"Stablecoin Interest Payments Could Trigger Excessive Competition and Coin Run Risks"

Digital Currency and Financial Stability

A study has found that if stablecoin issuers pay interest, a 'coin run' may occur. Even if reserve assets are invested in safe products, competition among firms could lead to a contagion of instability.

On the 18th, the 'Digital Currency' session of the World Congress of Economists held at Coex in Samseong-dong, Seoul, addressed the growing global attention on stablecoins by exploring from multiple angles the impact of digital currency on financial stability, monetary policy, and consumer welfare.

Professor Sebastian Zeltner of ETH Zurich pointed out, "If stablecoin issuers pay interest, the overall financial system could become unstable." Zeltner’s analysis is that merely constructing stablecoins with solid reserve assets is not sufficient to prevent the risk of a coin run.

He said, "Even if a stablecoin is well-designed, if it pays interest, users may move to a stablecoin offering higher yields," adding, "This could lead to interest rate competition among issuers, resulting in inefficient allocation." The European Union announced a ban on interest payments for stablecoins out of such concerns, and U.S-based stablecoins like Tether (USDT) and USDC are also designed not to pay interest.

Iñaki Aldasoro, an economist at the Bank for International Settlements (BIS), analyzed that transparent disclosure of information regarding reserve assets could reduce the risk of a stablecoin 'coin run'. He explained that, as seen in the Silicon Valley Bank (SVB) crisis, if there had been clear information about the stability of reserves during episodes of financial unrest, investors might have chosen to wait rather than redeem their coins. Aldasoro emphasized, "Greater transparency can help reduce the risk of stablecoin issuers going bankrupt."

Reporter Jinkyoo Kang josep@hankyung.com