Episode 39: Stablecoins — Scenario Analysis of Innovation and Regulatory Risk: Baseline, Bull Case, and Stress Test

Stablecoins merit separate risk scenario analysis because they play three roles at once: a unit of account for crypto markets, a settlement tool for on-chain finance, and an interface between the traditional financial system and blockchain. Treating them simply as “tokens with stable prices” underestimates the complexity. Whether a stablecoin can maintain its peg depends not only on market quotes, but also on whether reserve assets are genuine, whether redemptions are smooth, whether banking and custody channels are available, whether smart contracts are secure, and whether regulatory rules still allow further expansion.

Core mechanism of stablecoins: where the innovation is and where the risks come from

The common goal of stablecoins is to give on-chain assets a relatively stable unit of account. The most common peg target is the US dollar, though there are designs pegged to the euro, gold, or a basket of assets. By mechanism, stablecoins can be broadly divided into three categories:

• Fiat or cash-equivalent collateralized: Issuers promise to back the coin with reserves such as bank deposits, short-term sovereign bonds, repurchase agreements, and money market instruments, and allow eligible users to redeem according to rules. The key risks of this type are reserve quality, custody arrangements, legal rights, and liquidity during a run.
• Crypto-asset over-collateralized: Users deposit ETH, BTC, or other on-chain assets to mint stablecoins according to collateral ratios. Stability depends on collateral prices, liquidation mechanisms, oracles, and governance rules. In a sharp market decline, liquidation congestion can amplify risk.
• Algorithmic or partially algorithmic: Maintain the peg through arbitrage, mint/burn mechanics, governance tokens, or incentive structures. This design is highly sensitive to market confidence and, without sufficient high-quality collateral support, can enter a self-reinforcing death spiral under extreme stress.

The main sources of stablecoin innovation are threefold. First, it reduces settlement friction for on-chain transactions, so users do not need to move funds repeatedly between bank accounts and exchanges. Second, it lets global users transfer nearly dollar-denominated assets across protocols, exchanges, and wallets. Third, it provides a foundational settlement layer for tokenized sovereign debt, on-chain payments, cross-border remittances, and decentralized finance.

But innovation does not automatically mean low risk. The more a stablecoin behaves like financial market infrastructure, the more it must face infrastructure-level constraints: reserves must be transparent, redemptions executable, operations resilient under stress, regulation must clearly define boundaries, and technical systems must withstand attacks and congestion. The purpose of scenario analysis is not to predict that a specific stablecoin will certainly succeed or fail, but to establish a framework for identifying risk transmission channels under different market states.

Baseline scenario: Stablecoins continue as on-chain dollar infrastructure

Under the baseline scenario, the stablecoin market develops gradually: major fiat-collateralized stablecoins remain central in trading, lending, and payment scenarios; regulatory rules become clearer over time, though requirements still differ across jurisdictions; issuers increase reserve disclosure frequency and increasingly use short-term, highly liquid assets; users expand use from pure trading to settlement, remittances, and on-chain cash management.

In this scenario, the macro implications of stablecoins are mainly in two directions. First, they strengthen the network effect of the US dollar in on-chain economies. Many crypto trading pairs, DeFi lending pools, and cross-border payment scenarios are priced in dollar stablecoins, making stablecoins the proxy for “on-chain dollar liquidity.” Second, if issuers hold large amounts of short-term U.S. Treasuries or cash equivalents, reserve allocation becomes linked to short-end rate conditions. When rates are higher, reserve yields can improve issuer economics; when rates fall, issuers’ revenue mix and competitive strategy may change.

The baseline scenario does not mean no risk. Even if the price stays near $1 for a long period, users still need to watch:

1. Whether redemption rights belong directly to retail holders: Some stablecoins allow direct redemption for institutional clients, while retail users mainly exit through exchanges or secondary markets. The experience differs under stress.
2. Whether reserve assets are sufficiently short-duration and highly liquid: If reserves contain longer-dated, more complex, or less liquid assets, run episodes may force discounted disposals.
3. Whether on-chain supply is concentrated in a few networks or bridged assets: Cross-chain versions improve usability but add bridge and wrapping risk.
4. Whether the issuer has freeze, blacklist, or upgrade permissions: These powers may help compliance, but also mean users face centralized execution risk.

The investment implication of the baseline is that stablecoins are better used as liquidity management and settlement tools, not as simple risk-free cash. For traders, they can reduce rebalancing friction; for long-term investors, they can provide an on-chain cash position while waiting for opportunities; for institutions, they can become an entry point for tokenized settlement pilots. But all uses should be based on ongoing review of the issuer, reserves, and redemption framework.

Bull case: Regulatory clarity, payment adoption, and expansion of tokenized assets

A bull case is usually driven by three factors: first, major jurisdictions adopt clear and enforceable stablecoin regulatory frameworks; second, compliant issuers form more stable partnerships with banks, payment firms, and merchant networks; third, use cases such as tokenized sovereign debt, on-chain fund units, corporate settlement, and cross-border payments expand.

If regulation clearly defines reserve scope, segregated custody, periodic disclosure, redemption windows, consumer protections, and compliance requirements, the barrier for institutional adoption may fall. Traditional institutions often worry less about the technology itself than legal uncertainty, counterparty risk, and compliance liability. Once those boundaries are clearer, stablecoins may move from “an internal exchange settlement tool” to a “programmable payment instrument that is auditable, supervised, and rule-based.”

In a bull case, several shifts may occur:

• Improved on-chain payment experience: Merchants, freelancers, and cross-border service providers accepting stablecoins can shorten settlement time and reduce intermediaries. But whether this advantage holds depends on on/off-ramp costs, tax treatment, and local regulatory constraints.
• Rising demand for tokenized assets: If more short-term bonds, money market funds, or real-world assets are issued as tokens, stablecoins may become the main settlement asset for subscription, redemption, and secondary trading.
• Improved DeFi collateral quality: Transparent reserves and compliant stablecoins entering lending protocols can reduce some collateral uncertainty, though smart-contract and liquidation risks in protocols still remain.
• Institutional liquidity enters crypto markets: More auditable stablecoin systems may lower market-making, arbitrage, and settlement costs for institutions, potentially improving market depth.

A concrete example: a software services company serving global clients wants to pay freelancers in multiple countries. Traditional bank transfers may involve several correspondent banks and varying settlement times; with compliant stablecoins, the company can batch payments on-chain, and recipients can convert to local currency according to local rules. If the payment platform provides identity verification, transaction monitoring, tax records, and compliant conversion channels, stablecoin efficiency advantages become more pronounced. But if the recipient jurisdiction restricts the service or local on/off-ramp spreads are too wide, the efficiency advantage can be offset by regulatory and liquidity costs.

The boundary of the bull case is that regulatory clarity does not mean every stablecoin benefits. Projects with opaque reserves, weak governance, reliance on high-risk yield sources, or primary use in gray-market activity may be pushed out once rules tighten. Industry concentration may also rise, with top compliant issuers gaining stronger network effects while smaller projects face higher compliance costs.

Stress scenario: Depegging, runs, banking channels, and on-chain liquidation

The stress scenario is the most important part of stablecoin analysis, because stablecoin risk is usually underestimated in calm periods and fully exposed in stress periods. Typical stress drivers include sudden regulatory actions, doubts about reserve asset quality, issues at partner banks, redemption pauses or delays, exchange liquidity exhaustion, smart contract vulnerabilities, cross-chain bridge attacks, and rapid declines in crypto collateral prices.

For fiat-collateralized stablecoins, stress transmission usually starts with confidence. If the market doubts reserve sufficiency, the secondary-market price may first fall below $1. In theory, arbitrageurs would buy the discount and redeem from the issuer to capture spread. But whether this mechanism works depends on redemption thresholds, processing speed, KYC requirements, bank business hours, transfer limits, and whether the issuer continues to allow redemption. If redemption channels are blocked, the discount can widen.

For crypto-collateralized stablecoins, stress is more heavily on-chain liquidation. When collateral prices fall sharply, the system must quickly liquidate undercollateralized positions. If oracles are delayed, blocks are congested, liquidation bots are underfunded, or collateral market depth is inadequate, the system can incur bad debt. At that point, a falling governance token can further weaken risk buffers, creating negative feedback.

Algorithmic or weakly collateralized stablecoins are even more severe under stress. When the market no longer trusts the peg mechanism, users rush to exit; the exit itself pushes down supporting-asset or governance token prices, causing more users to exit. Without genuine, liquidatable, low-volatility reserves, price stability is often difficult to restore.

Stress can also transmit across markets. If a stablecoin depegs, traders may sell crypto assets and rotate into another stablecoin or fiat, raising volatility in BTC, ETH, and altcoins; in DeFi lending pools where stablecoins serve as collateral or debt units, discounts can alter liquidation thresholds; if exchanges price most pairs in one stablecoin, market quotes may become dislocated; if issuers must liquidate a large amount of short-term assets, this could in theory affect local liquidity conditions in certain money markets. Actual impact depends on stablecoin size, reserve composition, redemption speed, and market environment, and cannot be generalized.

Key triggers: Which events can shift scenario paths

Stablecoin scenarios do not stay in the baseline automatically. The following triggers can push markets toward bull or stress outcomes:

For users, the most important thing is not explaining after the fact why price moved, but judging whether risk is still controllable as soon as triggers appear. For example, one stablecoin briefly dropping to 0.995 USD does not automatically indicate a systemic crisis; but if it is accompanied by redemption pauses, delayed reserve disclosures, exchange withdrawal constraints, and social-media panic, the nature of risk is completely different.

Leading and lagging indicators: Don’t only watch whether price is at 1 USD

Stablecoin price is the most intuitive indicator, but it is often lagging. Useful risk monitoring should combine leading and lagging indicators.

Leading indicators include:

• Secondary market depth: Whether bid-ask depth within 0.5% or 1% spread on major exchanges is shrinking.
• Redemption and minting changes: Whether on-chain supply is contracting quickly, and whether large redemption addresses are acting in concentrated fashion.
• Capital flows: Whether users are rotating from one stablecoin into another, BTC, ETH, or fiat channels.
• Changes in reserve disclosures: Whether disclosure frequency is reduced, asset categories become more complex, or third-party attestation is missing.
• Abnormalities in rates and lending markets: A sudden rise in borrowing or lending rates for a stablecoin in DeFi may indicate shifting demand or risk perception for that asset.
• On-chain congestion and gas costs: In crises, high fees reduce small-user exit capability.

Lagging indicators include:

• Stablecoin spot price sustained away from the peg.
• Issuer announcements of delayed redemption, pauses, or service-scope changes.
• Bad debt or failed liquidation in DeFi protocols.
• Exchange suspensions of deposits, withdrawals, or certain trading pairs.
• Regulatory bodies issuing formal penalties, bans, or litigation filings.

A practical checklist can be set as follows: review reserve disclosures and on-chain supply of target stablecoins weekly; before any large position, check major exchange depth, on-chain transfer fees, and issuer redemption terms; when price deviates beyond personal thresholds, immediately verify whether exit is possible through at least two independent channels; if exit channels all depend on the same exchange, the same cross-chain bridge, or the same banking channel, treat that as concentration risk, not diversification.

Cross-asset impact: From crypto markets to short-end rates and risk appetite

Cross-asset effects of stablecoins can be divided into three layers.

The first layer is within crypto assets. Stablecoins are an important part of trading pairs, margin, lending, and liquidity pools. If a stablecoin encounters issues, capital may rotate to other stablecoins or major assets, or exit crypto markets more broadly. In this case, BTC and ETH may benefit short-term from “fleeing problematic stablecoins,” or may fall together due to declining risk appetite depending on event type and market structure.

The second layer is DeFi and on-chain yield markets. A stablecoin pool’s APY is sometimes mistakenly treated as a risk-free rate, but it contains smart contract, liquidation, counterparty, liquidity mining, and the stablecoin’s own credit risks. When a stablecoin discounts, AMM pools passively absorb more weak assets, and liquidity providers may suffer impermanent loss or deterioration of asset composition.

The third layer is traditional finance markets. Large fiat-backed stablecoins that hold substantial short-term Treasuries, cash, or repo assets can connect issuance and redemption behavior with short-end money markets. However, it is incorrect to claim that stablecoins determine short-end interest-rate movement. A more cautious view is that when scale is large enough and redemptions are concentrated, reserve management of stablecoins can become one variable to watch for short-end liquidity. Actual impact needs assessment by scale, asset duration, market conditions, and central bank liquidity settings.

Additionally, stablecoins affect foreign exchange and cross-border payment discussions. In regions with volatile local currencies or weak payment infrastructure, dollar stablecoins may be used as substitute settlement media. But this also raises regulatory scrutiny around capital controls, AML, consumer protection, and monetary sovereignty. Users should not mistake “technologically available” for “locally legal and risk-free.”

Risk management framework: Holding, trading, and institutional use

Stablecoin risk management should be layered by use case, rather than one answer for all users.

For retail holders, the core goal is to avoid treating stablecoins as protected bank deposits. A “three-do-nots” approach can be used: do not hold only one stablecoin for long periods, do not ignore redemption and withdrawal channels, and do not enter high-yield pools with unexplained yield sources. If it is only for short-term trade waiting, control amount and holding time; if long-term cash management is needed, consider differences between bank accounts, regulated money-market funds, and on-chain instruments.

For active traders, focus is on liquidity and execution risk. Traders should prepare multiple quote assets and exit paths in advance so they are not forced to cross chains, open accounts, or seek OTC only in stress periods. When using stablecoins as margin, understand whether exchanges revalue against discount, and whether there are auto-reduce, forced liquidation, or withdrawal suspension rules.

For DeFi users, focus is on portfolio risks across protocols. A seemingly simple stablecoin yield strategy may simultaneously include issuer risk, lending protocol risk, oracle risk, liquidation bot risk, cross-chain bridge risk, and governance risk. The higher the yield, the more necessary it is to clarify which risks are being compensated. If yield comes from token incentives, account for potential liquidity outflows when incentives end.

For institutions, stablecoin use should be integrated into operations, compliance, and financial controls. Key issues include: whether the stablecoin aligns with internal investment policy; who holds private keys and transfer approval rights; whether compliant custody is used; how accounting and taxation are recorded; how freeze events, mis-transfers, chain congestion, or counterparty defaults are handled; and whether there is a board- or risk-committee-approved exposure limit.

An executable stablecoin due diligence checklist is as follows:

1. Confirm legal issuer entity, place of incorporation, terms of service, and applicable jurisdictions.
2. Read latest reserve disclosures and identify proportions and maturities of cash, Treasuries, repos, commercial paper, and other assets.
3. Confirm redemption terms and minimum thresholds, fees, and processing times for retail and institutional users.
4. Check major exchange and on-chain pool depth, not just trading volume.
5. Review whether contracts are upgradeable, whether freeze permissions exist, and who controls those permissions.
6. Evaluate whether cross-chain versions are issued directly by the official issuer or are wrapped bridge assets.
7. Set exposure limits for one stablecoin, one chain, one exchange, and one custodian.
8. Prepare a stress response plan: include exit routes, alternative stablecoins, fiat channels, and internal approval workflow.

Data that requires continuous updates: Treating stablecoins as a dynamic risk exposure

Stablecoin risk is not a one-time judgment. Even if a project has behaved stably in the past, regulatory changes, banking relationships, market scale, or technical upgrades can alter risk characteristics. Data that should be continuously updated include:

• Circulating supply and on-chain distribution: Supply growth may indicate broader adoption, but could also indicate concentration; rapid supply contraction may signal redemptions or confidence shifts.
• Reserve reports and asset duration: Pay particular attention to whether short-term, high-liquidity assets are used and whether complex credit risk is present.
• Exchange depth and on-chain pool composition: Volume can be noisy, while depth and slippage better reflect exit capacity.
• Redemption execution: Issuer announcements, user feedback, and large on-chain transfers are all worth monitoring.
• Regulatory documents and enforcement trends: Rules can differ by region on issuance, distribution, custody, and payment use.
• Smart contract audits and permission changes: Contract upgrades, changes in multisig signers, oracle parameter updates, and bridge architecture changes can all affect security.
• Macro rate environment: Short-end rate changes affect reserve yields, issuer competition, and attractiveness of on-chain yield strategies.

The takeaway is that stablecoins can improve on-chain trading and payment efficiency and can become an important link between traditional and crypto finance. But their stability is not an inherent property; it is the result of reserves, redemption, market depth, technical security, and the regulatory environment acting together. The baseline, bull, and stress scenarios in this article are useful for understanding main stablecoin risk pathways, but they do not guarantee that any specific stablecoin will not depeg and cannot replace legal, tax, compliance, or investment advice. A robust approach is to treat stablecoins as a dynamic risk exposure requiring continuous monitoring, not as risk-free digital cash.

References

1. Ledger Academy: Episode 39 – Stablecoins – Innovation & Regulation：https://www.ledger.com/academy/school-of-block/episode-39-stablecoins-innovation-regulation
2. Bank for International Settlements: Stablecoins: risks, potential and regulation：https://www.bis.org/publ/work905.htm
3. Financial Stability Board: Regulation, Supervision and Oversight of “Global Stablecoin” Arrangements：https://www.fsb.org/2023/07/high-level-recommendations-for-the-regulation-supervision-and-oversight-of-global-stablecoin-arrangements-final-report/
4. European Union: Regulation (EU) 2023/1114 on markets in crypto-assets (MiCA)：https://eur-lex.europa.eu/eli/reg/2023/1114/oj
5. U.S. Federal Reserve: Money and Payments: The U.S. Dollar in the Age of Digital Transformation：https://www.federalreserve.gov/publications/money-and-payments-discussion-paper.htm
6. OneKey Blog：https://onekey.so/blog/

Risk Disclosure

Stablecoins and related crypto assets involve market, execution, liquidity, custody, technology, leverage, and regulatory risks. Market risk includes stablecoin depegging, sharp crypto-asset price volatility, and changes in risk appetite; execution risk includes exchange deposit/withdrawal suspension, on-chain congestion, widening slippage, and redemption delays; liquidity risk includes insufficient secondary-market depth, market-maker withdrawal, and discount on large redemptions; custody risk includes private-key loss, custodian default, account freeze, or banking channel interruption; technology risk includes smart contract bugs, oracle failures, cross-chain bridge attacks, and power abuse; leverage risk includes margin revaluation, forced liquidation, auto-liquidation, and lending protocol liquidations; regulatory risk includes changes in issuance, distribution, payment, anti-money laundering, taxation, and cross-border use rules. This article is for educational and scenario-analysis purposes only and does not constitute investment, legal, tax, or accounting advice; no stablecoin or yield strategy should be treated as a risk-free cash substitute.