The International Monetary Fund published a working paper examining how a large fiat-backed stablecoin could transmit liquidity stress into sovereign bond markets through redemptions and reserve asset sales, and which design choices could mitigate these risks. The analysis combines a financial-economics discussion with a simulation model of a run–fire-sale feedback loop in which redemptions erode reserves, trigger bond sales, depress bond prices, weaken issuer solvency and prompt further redemptions. The working paper notes that stablecoin issuers’ reserves commonly include bank deposits, short-term sovereign bonds and reverse repos, and highlights that the largest stablecoin issuers’ holdings of U.S. Treasury bills reached 1.7 percent of the total by mid-2025. It argues that 24/7 redemption against markets that do not trade continuously can amplify first-mover incentives and price-mediated contagion, with spillovers to other holders of the same sovereign securities. Model simulations link “design dials” such as capital buffers (asset-liability ratios above one), cash reserve buffers, redemption gates and shorter-duration reserve portfolios to outcomes including run frequency, fire sale intensity and bond market volatility, with capital buffers delivering the most comprehensive reduction in both the likelihood and severity of stress events, while cash reserves primarily reduce the need for bond sales and gates reshape outflow timing but may create pre-emptive redemption incentives. As an IMF Working Paper, the publication is intended to elicit comments and does not necessarily represent IMF views, and the associated model code is made available via the IMF website.

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