Crypto Market Rout Is Putting Asset-Backed Stablecoins Under Microscope

Ongoing volatility in crypto has erased nearly all of the market’s gains this year.

It’s a story that is uniquely crypto, full of the industry’s trademark ups and downs. What was poised to be a winning year has instead turned wintry, with bitcoin falling from its all-time high of $126,000 to around $86,000. Bitcoin ETFs are on track to register their highest monthly outflows since initially being launched in the U.S., bleeding out around $3.55 billion so far in November.

The problem for the rest of blockchain finance? The crypto ecosystem is highly interconnected, and certain stablecoins use bitcoin (and bitcoin ETFs) as part of their reserve mix of backing mechanisms. Stablecoin pegs can fluctuate during depegging events, when the token value moves away from the value it is supposed to match due to fluctuations in its reserve composition or other extenuating factors.

Positioned as a more reliable on-chain asset alternative to traditional cryptocurrencies, stablecoins still remain integrated into, and not wholly insulated from, the greater digital asset marketplace.

While in the U.S., the GENIUS Act requires stablecoin issuers to hold reserves in highly liquid assets like U.S. dollars or short-term U.S. Treasurys, the regulation around the world is more fragmented. Stablecoins issuers that adhere to U.S. reserve requirements for their domestic products may rely on alternatively structured pegs in other markets.

Read more: Stablecoins Power Billions in Payments. One in Ten Could Be Illicit

Mirage of Stability

The foundational pitch of stablecoins is deceptively simple. In theory, they provide a digital representation of a dollar (or euro or pound) that is instantly transferable, programmable, and usable across blockchain ecosystems without the price swings that plague traditional cryptocurrencies. They are meant to be the mellow center of crypto’s volatile universe — a token investors can anchor to, traders can settle with, and enterprises can experiment with confidently.

The European Central Bank (ECB) on Monday (Nov. 24) released a preview of a stability report calling for close oversight of stablecoins in its region. The ECB stressed that stablecoins’ main vulnerability comes from investors losing confidence that they “can be redeemed at par,” which can trigger a run on a stablecoin and cause them to lose their peg, the report noted.

Given the importance of stablecoins in the crypto ecosystem, a large adverse stablecoin shock would be detrimental for crypto markets. “However, other market segments could also be affected through spillovers and second-round effects, including those arising from wealth effects and interconnections with traditional finance,” the ECB added.

From an enterprise point of view, trust within the context of a stablecoin value transfer depends not on blockchain speed or market capitalization, but on the nature of reserves, the quality of governance, and the issuer’s ability to deliver on its most basic promise: one token, one dollar, every time, even when the markets are bleeding.

If stablecoins cannot deliver on redemption, pegging and trust, their promise may revert to being a niche crypto-market instrument rather than a mainstream payments enabler.

Read more: Institutional Interest Is Stress Testing Blockchain’s Financial Interoperability

Firms Must Scrutinize Issuers

For institutional users such as payments companies, cross-border settlement networks, FinTech platforms, and more, stablecoins live or die at the moment of redemption. For all their technological sophistication, the most important question is the simplest one: Can the issuer reliably exchange one token for one dollar, on demand, at scale?

After all, while stablecoins may all appear relatively similar to the uninitiated, even the term “asset-backed stablecoin” conceals a wide range of models. Some issuers rely almost entirely on short-duration U.S. Treasurys and overnight repo markets, treating stablecoins as tokenized money-market funds with high liquidity and low risk. Others use a blend of traditional assets and crypto collateral, with bitcoin increasingly popular because of its liquidity profile and the signaling power it gives to retail and institutional users alike.

For firms considering stablecoins for strategic use cases, the essential analysis extends far beyond the token ticker and can entail a decisioning framework akin to counterparty risk assessment in traditional finance. It can require interrogating the underlying issuer, including how frequently and transparently are reserves audited or attested, what jurisdiction governs the issuer, and what redemption mechanisms exist under which relevant laws.