Paper: The Hidden Plumbing of Stablecoins: Financial and Technological Risks in the GENIUS Act Era
Authors: Daniel Aronoff, F. Christopher Calabia, Anders Brownworth, Ashwanth Samuel, Neha Narula
Date: 2026-04-18
Estimated Reading Time: 31 minutes
The paper examines how U.S. dollar stablecoins behave when they scale beyond crypto markets into broader payment and settlement use under the 2025 GENIUS Act framework. It argues that reserve quality alone does not guarantee par redemption because stablecoin stability also depends on Treasury market liquidity, repo market functioning, and broker-dealer balance-sheet capacity. The authors analyze risks across three connected layers: issuer balance sheets, blockchain and smart contract infrastructure, and regulatory supervision. They show that even conservatively backed stablecoins can face instability during redemption surges if intermediated markets cannot absorb liquidation demand efficiently. The paper also studies operational risks from smart contracts, bridges, consensus failures, governance design, and fragmented blockchain standards that may disrupt transferability even when reserves remain intact. Stablecoin issuers are compared with banks and money market funds, highlighting differences in capital requirements and intervention mechanisms. The conclusion is that durable stablecoin stability requires combined financial-market oversight, prudential rules, and software governance rather than reserve mandates alone.
Core insights
- Par depends on market structure: Stablecoin redemption at one dollar depends on more than holding safe reserve assets. Treasury market depth, repo liquidity, and dealer capacity determine whether reserves can be converted into cash quickly during redemption stress.
- Stablecoins sit lower in the money hierarchy: The paper places stablecoins below bank deposits and short-term Treasury instruments in the hierarchy of money. Their credibility depends on the option of conversion at par, and confidence weakens if that option becomes uncertain.
- Capital rules remain underdeveloped: GENIUS improves reserve restrictions but does not impose bank-equivalent leverage requirements or prompt corrective action rules. This creates a gap where issuers can remain weakly capitalized without mandatory early intervention.
- Technology risk affects monetary confidence: Smart contract bugs, bridge failures, governance attacks, and blockchain congestion do not directly reduce reserve assets, but they can interrupt transfers and redemptions. These disruptions can create confidence shocks even when collateral remains intact.
- Interoperability shapes monetary singleness: Different stablecoins and blockchain deployments may not be interchangeable at par. Without standards for fungibility and transferability, the system may fragment into separate private dollars rather than a single reliable payment layer.
The paper treats stablecoin tokenomics primarily as a liability management problem rather than a token issuance problem. Supply expands when users acquire stablecoins against reserve assets, but the credibility of that supply depends on whether redemption at par can be maintained under stress. This means the economic question is less about issuance mechanics and more about whether liabilities can be converted without discount. A stablecoin with strong reserve composition may still fail if liquidation channels break during heavy withdrawals.
The reserve framework under the GENIUS Act restricts backing assets toward cash, deposits, Treasuries, and repo-linked instruments. This reduces direct credit risk, but it does not eliminate interest-rate exposure or dependence on intermediated markets. If many holders redeem simultaneously, issuers may need to sell or finance Treasury positions quickly through dealers and repo markets. What happens if broker-dealer balance sheets are constrained at the same time that redemptions accelerate? The paper argues that this liquidity channel is central to stablecoin stability.The authors compare issuers with commercial banks using leverage ratio logic. Several issuers would fall below thresholds that would trigger prompt corrective action if they were regulated as banks. This highlights that capital adequacy remains weaker than reserve disclosure standards. Stablecoin holders may assume full safety from reserve backing, but the absence of bank-like intervention rules creates a different solvency profile during stress.
The paper also compares issuer practices with money market funds. Some issuers appear to be converging toward MMF-style reserve management with short maturity assets and high liquidity buffers. However, MMF reforms during the COVID-19 period did not fully prevent redemption runs, and withdrawal controls sometimes accelerated exits. Would similar redemption gates in stablecoins protect stability, or would they undermine confidence faster by signaling stress? The paper suggests that redemption design itself can change run incentives.
Demand for stablecoins is linked to settlement convenience and programmable transfer, but monetary interchangeability remains unresolved. If stablecoins from different issuers are not reliably exchangeable at par, users face a fragmented digital dollar environment where acceptance varies by issuer and blockchain. This weakens the singleness of money and can produce discounting between nominally identical dollar claims. The paper compares this risk to private banknote fragmentation rather than a unified public money system.
Rewards in this structure are indirect rather than inflationary. Users benefit from transaction speed, settlement certainty, and integration with blockchain applications rather than explicit token rewards. The system therefore depends on trust in redemption and operational continuity rather than incentive emissions. The paper implies that if transfer rails fail or confidence in par weakens, demand can contract quickly even without deterioration in reserve assets, making governance of infrastructure as important as governance of balance sheets.
