The Stablecoin Systemic Risk Gap: 00B in Undercollateralized Assets Operating Without Prudential Oversight
Problem Definition
Stablecoins have grown to over 00B in market capitalisation but operate in a regulatory vacuum that creates systemic risk comparable to the unregulated money market funds that triggered the 2008 financial crisis. The TerraUSD collapse (May 2022, 0B wiped out in 72 hours) was a preview — but regulators have not acted with urgency.
Algorithmic stablecoins can devalue to zero; even asset-backed stablecoins (Tether, USDC) face reserve opacity, run risk, and cross-border contagion risk. Unlike bank deposits, stablecoin holders have no deposit insurance, no lender of last resort, and no enforceable claim on reserves.
The stablecoin sector is now deeply integrated into crypto markets and increasingly into payments infrastructure — making a major stablecoin failure a potential trigger for broader financial contagion.
Root Causes
No jurisdiction requires stablecoin issuers to hold 1:1 reserves in central bank money or short-term government securities
Reserve audits are voluntary, infrequent, and conducted by non-independent auditors in most cases
Cross-border regulatory arbitrage allows issuers to domicile in the least regulated jurisdiction while serving global users
No international coordination mechanism exists for stablecoin oversight — FATF, FSB, and BIS have issued guidance but no binding rules