
What makes stablecoins more than a crypto curiosity is their growing entanglement with global finance. Issuers park reserves in U.S. Treasury bills and commercial paper. In effect, they are becoming shadow holders of sovereign debt—large enough to sway short-term markets. If redemptions surge, issuers may dump Treasuries en masse, creating unexpected volatility in instruments central banks rely on for monetary policy.
For emerging markets, the risks are sharper still. Stablecoins enable capital flight at a scale regulators struggle to monitor. During periods of political or currency instability, billions can exit in the form of tokens, draining domestic liquidity without ever passing through official channels. These are reserves without oversight, circulation without safety nets.
Calls for Guardrails
Policymakers are not blind to the risks. The European Union’s MiCA framework now subjects stablecoin issuers to licensing and reserve disclosure rules. In the United States, proposals have circulated to regulate stablecoin issuers as banks. The IMF has urged developing economies to clarify the legal status of these tokens before they become systemic.
But regulation lags adoption. As of today, most stablecoin markets still operate in a gray zone—globally significant, locally unaccountable.
A Reserve Without a Central Bank
The irony is striking: stablecoins emerged to escape the perceived inefficiencies of central banking, yet they now replicate the very function of reserves, only without the lender of last resort. They are, in effect, shadow reserves: growing in scale, fragile in design, and systemically under-supervised.
History offers a lesson. From the wildcat banks of the 19th century to the offshore dollar markets of the 20th, unsupervised reserve systems eventually forced governments to respond. The question for the 21st is whether regulators will move before—or after—the next run.
