## Making Stablecoins Stable (WP/2026/074 — excerpt)

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---

### I. Introduction and background
- Stablecoins: crypto assets purported to maintain a stable value typically relative to a national currency (e.g., U.S. dollar).
- Key regulatory milestones and dates:
  - U.S. Genius Act in July 2025 provided a legal foundation for issuance and regulation in the U.S.
  - European MiCa Regulation in 2023.
  - Monetary Authority of Singapore acknowledged that regulated stablecoins could serve as a potentially acceptable form of money for financial transactions (date not specified).
- Historical episodes:
  - Facebook’s 2018 Libra announcement (popularity boost).
  - Terra Luna bankruptcy in 2022 (marked a trough).
  - Circle’s USDC fell to 87 cents to the dollar in March 2023 after Silicon Valley Bank collapse.

### II. Market size, composition, and holdings
- Market growth and magnitudes:
  - Stablecoin market increased by 50 percent over 2025, reaching 300 billion by year-end.
  - Total crypto asset market cap: $3.2 trillion in January 2026.
- Composition and reserve holdings:
  - Stablecoins primarily pegged to fiat currencies.
  - Non-fiat-backed stablecoins: less than 10 percent of market cap.
  - USDC and USDT account for more than 80 percent of market cap.
  - Reserve assets: short-term government debt, cash, and deposits in commercial banks (recent development).
  - Tether in 2024 still held 5 percent of its reserves in Bitcoin and undisclosed assets.

### III. Promised benefits of stablecoins
- Faster, cheaper, and more accessible payments within and across borders.
- Round-the-clock payments by anyone with access to a global blockchain.
- Programmable payments to minimize counterparty risk.
- Consolidation of compatible financial services in a single wallet.
- Potential to ease payment of other on-chain assets such as tokenized bonds.
- Potential to spur innovation and product diversity in digital payments and financial services.
- Empirical note: sustained perceived benefits, especially among younger generations.

### IV. Risks and concerns
- Core risks:
  - Operational stability, financial integrity, protection of user funds, contagion to other financial institutions (especially banks).
  - Macro-financial risks: currency substitution, capital flow volatility, cross-border contagion, payment system fragmentation.
- Run risk:
  - Defined as large and coincident redemptions for cash or sales on secondary markets.
  - Self-fulfilling runs: asset sales to meet redemptions depress prices, triggering further redemptions.
  - Correct pricing of run risk implies a discount on stablecoin price (e.g., a dollar-faced stablecoin would trade slightly below a dollar if run risk priced).
  - Run risk typically bars an instrument from being considered money under Holmstrom (2015) NQA litmus test: money accepted “no questions asked” (NQA).

### V. Three policy approaches to dampen runs (overview)
- Option 1: Require issuers to hold very safe and liquid assets (e.g., central bank reserves in a narrow bank setting).
- Option 2: Require issuers to hold additional loss-absorbing equity.
- Option 3: Provide public backstops to ensure issuers can honor redemptions (e.g., deposit insurance, access to central bank liquidity standing facilities, emergency lending).
- Interplay:
  - If backing assets are not fully safe, equity may still be needed.
  - If equity is not sufficient, backstops may be necessary.
- Paper focus: Option 1 — making reserve assets as safe as possible.

### VI. Theoretical model — setup and key mechanisms
- Model lineage: Diamond and Dybvig (1983), Goldstein and Pauzner (2005), and Kashyap et al. (2023).
- Agents and timing:
  - Three periods t = {1,2,3}; single consumption good; continuum of households; one monopolistic issuer.
  - Productive illiquid risky asset: yields 1+R at t = 3 with probability ω; zero otherwise.
  - Risky asset liquidation value at t = 2 is ξ ∼ U[ξ, ξ] with 0 < ξ < 1 < ξ and Δξ = ξ − ξ.
  - Cash: zero return, storage/use cost −d.
  - Stablecoins: liabilities redeemable at face value but subject to run risk.
- Household behavior:
  - Endowment eH at t = 1; choose stablecoin holdings S and cash M (model focuses on equilibria with M = 0 and S > 0).
  - Idiosyncratic impatience shock at t = 2: fraction δ impatient, 1 − δ patient.
  - Noisy signal about ξ at t = 2 generates unique threshold ξ*; probability of a run q = (ξ* − ξ)/Δξ.
  - Transaction benefit from stablecoins: V(S) with V(0) = 0, V′ > 0, V′′ < 0.
- Issuer choices and profits:
  - Chooses issuance scale S, asset mix I (illiquid risky) and L (liquid safe) with I + L = S, transaction-service investment v, operating cost X.
  - Interpretation: safe liquid asset interpreted as central bank reserves.
  - Issuer revenue may include transaction-data revenue scaled by regulator parameter b ∈ [0,1].
  - Key run mechanics: fraction of withdrawals that can be served θ(ξ) = (ξ I + L) / S; issuer profit depends on liquidation rules and returns in period 3.

### VII. Equilibria and key comparative results
- Private equilibrium (issuer maximizes profit π):
  - Issuer holds too much risky illiquid assets and issues fewer stablecoins than socially optimal.
  - Two margins:
    - Asset allocation margin AMM_PE: trade-off when shifting a unit of illiquid asset into liquid asset (direct profit effect vs indirect run-probability effect).
    - Stablecoin issuance margin SIM_PE: trade-off of raising a unit of stablecoins via transaction-service investment v (raises run-risk but increases good-state returns and transaction surplus).
- Social planner equilibrium (maximizes weighted sum of household welfare and issuer profit):
  - Planner internalizes household welfare effects, prefers higher S and a more liquid asset mix (lower ξ* and lower run probability).
  - Planner’s asset allocation margin AAM_SP = AAM_PE + AAM_WD, where AAM_WD reflects household welfare weight; implies planner prefers more liquid backing than private issuer.
  - Planner’s issuance margin SIM_SP = SIM_PE + SIM_WD, trading off run-risk reduction against household surplus when no run occurs.
- Core comparative statics:
  - Private equilibrium: lower stablecoin holdings and higher run probability than social equilibrium.
  - Planner may optimally accept some run-risk if issuer’s only revenue is illiquid investment; full NQA (zero run-risk) not always socially optimal absent other revenue sources.

### VIII. Policy tools and extensions — operational implications
- Remuneration of safe liquid asset (central bank reserves):
  - If central bank pays interest on reserves R′, issuer expected profit increases by L R′; profit-maximizing liquidity ratio increases in R′.
  - Key insight: sufficiently high R′ can make 100 percent backing by liquid, safe assets optimal and reduce run-risk to zero.
- Economies of scale and non-investment revenue:
  - Introducing E(S) with E′ > 0, E′′ > 0 increases issuance S; ratio of illiquid to liquid assets remains constant in simple formulation.
  - Allowing issuers to earn transaction-data revenue (parameter b) or remuneration on reserves can align private incentives with social optimum.
- Regulatory toolkit:
  - Two instruments are required: one to manage liquidity asset mix (run risk) and one to manage issuance scale (supply of stablecoins).
  - Liquidity requirements reduce run-risk but can lower stablecoin supply absent alternative issuer revenues.
  - Permitting reserve remuneration or data-related income can enable 100 percent safe backing without reducing supply.

### IX. Policy discussion, models for central bank access, and practical examples
- Considerations for central banks opening accounts to issuers:
  - Benefits: stability and singleness of money.
  - Potential costs: closer supervision needs, reputational risks, bank disintermediation.
- Narrow bank model:
  - Technology firms could set up licensed narrow banks with 100 percent reserve requirement backed by central bank reserves to issue stablecoins safely and at scale.
- Four models for access to central bank reserves / payment infrastructure:
  - Full-service model: fully backed with central bank reserves; access to central bank payment system (closest to narrow banking / “synthetic CBDC”).
  - Partial service model: issuers hold a fraction as central bank reserves, with access to payment system and emergency liquidity (similar to Bank of England proposal (2025)).
  - Light service model: issuers access central bank payment system only, not overnight reserves (similar to “skinny payment account”).
  - Self-service model: no access to central bank reserves (most current stablecoins).
- Jurisdictional examples and policy notes:
  - Bank of England (2025): proposed portion of assets backing stablecoins be held in central bank reserves; expects systemic stablecoin issuers to have direct access to payment systems.
  - U.S. Federal Reserve (Waller, 2025): exploring intraday access to central bank reserves for stablecoin providers.
  - China example: PBoC began remunerating reserves at 0.35 percent annual interest in August 2019; total balance of nonbank online payment institutions at the PBoC reached RMB1.99 trillion ($305 billion, equivalent to 6.1 percent of total reserves at the PBC) in September 2021.
  - MMF comparison: large redemptions start when value drops below 0.995 for MMFs and 0.99 for stablecoins (Anadu et al. 2023).

### X. Model-derived policy-relevant insights (summary)
- Private issuers underprovide stablecoins and choose riskier asset mixes relative to social optimum because they do not internalize household welfare costs of run-risk.
- Increasing share of safe, liquid assets reduces run probability; planner prefers more liquid backing than private issuer.
- Improving transaction services increases S and can finance illiquid investment but raises run-risk; planner trades off transaction surplus against run-risk.
- Remuneration of reserves (raising R′) incentivizes issuers to hold more liquid safe assets; sufficiently high R′ can make 100 percent liquid backing optimal.
- Allowing non-investment revenue (e.g., data use, reserve remuneration) can permit NQA status with stable issuance scale, but raises competition and concentration considerations.

### Key statistics and numeric values (preserved exactly as in source)
- Stablecoin market: increased by 50 percent over 2025, reaching 300 billion by year-end.
- Total crypto asset market cap: $3.2 trillion in January 2026.
- Non-fiat-backed stablecoins: less than 10 percent of market cap.
- USDC and USDT share: more than 80 percent of market cap.
- Tether reserve exposure: 5 percent in Bitcoin and undisclosed assets (2024).
- USDC event: fell to 87 cents to the dollar in March 2023.
- U.S. currency in circulation: around $2 trillion; short term deposits (other constituents of M1): $16 trillion.
- PBoC reserve remuneration: 0.35 percent annual interest (August 2019).
- Nonbank online payment institutions at PBoC: RMB1.99 trillion ($305 billion, equivalent to 6.1 percent of total reserves at the PBC) in September 2021.
- MMF and stablecoin redemption thresholds: 0.995 for MMFs and 0.99 for stablecoins (Anadu et al. 2023).

*Source: IMF Working Paper — Making Stablecoins Stable (excerpt).*

### References _____________________________________________________________________ 26

### Making Stablecoins Stable

### I. Introduction and background
- Stablecoins are crypto assets purported to maintain a stable value typically relative to a national currency like the U.S. dollar.
- Key regulatory milestones and dates:
  - U.S. Genius Act in July 2025 provided a legal foundation for issuance and regulation in the U.S.
  - European MiCa Regulation in 2023.
  - Monetary Authority of Singapore acknowledged that regulated stablecoins could serve as a potentially acceptable form of money for financial transactions (date not specified in the source).
  - Regulatory developments in Japan and the United Kingdom also noted.
- Historical episodes referenced:
  - Facebook’s 2018 Libra announcement (boosted popularity).
  - Terra Luna bankruptcy in 2022 (marked a trough).
  - Circle’s USDC fell to 87 cents to the dollar in March 2023 after collapse of Silicon Valley Bank in which Circle held significant deposits.

### II. Market size, composition, and holdings
- Market growth and magnitudes:
  - The stablecoin market increased by 50 percent over 2025, reaching 300 billion by year-end.
  - The total crypto asset market cap stands at $3.2 trillion in January 2026.
- Composition:
  - Stablecoins are primarily pegged to fiat currencies.
  - Non-fiat-backed stablecoins account for less than 10 percent of market cap.
  - USDC and USDT (Tether) account for more than 80 percent of market cap.
- Reserve asset holdings and examples:
  - Stablecoins are backed with short-term government debt, cash, and deposits in commercial banks (recent development).
  - Tether in 2024 still held 5 percent of its reserves in Bitcoin and undisclosed assets.
  - Historical practices included backing with more volatile assets; Terra Luna operated with minimal reserves and a promise to purchase coins if prices dropped (failed under market pressure).

### III. Promised benefits of stablecoins
- Faster, cheaper, and more accessible payments within and across borders.
- Round-the-clock payments by anyone with access to a global blockchain.
- Programmable payments (timing with asset delivery) to minimize counterparty risk.
- Consolidation of compatible financial services in a single wallet.
- Potential to ease payment of other on-chain assets such as tokenized bonds.
- Potential to spur innovation and product diversity in digital payments and financial services.
- Empirical note: perceived benefits appear sustained by growth and adoption, especially among younger generations.

### IV. Risks and concerns
- Operational stability, financial integrity, protection of user funds, and contagion to other financial institutions (especially banks).
- Macro-financial risks: currency substitution, capital flow volatility, cross-border contagion, and payment system fragmentation if stablecoins are not compatible.
- Run risk defined:
  - Runs entail large and coincident redemptions of stablecoins for cash or sales on secondary markets.
  - Runs can be self-fulfilling if asset sales to meet redemptions depress asset prices, triggering further redemptions.
  - Correct pricing of run risk should result in a discount on stablecoin price (a stablecoin with a dollar face value would trade slightly lower than a dollar if run risk were priced).
- Run risk typically bars an instrument from being considered money under the Holmstrom (2015) NQA litmus test: money is accepted “no questions asked” (NQA).

### V. Three policy approaches to dampen runs (overview)
- Option 1: Require issuers to hold very safe and liquid assets (e.g., central bank reserves in a narrow bank setting).
- Option 2: Require issuers to hold additional loss-absorbing equity.
- Option 3: Provide public backstops to ensure issuers can honor redemptions (e.g., deposit insurance, access to central bank liquidity standing facilities, emergency lending).
- Interplay:
  - If backing assets are not fully safe, equity may still be needed.
  - If equity is not sufficient, backstops may be necessary.
- This paper focuses on Option 1 (making reserve assets as safe as possible).

### VI. Theoretical model and key implications
- Model foundations:
  - Builds on Diamond and Dybvig (1983), Goldstein and Pauzner (2005), and Kashyap et al. (2023).
  - Households do not internalize aggregate effects of individual actions; a monopolistic issuer holds risky assets to maximize profits under limited liability.
- Main model mechanisms and results:
  - Issuers take on risky investments for profit, increasing insolvency and run risk.
  - Households value stablecoins for payments, even when run risk exists.
  - Issuers do not internalize how run risk undermines household welfare.
- Policy implications from the model:
  - Self-regulation is insufficient: left alone, issuers will hold a high share of risky assets and recurring runs will arise.
  - A social planner can require higher shares of safe assets to back stablecoins, but positive returns on the backing portfolio are necessary to incentivize issuance.
  - Two policy instruments are necessary to achieve both objectives (price stability / zero run risk and issuance quantity):
    - Provision of a safe asset (e.g., central bank reserves).
    - Remuneration of that safe asset (or regulation allowing other sources of issuer income).
  - If safe assets are remunerated (e.g., central bank paying interest on reserves), issuers will not hold risky assets and run risk can drop to zero.
  - Alternatively, issuers can be induced to hold safe assets if allowed to earn other income sources (e.g., selling or leveraging data).

### VII. Policy discussion, operational considerations, and examples
- Considerations for central banks deciding whether to open accounts to stablecoin issuers:
  - Benefits: stability and singleness of money.
  - Potential costs: need for closer supervision of issuers, related reputational risks, potential bank disintermediation.
- Narrow bank model and non-bank issuers:
  - Proposal to allow technology companies to set up narrow banks (subject to licensing and 100 per cent reserve requirement) to issue stablecoins fully backed by central bank reserves.
  - Rationale: technology companies with large networks (e.g., e-commerce, social networks) are well positioned to provide payment services and stimulate innovation; narrow banks could enable quick scaling and large payment networks while ensuring safety and singleness of money.
- Central bank and regulator developments mentioned:
  - Bank of England proposed a portion of assets backing stablecoins be held in central bank reserves (Bailey, 2025 and Bank of England 2025) and expects systemic stablecoin issuers to have direct access to payment systems.
  - U.S. Federal Reserve (Waller, 2025) is exploring giving stablecoin providers intraday access to central bank reserves for payments.
  - Box 3 in the source provides a simple framework to compare access options and reviews the discussion (box content not reproduced here).

### VIII. Literature positioning and related work
- The paper complements and expands literature by providing a theoretical framework balancing stability and issuance incentives.
- Related literature highlights and conclusions (as reported in the source):
  - Gorton and Zhang (2021): reliability if issued by insured banks and fully backed by government bonds or central bank reserves.
  - Catalini and De Gortari (2021), Kahn and Sing (2021): favor high-quality and liquid asset backing.
  - Caramichael and Liao (2022): considers full backing with central bank reserves (narrow bank).
  - Gorton and others (2022): argue stablecoins can maintain a peg if leveraged investors pay a premium to borrow stablecoins.
  - Parma and others (2022): argue for full backing by central bank reserves for stablecoins offering on-demand redemption.
  - Aldasoro and others (2023): draw parallels with Eurodollars and emphasize especially safe and liquid backing assets.
  - Gross and Senner (2026): analyze options for increasing safety including safer asset backing, loss-absorbing equity, and redemption gates; highlight feedback loop between reserve asset prices and stablecoin redemptions leading to fire sales.
- This paper fills a void by explicitly modeling the trade-offs between run-risk minimization and incentives for issuance.

### IX. Historical context: Box 1 summary (Private Money in Search of NQA)
- Evolution:
  - Commodity money → paper money → trust in issuer and balance sheet for NQA status.
- Free Banking Era in 19th century US:
  - Private banks issued bank notes backed one-for-one with state bonds deposited with state treasurers.
  - Bank notes were not traded at-par due to uncertainty over issuing bank stability and geographic distance; discounts varied and private money was not NQA.
- Contemporary picture:
  - Private account-based money (bank deposits) is dominant and rooted in trust in central bank, supervisory authorities, and deposit insurance.
  - Private paper money persists in Scotland, Northern Ireland, Hong Kong SAR, and Macao SAR (banks must hold central bank reserves or foreign exchange reserves to fully back cash issuance).
  - In the U.S.: currency in circulation sums to around $2 trillion, while short term deposits (the other constituents of M1) amount to $16 trillion.

*IMF Working Papers — Making Stablecoins Stable.*

### introduction of deposit insurance, have strengthened public trust and given bank deposits, under most

### wpiea2026074-source-pdf - introduction of deposit insurance, have strengthened public trust and given bank deposits, under most

### Distinction between stablecoins and bank deposits
- Stablecoins are described as digital cash and token-based money; bank deposits are account-based money.
- Legal and operational differences emphasized:
  - Stablecoins allow some degree of anonymity depending on design; bank deposits do not.
  - Stablecoins can be transferred through change of possession without a nexus of contractual arrangements; bank deposits can only be transferred through a nexus of regulated contracts.
  - As tokenized money, stablecoin transfers are likely governed by property law; bank transfers are likely governed by contract law.
  - Bank deposits are regulated to maintain stable value by fractional reserve requirement and deposit insurance; similar arrangements may not be suitable for stablecoins as tokenized money.

### Model of stablecoin issuance — setup and objectives
- Purpose: study trade-offs when issuers choose reserve asset composition (risky vs risk-free) and issuance scale, accounting for run risk and transaction-service investment.
- Model lineage: modification of Diamond-Dybvig, adapting Goldstein and Pauzner (2005) and Kashyap et al. (2023).
- Agents and timing:
  - Three periods, 푡={1,2,3}, single consumption good, continuum of households and one stablecoin issuer.
  - Productive illiquid risky asset: funds invested at 푡=1 yield 1+푅 at 푡=3 with probability 휔 (the "good" state) and zero otherwise ("bad" state).
  - Risky asset liquidation value at 푡=2 is 휉∼푈[휉,휉] with 0<휉<1<휉 and 훥휉=휉−휉.
  - Cash: zero return, but storage/use cost −푑 (shoe-leather cost).
  - Stablecoins: liabilities denominated in local currency promised to be redeemed at face value; subject to runs (redeemed at less than face value).
- Households value stablecoins for transaction convenience and limited store-of-value demand (model focused on transactional role).
- Issuer revenue uses investment proceeds and potentially revenue from household transaction data (subject to regulator via parameter 푏∈[0,1]).

### Households: preferences, demand, and run coordination
- Endowment: each household has endowment 푒퐻 at t = 1 and chooses stablecoin holdings 푆 and cash holdings 푀 (cash storage cost −푑).
- Idiosyncratic preference shock at 푡=2: fraction 훿 are impatient (consume at 푡=2), 1−훿 are patient (consume at 푡=3). Shocks are private, i.i.d., not contractible.
- Stablecoins are demandable; early withdrawals are serviced sequentially. Run risk arises from illiquidity of issuer balance sheet.
- Coordination: households receive a noisy signal about true 휉 at 푡=2 to address coordination and obtain a unique equilibrium; there exists a unique threshold 휉∗ such that patient households redeem if signal implies 휉<휉∗. Probability of a run q=(휉∗−휉)/훥휉.
- Utility and decision rules:
  - Households have quasi-linear preferences across periods; transaction benefit from stablecoins described by concave increasing function 푉(푆) with 푉(0)=0, 푉′>0, 푉′′<0.
  - Household expected utility expression provided (equation (1)), incorporating run outcomes, no-run impatient and patient outcomes, and transaction-service surplus.
  - First-order condition for stablecoin holdings (equation (2)): marginal utility trade-off equating forgone consumption at 푡=1 to expected marginal gains from holding stablecoins (holds with equality if 푆>0).
  - First-order condition for cash (equation (3)): marginal utility trade-off for holding cash (analysis focuses on equilibria with 푀=0 and 푆>0).
  - Indirect utility when 푀=0 (equation (4)): 핌퐻∗=푈(푒퐻−푆)+푈′(푒퐻−푆)푆 + (1−푞)[푉(푆)−푉′(푆)푆], where the last term is surplus from transactions and is strictly positive under assumptions.
- Implication: households prefer stablecoins to autarky (cash-only) under model assumptions; stablecoin demand depends on transaction-service value and run probability.

### Stablecoin issuer: balance sheet, choices, and profits
- Issuer choices:
  - Scale of stablecoin issuance S (affected by investment v in transaction-service quality).
  - Asset liquidity mix: risky illiquid assets I and safe liquid assets L (balance sheet constraint I+L=S).
  - Operating cost X; cost to improve transaction services v per dollar of stablecoin; transaction-data revenue function B(S) scaled by regulator parameter b∈[0,1].
- Interpretation: safe liquid asset interpreted as central bank reserves.
- Run mechanics and service probability:
  - If run at 푡=2 (휉<휉∗), proceeds liquidated and distributed first-come-first-served; maximum withdrawals that can be served in full: 휃(휉)=휉퐼+퐿 / S (equation (6)), equal to probability of being served if all withdraw.
  - If no run (휉≥휉∗), issuer may liquidate part y(휉,휆)=max[휆푆−퐿 / 휉퐼,0] of illiquid asset to meet early withdrawals (equation (7)).
- Issuer incentive compatibility (operate only if expected profits exceed X): 휔[(1−푦(휉,휆))퐼푅]−푆푣+푏퐵(푆)−푋≥0 (equation (8)).
- Expected profit expression (equation (9)): π=∫휔휉휉∗[(1−푦(휉,휆))퐼푅]−푆푣+푏퐵(푆)−푋 d휉/훥휉.

### Households’ run decision and scenarios at period 2
- Period 1: households buy stablecoins; issuer chooses asset mix and scale.
- Period 2: idiosyncratic shocks realized; issuer liquidates if needed; patient households may withdraw depending on beliefs and realization of 휉.
- Period 3: issuer receives return R on illiquid assets with probability ω; otherwise zero; issuer repays households.
- Three scenarios in period 2:
  - No run: liquidation value of assets higher than stablecoin liabilities; only impatient withdraw and are served in full.
  - Illiquidity (possible coordination problem): asset liquidation value lower than liabilities but issuer not insolvent; patient households withdraw only if they expect others to withdraw, leading to potential multiple equilibria.
  - Insolvency: liquidation value so low issuer cannot meet even impatient withdrawals by selling all portfolio; all households run.

### Equilibria: private vs social planner
- Private equilibrium (Definition 1):
  - Issuer maximizes profits π choosing (S, I, L, v) subject to household demand, balance sheet, and run threshold function 휉∗.
  - First-order conditions take form dπ/dC + ΣψΔ ∂Δ/∂C = 0 for C∈{I,L,S,휉∗,v} (equation (10)).
  - Two margins summarized:
    - Asset allocation margin AMM_PE (equation (11)): trade-off shifting unit of risky illiquid assets into liquid assets, combining direct profit effect and indirect run-probability effect.
    - Stablecoin issuance margin SIM_PE (equation (12)): trade-off to raise a unit of stablecoins (via improving transaction services) to fund illiquid asset investment, raising run-risk but increasing good-state returns.
- Social planner’s equilibrium (Definition 2):
  - Planner maximizes social welfare 핌SP = 푤퐻핌퐻 + π (equation (13)); substituting indirect utility yields 핌SP∗ = 푤퐻핌퐻∗ + π (equation (14)).
  - Planner internalizes household welfare effects; desires higher stablecoin holdings S (via v) and lower run threshold 휉∗ (via higher liquidity ratio).
  - First-order conditions: ∂π/∂C + 푤퐻∂핌SP∗/∂C + ΣψΔ ∂Δ/∂C = 0 (equation (17)).
  - Planner’s asset allocation margin AAM_SP = AAM_PE + AAM_WD, where AAM_WD = 푤퐻 ∂핌SP∗/∂휉∗ (∂휉∗/∂퐿 − ∂휉∗/∂퐼 ) (equation (18)). Since (∂휉∗/∂퐿 − ∂휉∗/∂퐼) is negative, planner prefers more liquid mix than private issuer.
  - Planner’s stablecoin issuance margin SIM_SP = SIM_PE + SIM_WD, with SIM_WD capturing run consequences and household surplus trade-offs (equation (19)). The planner trades off reducing run-risk against improving household surplus when no run occurs.

### Extensions and policy tools
- Remuneration of safe liquid asset (central bank reserves):
  - If central bank pays interest on reserves (푅′), expected profit becomes (equation (20)): π=∫휔휉휉∗[(1−푦(휉,휆))퐼푅]+퐿푅′−푆푣+푏퐵(푆)−푋 d휉/훥휉.
  - Profit-maximizing liquidity ratio (퐿 / (퐼+퐿)) increases in 푅′; higher remuneration makes liquid assets more attractive.
  - Key policy insight: If central bank pays interest on safe liquid asset, 100 percent backing by liquid, safe assets can be optimal; optimal share of liquid assets increases with interest rate on central bank reserves.
- Economies of scale in issuance:
  - Introducing E(S) with E′>0, E′′>0 (equation (21)): π=∫휔휉휉∗[(1−푦(휉,휆))퐼푅]−푆푣+푏퐵(푆)+E(S)−푋 d휉/훥휉.
  - Economies of scale increase amount of stablecoin issued; ratio of illiquid to liquid assets remains constant.

### Graphic representation and comparative statics
- State space: x-axis S (stablecoins issued), y-axis stability 1−q (q = run probability).
- Social welfare indifference curves increase with higher stability and stablecoin issuance.
- Frontier of achievable combinations if planner/internalization holds (bold blue); private equilibrium point E lies below frontier; social optimum E′ lies on frontier.
- Remuneration of reserves shifts the frontier outward (bold red), enabling higher stablecoin issuance with greater safety; in extreme, 100 percent reserve backing optimal (point E'').
- Model summarized to produce comparative statics across asset mix, issuance scale, remuneration of reserves, and data-revenue permissions.

### Model-derived policy-relevant insights (summarized from analysis)
- Issuer incentives versus social welfare:
  - Private issuers may underprovide stablecoins and choose asset mixes that are riskier (higher run probability) relative to social optimum because they do not internalize household welfare consequences of run-risk.
- Liquidity composition matters:
  - Increasing share of safe, liquid assets reduces run probability; planner prefers a more liquid asset mix than private issuer.
- Transaction-service investment and scale:
  - Improving transaction services (via v) raises demand S, can finance more illiquid investment, but increases run-risk; planner trades off household surplus gains from transactions against higher run-risk.
- Central bank tools:
  - Remuneration of reserves (raising 푅′) incentivizes issuers to hold more liquid safe assets; sufficiently high 푅′ can make 100 percent liquid backing optimal.
- Data- or fee-related revenues:
  - Revenue from use of transaction data (scaled by b) and economies of scale (E(S)) affect issuance incentives, potentially increasing S; regulator controls b thereby affecting issuer profit calculus and social outcomes.

*Source: IMF working paper text excerpt (model, household and issuer setup, equilibria, and extensions).*

### 1. The private equilibrium is socially inefficient, thus creating scope for regulation; the private

### 1. The private equilibrium is socially inefficient, thus creating scope for regulation; the private

### Private versus social equilibrium: key findings
- The private equilibrium features lower stablecoin holdings and higher run probability than the social equilibrium.
- In the private equilibrium:
  - The stablecoin issuer invests too much in illiquid, risky assets, raising the probability of a run without internalizing how run-risk decreases household welfare.
  - The issuer restricts the supply of stablecoins to lower its costs via less investment into transaction services (akin to higher prices in a standard monopolistic set up).
- The private equilibrium is therefore socially inefficient, creating scope for regulation.

### Social planner trade-offs and implications for stablecoin backing
- Absent revenues from other sources than just investment, the socially efficient equilibrium does not prescribe 100 percent backing by safe, liquid assets; consequently run risk is not zero.
- The social planner trades off reducing run-risk against improving household welfare by boosting stablecoin holdings.
- It is optimal in some cases to accept some run-risk in order for the stablecoin issuers to supply a higher quantity; in these cases stablecoins would not satisfy the "no-questions-asked" (NQA) property of money.

### Role of issuer revenues and optimal backing
- If investment into illiquid, risky assets is the only potential revenue stream for the stablecoin issuer:
  - High liquidity requirements will hurt the issuer’s ability to profit from issuance.
  - The issuer will lower the supply of stablecoins below the socially optimal level.
  - It can be optimal to tolerate some run risk to preserve access to stablecoins.
- If the stablecoin issuer can generate revenue from non-investment means (examples in text include using stablecoin transactions data or receiving remuneration on stablecoin reserves):
  - It will be profitable for the issuer to provide stablecoins at the socially optimal level even without investment in risky assets.
  - 100 percent backing by liquid, safe assets can then be optimal.
  - This allows stablecoins to achieve NQA status while incentivizing the issuer to supply the optimal amount of stablecoins.

### Central bank reserves and policy levers
- Specifically, if the central bank pays interest on reserves, 100 percent backing by central bank reserves can be optimal.
- The model shows the optimal share of liquid assets increases with the interest rate on central bank reserves because relative returns to holding the illiquid asset decrease.
- If the interest rate is sufficiently high, 100 percent backing by central bank reserves would be optimal.
- Among “liquid and safe assets”, only central bank reserves are identified as truly NQA.
- Central banks could use reserve remuneration as a policy tool to encourage greater backing by safe assets.

### Regulatory toolkit to achieve social optimum
- More than one regulatory tool is needed to implement socially optimal allocations:
  - One tool is needed to manage the liquidity asset mix (run risk).
  - One tool is needed to manage the scale of stablecoin issuance.
- Introducing liquidity requirements:
  - Will reduce run-risk.
  - Will also lower the supply of stablecoins.
- Allowing issuers to generate sufficient revenue from non-investment sources (e.g., data utilization or remuneration on reserves) can permit 100 percent backing by liquid, safe assets without reducing supply.

### Connections to current policy landscape and examples
- Policy frameworks in many jurisdictions are evolving to require reserve backing in safe and highly liquid assets; definitions of such assets differ across jurisdictions.
- Some jurisdictions consider currency, insured bank deposits, central bank reserves, and short-term government bonds as sufficiently safe and liquid assets.
- Algorithm-based stablecoins are explicitly banned in the EU and Australia.
- Some jurisdictions (e.g., EU, UK) explicitly prohibit any interest being paid to stablecoin holders.
- Comparisons drawn to money market funds (MMFs):
  - MMFs have been vulnerable to runs; large redemptions start when value drops below 0.995 for MMFs and 0.99 for stablecoins (Anadu et al 2023).
- E-money and China example:
  - The People’s Bank of China (PBoC) required third-party payment providers to deposit customer funds at central bank accounts and in August 2019 began remunerating reserves at 0.35 percent annual interest (PBoC changed the “no interest” policy in August 2019 and provided an annual interest rate of 0.35 percent).
  - The total balance of nonbank online payment institutions in the PBC reached RMB1.99 trillion ($305 billion, equivalent to 6.1 percent of total reserves at the PBC) in September 2021.
  - PSP fee income example: Alipay and WeChat Pay charge online payment merchants a 0.6 percent fee, compared with credit card companies often charging in the range of 2 percent.

### Models for access to central bank reserves (implications)
- Four possible models described with differing access to central bank reserves and payment infrastructure:
  - Full-service model: fully backed with central bank reserves; issuer has access to central bank payment system; closest to narrow banking and “synthetic CBDC”.
  - Partial service model: issuers hold a fraction as central bank reserves, with access to payment system and emergency liquidity (similar to Bank of England proposal (2025)).
  - Light service model: issuers access the central bank’s payment system only, not overnight reserves (similar to a “skinny payment account” concept).
  - Self-service model: issuers have no access to central bank reserves (most current stablecoins).
- The model highlights that the full-service model could be sufficient to limit run risks; the partial service model could also support stability by providing standing facilities and emergency liquidity.

### Policy trade-offs and open questions
- Trade-offs include:
  - High liquidity requirements reduce run risk but can depress stablecoin supply if issuers lack alternative revenue sources.
  - Allowing issuers to earn from reserve remuneration or data-related income can align private incentives with social optimum but may raise market concentration concerns.
- Issues left for future research:
  - Market contestability and the effects of data-related revenue on concentration.
  - Broader implications of requiring central bank reserves (larger central bank balance sheet, deposit disintermediation, monetary policy complications, supervisory capacity constraints, reputational risks).
  - Paying interest to issuers on reserves could be seen as privatizing seigniorage if interest is not passed to coin holders.
  - Alternative stabilizing options: requiring loss-absorbing equity capital, deposit-insurance–like backstops, or issuing CBDC and using payment service providers to distribute it.

*Source: IMF Working Paper excerpt (Making Stablecoins Stable).*

### References

### References

### Stablecoins and regulatory frameworks
- Aldasoro, Inaki, Perry Mehrling, and Daniel H. Neilson (2023). “On par: A Money View of stablecoins”. Bank of International Settlements Working Papers No. 1146. November 2023.
- Anadu, Kenechukwu, Pablo Azar, Marco Cipriani, Thomas M. Eisenbach, Catherine Huang, Mattia Landoni, Gabriele La Spada, Marco Macchiavelli, Antoine Malfroy-Camine, and J. Christina Wang (2023). “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?”. Federal Reserve Bank of New York, Staff Reports No. 1073, September 2023.
- Bank of England (2021). “New Forms of Digital Money”. Discussion paper. Available at: https://www.bankofengland.co.uk/paper/2021/new-forms-of-digital-money .
- Bank of England (2025). “Proposed regulatory regime for sterling-denominated systemic stablecoins”. Consultation Paper, London
- Financial Stability Board (2023). “High-level Recommendations for the Regulation, Supervision and Oversight of Global Stablecoin Arrangements (GSCs)”. July 2023.
- International Monetary Fund (2025). “Understanding Stablecoins”, Policy Paper No. 2025.
- International Monetary Fund and Financial Stability Board (2023). “IMF-FSB Synthesis Paper: Policies for crypto-assets”.
- Bains, Parma, Arif Ismail, Fabiana Melo, and Nobuyasu Sugimoto (2022). “Regulating the Crypto Ecosystem: The Case of Stablecoins and Arrangements”. IMF Fintech Note 008. September 2022.
- Gorton, Gary B., and Jeffery Y. Zhang (2023). “Taming Wildcat Stablecoins”. University of Chicago Law Review. Vol. 90.
- Liao, Gordon Y., and John Caramichael (2022). “Stablecoins: Growth Potential and Impact on Banking”. Board of Governors of the Federal Reserve System, International Finance Discussion Papers No. 1334, January 2022.

### Runs, liquidity, and financial stability
- Baughman, Garth, Francesca Carapella, Jacob Gerszten, and David Mills (2022). "The stable in stablecoins". FEDS Notes. Washington: Board of Governors of the Federal Reserve System. December 16, 2022. https://doi.org/10.17016/2380-7172.3224.
- Bouveret, Antoine, and Antoine Martin, and Patrick E. McCabe (2022). “Money Market Fund Vulnerabilities: A Global Perspective”. Board of Governors of the Federal Reserve System, Finance and Economics Discussion Series No. 12, March 2022.
- Gorton, Gary B., Elizabeth C. Klee, Chase P. Ross, Sharon Y. Ross and Alexandros P. Vardoulakis (2022), “Leverage and Stablecoin Pegs”. NBER Working Paper 30796, December 2022.
- Gross, Marco, and Senner, Richard (2026). “From Par to Pressure: Liquidity, Redemptions, and Fire Sales with a Systemic Stablecoin”. IMF Working Paper No. 26/5.
- Diamond, Douglas W., and Philip H. Dybvig (1983). “Bank Runs, Deposit Insurance, and Liquidity”. Journal of Political Economy, Vol. 91, No. 3.
- Goldstein, Itay, and Ady Pauzner (2005). “Demand-Deposit Contracts and the Probability of Bank Runs”. The Journal of Finance, Vol. 60, Issue 3.
- Peck, James and Karl Shell (2010). “Could making banks hold only liquid assets induce bank runs?”. Journal of Monetary Economics, Vol. 57, Issue 4.

### Central bank digital currencies, digital money, and payment systems
- Bank for International Settlements (2025). “The next-generation monetary and financial system”, BIS Annual Economic Report, Chapter III, June 2025.
- Di Iorio, Alberto, Kosse, Anneke, and Ilaria Mattei (2024). “Embracing diversity, advancing together – Results of the 2023 BIS survey on central bank digital currencies and crypto”. Bank of International Settlement Papers, No. 147. June 2024.
- Sun, Tao and Ryan Rizaldy (2023). “Some Lessons from Asian E-Money Schemes for the Adoption of Central Bank Digital Currency”. IMF Working Paper No. 23/123.
- Waller, Christopher (2025). “Embracing New Technologies and Players in Payments”. Opening remarks at the Payments Innovation Conference, Federal Reserve Board, Washington, D.C., October 21, 2025.
- Xie, Zicheng (2025), “How Mobile Payments Affect the Liability Structure of Commercial Banks: A Comparative Analysis of Alipay/WeChat Pay and Traditional Banks”, Advances in Economics Management and Political Sciences, November 2025.
- Bank of England (2021). “New Forms of Digital Money”. Discussion paper. Available at: https://www.bankofengland.co.uk/paper/2021/new-forms-of-digital-money .

### Empirical analyses and volatility studies
- Hoang, Lai T., and Dirk G. Baur (2021). “How stable are stablecoins?”. The European Journal of Finance. DOI: 10.1080/1351847X.2021.1949369
- Jarno, Klaudia, and Hanna Kołodziejczyk (2021). “Does the Design of Stablecoins Impact Their Volatility?”. Journal of Risk and Financial Management, Vol. 14, Issue 2.
- Jeger, Clemens, Bruno Rodrigues, Eder J. Scheid, and Burkhard Stiller (2020). “Analysis of Stablecoins during the Global COVID-19 Pandemic”. 2020 Second International Conference on Blockchain Computing and Applications doi:10.1109/BCCA50787.2020.9274450.
- Anadu, Kenechukwu, et al. (2023). “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?”. Federal Reserve Bank of New York, Staff Reports No. 1073, September 2023.

### Theoretical foundations and broader macro/finance context
- Hart, Oliver D. and Holmström, Bengt R., A Theory of Firm Scope (2002). Available at SSRN: https://ssrn.com/abstract=355860 or http://dx.doi.org/10.2139/ssrn.355860
- Holmstrom, Bengt (2015). “Understanding the role of debt in the financial system”. Bank of International Settlement Working Papers, No. 479. January 2015.
- Kahn, Charles, and Manmohan Singh (2021), “If stablecoins are money, they should be backed by reserves”, Riks.net. https://www.risk.net/comment/7744611/if-stablecoins-are-money-they-should-be-backed-by-reserves.
- Kashyap, Anil K., Dimitrios P. Tsomocos, and Alexandros P. Vardoulakis (forthcoming). “Optimal Bank Regulation in the Presence of Credit and Run-Risk”. Journal of Political Economy
- McBride, William, and Kurt Schuler (2012). “Where Is Private Note Issue Legal?”. Cato Journal, Vol. 32, No. 2.
- Eichengreen, Barry (2005): New York Times

### IMF and global financial stability publications
- Global Financial Stability Report (2021). International Monetary Fund. October 2021. Chapter 2.
- Global Financial Stability Report (2022). International Monetary Fund. April 2022. Chapter 3.
- International Monetary Fund (2023). “Elements for Effective Policies for Crypto Assets”, Policy Paper No. 2023/04.
- International Monetary Fund and Financial Stability Board (2023). “IMF-FSB Synthesis Paper: Policies for crypto-assets”.

### Other relevant contributions
- Catalini, Christian and Alonso de Gortari (2021). “On the Economic Design of Stablecoins”. Available at SSRN: https://ssrn.com/abstract=3899499 or http://dx.doi.org/10.2139/ssrn.3899499
- Kahn, Charles, and Manmohan Singh (2021), “If stablecoins are money, they should be backed by reserves”, Riks.net. https://www.risk.net/comment/7744611/if-stablecoins-are-money-they-should-be-backed-by-reserves.
- Jarno, Klaudia, and Hanna Kołodziejczyk (2021). “Does the Design of Stablecoins Impact Their Volatility?”. Journal of Risk and Financial Management, Vol. 14, Issue 2.
- Witmer, Jonathan, and Jing Yang (2016). “Estimating Canada’s Effective Lower Bound”. Bank of Canada Review. Spring 2016.
- Zhang, Longmei and Sally Chen (2019). “China’s Digital Economy: Opportunities and Risks”. IMF Working Paper No. 201

*Making Stablecoins Stable — References (Working Paper No. WP/2026/074).*

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_Source: https://www.imf.org/-/media/files/publications/wp/2026/english/wpiea2026074-source-pdf.pdf_