BIS Warns Stablecoin Fragility Could Spill Into U.S. Treasury Markets

The global stablecoin market has climbed to a record roughly $321 billion, but the Bank for International Settlements (BIS) is warning that the sector’s apparent growth masks a fundamental fragility: most issuers hold surprisingly little cash to meet large-scale redemptions, and the stress could spill beyond crypto into the U.S. short-term funding markets.

In a June working paper titled “Making Stablecoins Stable(r): Can Regulation Help?”, BIS researchers Tirupam Goel, Ulf Lewrick, and Isha Agarwal model what happens when redemption requests surge at once—an increasingly relevant scenario as stablecoins deepen their role in trading, payments rails, and on-chain settlement. Their central conclusion is blunt: without regulation, stablecoin issuers are structurally vulnerable to runs, and forced asset sales could transmit shocks directly into the U.S. Treasury bill market.

Cash makes up just 12% of reserves

Using disclosures from major issuers to calibrate their model, the BIS team found that cash and cash-like assets account for only about 12% of representative reserve portfolios. The remaining 88% is largely placed into interest-bearing instruments such as short-term U.S. Treasuries—an allocation that looks efficient in normal conditions, since cash earns little while T-bills provide yield and are typically highly liquid.

The more striking metric is capitalization. The paper estimates capital relative to outstanding stablecoins at roughly 0.1%, a level that is a fraction of what banks maintain under prudential rules. In practice, that leaves stablecoin issuers closer to a ‘capital-light financial institution’ than a traditional deposit-taking entity—even if their product is marketed as stable.

The vulnerability emerges when redemptions accelerate. Once the cash buffer is exhausted, an issuer must sell Treasuries to raise dollars. If those sales occur under pressure, prices can gap lower—classic ‘fire sale’ dynamics—turning a liquidity event into a solvency event as losses quickly consume the thin capital layer. Under an unregulated baseline and a stress scenario equivalent to a two-standard-deviation redemption shock, the BIS model puts a stablecoin issuer’s weekly default probability above 15 basis points. If capital turns negative, holders may no longer be able to redeem at par.

From crypto run to Treasury-market ripple

The BIS paper’s core warning is not merely that a stablecoin can wobble—it’s that the mechanisms used to defend a peg could shake the world’s largest safe-asset market. The authors estimate that forced Treasury bill sales by stablecoin issuers can measurably affect 3-month U.S. Treasury yields: around $10 billion in compelled selling could move the weekly yield by roughly 2.9 basis points, while $30 billion could shift it by about 6.4 basis points. In a market where moves are often measured in basis points, that magnitude is not trivial.

This matters because the sector has become a significant holder of short-dated Treasuries. The report estimates stablecoin issuers collectively hold around $155 billion in U.S. T-bills, and notes that the largest issuers’ positions are comparable to those of major Treasury money market funds. Tether, in particular, is described as having become one of the largest holders of short-term U.S. government debt.

Market participants have already seen an early version of this dynamic. During the March 2023 turmoil tied to Silicon Valley Bank (SVB), USD Coin (USDC) experienced rapid outflows as holders rushed to redeem amid uncertainty about reserve exposure. While the episode stabilized, the BIS frames it as a preview of how quickly confidence shocks can propagate.

A ‘usable buffer’ approach—regulation that doesn’t backfire

Rather than simply calling for higher reserves, the BIS proposes a design shift centered on ‘usable buffer’ regulation. The paper outlines two key metrics: a liquidity requirement (LR) and a capital requirement (CR). However, it argues these should not function as rigid hard floors that must never be breached. In a crisis, buffers that cannot be used without triggering penalties can become counterproductive, forcing issuers to sell assets immediately to remain compliant—potentially amplifying market stress and raising default risks.

In simulations, imposing liquidity rules as strict minimums pushed issuers toward immediate bond sales rather than drawing down cash, increasing failure probability—an example of regulation unintentionally worsening outcomes. The BIS instead suggests linking temporary breaches to enhanced disclosure and market discipline, allowing holders to assess risk while enabling issuers to actually deploy liquidity when it is needed.

The paper also emphasizes that liquidity and capital tools work differently. A liquidity rule mainly increases cash holdings. A capital rule, by contrast, tends to raise both capital and cash, improving resilience on two fronts. To reduce both ‘micro-prudential’ default risk and ‘macro-prudential’ market impact, the BIS argues regulators should use both together.

Numerically, the BIS finds that even relatively modest requirements can materially improve stability: an LR of 5% combined with a CR of 0.125% reduces the weekly default probability in stress to roughly 0.7 basis points from above 15 basis points, while cutting estimated Treasury-market impact to about 2.7 basis points from roughly 4 basis points.

Implications extend to Asia’s regulatory debates

While the BIS paper focuses on global financial stability, its framework is likely to resonate in jurisdictions still debating how to regulate stablecoins. In South Korea, for example, legislative work on a second phase of digital-asset rules covering stablecoins has been pushed into 2026, and policymakers remain divided over whether banks should hold controlling stakes in issuers—an argument centered on governance rather than balance-sheet engineering.

The BIS approach implicitly reframes the question: not only who may issue stablecoins, but how much liquidity and capital must be held, and under what conditions buffers can be drawn down without triggering destabilizing behavior. The paper also highlights a policy-design feature regulators may find attractive: a two-way mapping between objectives and tools. Authorities can set acceptable levels of default probability and market impact, then reverse-engineer the liquidity and capital requirements needed to meet those targets.

As the stablecoin market becomes more intertwined with U.S. Treasury financing and global dollar liquidity, the BIS message is that stability cannot rely on branding alone. The issuers most likely to endure, the paper implies, will not be those that mint the most tokens, but those that can preserve liquidity and confidence when redemptions accelerate—because in modern finance, stability is not a slogan; it is infrastructure.