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Making stablecoins stabler(r): can regulation help?

Author

Listed:
  • Tirupam Goel
  • Ulf Lewrick
  • Isha Agarwal

Abstract

We model a stablecoin issuer that optimises capital, cash and bond holdings under persistent stablecoin flows. Absent regulation, the issuer holds little capital and favours interest-bearing but less-liquid bonds over cash. This exposes coin-holders to default risks and poses systemic spillovers via price impact of bond fire-sales. How can regulation mitigate these risks? We consider capital and liquidity thresholds as usable buffers. They can be breached in stress but discipline issuers by triggering additional redemptions, thus endogenising stablecoin flows. The thresholds work through asymmetric channels. While the liquidity threshold only raises cash holdings, the capital threshold increases both capital and cash. Both thresholds mitigate default and spillover risks, suggesting they are substitutes. However, they are complements for regulators targeting both risks. Using stablecoin flows and US Treasury market depth, we calibrate a two-way mapping that enables regulators to recover capital-liquidity threshold combinations implied by chosen risk targets (and vice-versa).

Suggested Citation

  • Tirupam Goel & Ulf Lewrick & Isha Agarwal, 2026. "Making stablecoins stabler(r): can regulation help?," BIS Working Papers 1355, Bank for International Settlements.
    • Handle: RePEc:bis:biswps:1355
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    JEL classification:

    • G2 - Financial Economics - - Financial Institutions and Services
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • C6 - Mathematical and Quantitative Methods - - Mathematical Methods; Programming Models; Mathematical and Simulation Modeling

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