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Synthetic Stablecoins and Financial Stability

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Abstract

On October 10, 2025, the announcement of a potential additional 100 percent tariff on Chinese goods drove risk-off moves across equities, Treasuries, credit spreads, and digital assets. Digital asset prices fell sharply, trading volumes surged, and liquidity vanished from key exchanges. In this post, we show how the price shock in digital assets was transmitted and amplified through a class of instruments called synthetic stablecoins—crypto assets whose structural design turned an external shock into a self-reinforcing deleveraging spiral within the crypto ecosystem.

Suggested Citation

  • Pablo D. Azar & Jeff Garofano, 2026. "Synthetic Stablecoins and Financial Stability," Liberty Street Economics 20260623, Federal Reserve Bank of New York.
    • Handle: RePEc:fip:fednls:103415
    DOI: 10.59576/lse.20260623
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    File URL: https://libertystreeteconomics.newyorkfed.org/2026/06/synthetic-stablecoins-and-financial-stability/
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    JEL classification:

    • G12 - Financial Economics - - General Financial Markets - - - Asset Pricing; Trading Volume; Bond Interest Rates
    • G18 - Financial Economics - - General Financial Markets - - - Government Policy and Regulation

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