Stablecoins are a type of digital asset designed to hold a steady value—often one U.S. dollar—backed with real-world reserves such as cash, Treasuries, and other dollar-denominated assets. In practice, they function as a bridge between traditional finance and the crypto ecosystem: easy to transfer, quick to settle, and widely used for payments, trading, and lending online.
In July, President Donald Trump signed into law a bipartisan bill, the Guiding and Establishing National Innovation for U.S. Stablecoins Act (GENIUS Act), which establishes federal oversight for stablecoin issuers. Most notably, the legislation requires stablecoins to be backed by U.S. dollars or other low-risk assets at a one-to-one rate.
But keeping a stablecoin at $1 is more complex than it appears, and that complexity has significant implications for U.S. financial stability. Yiming Ma, the Regina Pitaro Associate Professor of Business at Columbia Business School, recently spoke on this topic at a Brookings Institution panel, drawing from her research, “Stablecoin Runs and the Centralization of Arbitrage.”
This abridged Q&A draws from Ma’s insights from the panel, moderated by Nellie Liang, a senior fellow in The Hutchins Center on Fiscal and Monetary Policy at Brookings.
Nellie Liang: What redemption risks are there with stablecoins and why could they pose risk to financial stability?
Yiming Ma: Usually when people think about risks to stablecoins, the first thing people think about is run risk —the standard kind of bank run problem where you go to the stablecoin issuer, you ask for your $1 for each stablecoin, and then they don't have the assets to pay you that $1. That's a clear financial stability risk.
But that is different from how most people trade stablecoins and use stablecoins in practice. The vast majority of people who are using stablecoins, when they want to cash out or liquidate, they are going to sell it on an exchange to someone who wants to buy it at a price at which the exchange market is clearing. It's no different from when you sell an ETF share, for example.
That means that the price on this exchange will depend on how many people want to sell and buy the assets at that time. Notice that that may not always be at $1. Most of the time it is pretty close to $1, but there are events where, say, a lot of people want to sell at the same time, so you get a price that is quite a bit below one.
On its own, it is not necessarily a financial stability risk. It may indicate that there's something else that's wrong, but on its own it's simply a price fluctuation in an exchange market, which is what an exchange is supposed to do, right? That's the fair market price. But when we talk about a payment stablecoin, it is very important that that coin has a stable price. That's the key difference between what makes a stablecoin and what makes Bitcoin not a great means of payment.
If you have a lot of this volatility in prices in these secondary markets, it's going to hurt the ability of the stablecoin to become a good means of payment and to be widely adopted. In that sense, this risk or price stability risk in these secondary markets is very important for the stablecoin issuer and for the general stablecoin market. And what determines this is how many people buy and sell. But there's one crucial element that we find in our work, whereby it really depends on how many institutions at what speed and at what cost can actually go to the issuer and redeem stablecoins for a dollar.
In the language of crypto, this is how quickly you can burn and mint and at what cost. You can think that the more people can buy up stablecoins when they're underpriced, and deliver them to the issuer to get a dollar, the more anchored the secondary market price will be, and the more stable the exchange price will be. And that will help to achieve stability in prices and make it a better means of payment.
There's one caveat, which is that the more you allow this redemption process, it is also true that if your assets are not that great, you need to—as the issuer—sell more of your assets and run a higher risk of not having enough assets to meet the redemption request. That goes back to the first kind of risk, which is the run risk. So this arbitrage mechanism of people buying coins on the secondary market, taking them to the issuer, and redeeming that for cash, it's a bit of a double-edged sword. But if you have good assets, it is certainly true that better arbitrage or efficient arbitrage allows the stablecoin to have better price stability and become a better means of payment.
Liang: In your view, do the provisions of the GENIUS Act as written currently address this risk for the most part or not quite yet?
Ma: The GENIUS Act is a big step forward. Limiting the assets —to short-term treasuries, to deposits, to money market funds that hold these assets—is really a big leap forward in reducing run risk or financial stability risk. It also helps to ensure you have efficient arbitrage—that the arbitrage is not going to cause a run at these stablecoins. Now, it's not perfect of course because there's no such thing as a perfectly liquid and safe asset. So, there's still some residual run risk.
In terms of redemption risk, the GENIUS Act does say that there should be transparent disclosure about the redemption process and that it should be timely. There's not too much guidance about what timely means. There's also not much guidance about who can actually go and redeem, which is actually a big part when you look at some stablecoin issuers that don't allow redemptions very freely. It is really about selecting the set of institutions that are allowed to do so. Some guidance, some clarity on that front would be helpful.
Liang: How do you think the payment system will evolve?
Ma: Improvements in technology generally are not zero sum and generally improve the size of the pie for everyone. You see that in other countries that have innovated in instant payments, say, in Brazil. In India you have basically pulled more people into the financial system and more transactions are being done. In that sense it's definitely positive.
With payments there is something subtle, whereby if you have a lot of different payment systems, whether it's tokenized deposits, fast payments, or stablecoins, and there's no way to go from one to the other without much cost, there is going to be a duplication of a lot of transfers and the segmentation can be very inefficient. And I think that's when the normal economics of competition being good, of multiple providers offering variety, being good, starts to come at a trade off.
