Runs, transparency and regulation: On the optimal design of stablecoin frameworks

Stablecoin issuers can become subject to runs, just like banks. In the absence of adequate regulation, issuers are incentivised to hold disproportionate amounts of high–yielding but illiquid assets in their reserve portfolios. The value of such reserve assets may be overly volatile, thus inducing investors to suddenly redeem their stablecoins. To mitigate the risk of runs and exposure to exogenous shocks, recent regulatory initiatives both in the EU and in the US propose that reserve–asset portfolios should be overcollateralized, and that stablecoin issuers provide sufficient disclosure to holders about their composition. We formalize these points in a theoretical model, highlighting how they would mitigate the risk of runs on the stablecoin issuer and its potential bankruptcy ex–ante.