Bank for International Settlements publishes research showing usable liquidity and capital thresholds can cut stablecoin default risk and market spillovers

The Bank for International Settlements has published a working paper on how prudential regulation could make fiat-backed stablecoins more resilient. The paper finds that, without regulation, issuers tend to hold little capital and prefer higher-yielding but less liquid government bonds over cash, leaving coin-holders exposed to losses if redemptions force bond fire sales and creating spillovers into money markets. In the model, liquidity and capital thresholds reduce both issuer default risk and market price impact when they are designed as usable buffers that can be breached in stress rather than as hard minimum requirements. The paper says the two tools work through different channels. A liquidity threshold increases cash holdings, while a capital threshold increases both capital and cash. Both measures lower default and spillover risks, which makes them partial substitutes, but both are needed if regulators want to target the two risks jointly. Using stablecoin flow data and US Treasury market depth, the authors calibrate a two-way mapping between threshold settings and risk outcomes. In one low-end example, a liquidity ratio threshold and capital ratio threshold together reduce weekly issuer default probability under stress to about 0.7 basis points from more than 15 basis points in the unregulated case, and lower expected price impact to 2.7 basis points from around 4 basis points. The paper also finds that hard minimum liquidity requirements can backfire by forcing premature bond sales and increasing default risk.