A new MIT study reveals stablecoins face underappreciated systemic risks beyond their reserve assets, including Treasury market bottlenecks and smart contract bugs. The research argues last year’s Genius Act fails to address these vulnerabilities, which could threaten peg stability during periods of market stress or mass redemptions.
Stablecoin growth may have stalled, but the lull might be short-lived if expert predictions are to be believed. Forecasts suggest the market could swell to several trillion dollars by 2030.
New research from MIT suggests critical risks are lurking in plain sight, and that last year’s Genius Act did nothing to address them. The study found that even fully-backed stablecoins can break their peg during market stress as underlying infrastructure buckles.
“A stablecoin’s ability to trade at par under stress depends not only on its asset quality, but on the functioning of redemption mechanisms, markets, and operational infrastructure,” the researchers write. They note the Genius framework leaves these dynamics largely unspecified.
While regulatory focus often centers on reserve assets, broker-dealers in the Treasury market can become a bottleneck. This could limit an issuer’s ability to honor mass redemption requests in a crisis, potentially knocking a stablecoin off its peg and setting off a doom loop.
Technical vulnerabilities in blockchains and smart contracts also pose significant threats. The researchers identify smart contract logic flaws and bridge failures as particularly worrisome risks on their matrix. Operational errors, like the incident where Paxos accidentally minted $300 trillion in PYUSD, demonstrate how easily stability can be briefly disrupted.
The ongoing U.S. debate over stablecoin legislation, currently held up by banks contesting aspects of the Genius Act, may not be Congress’s last battle on the issue if these additional risks remain unaddressed.
