Cristiano Oliveira – Head of Research at Rivool Finance

Traditional monetary systems, based on the centralized issuance of currency and the intermediation of commercial banks, play a key role in the global economy. However, their stability depends intrinsically on the trust of the participants. History and economic theory show that crises of confidence can trigger bank runs, events in which the mass withdrawal of funds depletes the system's liquidity and compromises its viability. Well-known episodes, such as the Great Depression and the 2008 financial crisis, exposed these vulnerabilities.

At the same time, the rise of cryptocurrencies, particularly stablecoins, has brought a new dynamic to the financial landscape. Stablecoins, designed to offer greater price stability than conventional cryptocurrencies, have been gaining relevance as payment alternatives and stores of value. However, despite their promises to revolutionize the financial market, stablecoins are not immune to the risks of speculative attacks and "money runs." These events occur when holders of the asset attempt to sell it simultaneously, taking its value to an abrupt drop, often leading it to values close to zero. An example of this was the collapse of the algorithmic stablecoin TerraUSD (UST) in 2022.

In the case of the 2008 crisis, the collapse of Lehman Brothers, until then one of the largest investment banks in the United States, unleashed a wave of panic in global financial markets. This bankruptcy was the culmination of a broader crisis that originated in the subprime mortgage market, characterized by granting subprime loans and securitizing these assets into complex financial instruments. When delinquencies in the real estate sector increased, the devaluation of these assets quickly compromised the liquidity and solvency of financial institutions worldwide. The perception that the banking system was structurally fragile led to a crisis of confidence that paralyzed credit markets, requiring massive interventions by central banks and governments to prevent the total collapse of the financial system.

In the collapse of the algorithmic stablecoin TerraUSD (UST) in 2022, the dynamics differed, but it also involved an abrupt loss of confidence. UST relied on an algorithmic model that sought to maintain its peg to the dollar through automatic supply and demand mechanisms mediated by the LUNA token. However, this system was not backed by real reserves, such as fiat assets or tangible collateral, making it vulnerable to external shocks and speculative attacks. When confidence in the model was shaken, investors began massively liquidating UST and LUNA, creating a downside spiral. This dynamic has made clear the limitations of purely algorithmic models and reinforced the need for more robust and transparent frameworks to ensure the stability of stablecoins. As in the 2008 crisis, the lack of confidence was the main catalyst.

Traditional monetary systems have a series of regulatory mechanisms designed to prevent crises of this type and mitigate their impacts. One of the pillars of this structure is deposit insurance, which protects account holders against losses in the event of bank failure. This mechanism reduces the incentive for mass withdrawals, as depositors know their funds are protected up to a certain limit.

Another central element for confidence in the financial system is the central bank's role as lender of last resort, an essential function for monetary and financial stability. During periods of crisis, central banks can provide emergency liquidity to distressed financial institutions, preventing short-term liquidity problems from turning into solvency crises. This action not only prevents the immediate collapse of individual institutions but also curbs systemic panic, restoring confidence in the market.

The relevance of this mechanism was evident during the 2008 financial crisis. As the credit market "paralyzed" and large financial institutions faced severe difficulties, central banks worldwide implemented extraordinary measures to prevent global collapse. The Fed, for example, established multiple emergency credit programs, significantly expanded the monetary base, and lowered interest rates to historic lows. In addition, it coordinated actions with other major central banks, such as the European Central Bank (ECB) and the Bank of Japan, injecting trillions of dollars into financial markets through repo operations, currency swaps, and acquisitions of troubled assets. These measures helped stabilize markets, restore liquidity, and prevent a more severe global financial system collapse. Demonstrating that the ability to act as a lender of last resort is an indispensable pillar for the resilience of the monetary system.

In addition, ongoing regulatory oversight ensures that banks maintain adequate levels of capital and liquidity to weather economic shocks. Rules such as those in the Basel Accords require banks to hold sufficient reserves to absorb potential losses, reducing the likelihood of insolvency. Combined with monitoring and rapid response systems, these measures help identify risks before they become widespread crises.

In turn, stablecoins still lack robust instruments to prevent crises and ensure stability in times of tension. Despite their promise of price stability, by pegging their value to underlying assets such as fiat currencies, commodities, or cryptocurrencies, these digital currencies face problems in terms of transparency and trust. The collapse of TerraUSD (UST) in 2022 is a clear example of the consequences of such vulnerabilities.

Another emblematic case that highlights the weaknesses of stablecoins occurred with Tether (USDT), the largest stablecoin by market capitalization. In 2022, Tether faced a coordinated speculative attack by hedge funds, which sought to profit from a potential loss of USDT's peg against the U.S. dollar. These funds carried out short-selling operations, betting on the devaluation of the stablecoin. While Tether has managed to maintain its peg and demonstrated resilience, the episode has made it clear that stablecoins, even if widely used, are also subject to speculative shocks.

In the case of stablecoins, the main risk factor is the lack of clarity about the reserves that guarantee their peg. Issuers often do not provide sufficient information about these assets' composition, liquidity, or location, which fuels suspicion. When investors begin to doubt a stablecoin's ability to honor large withdrawals, it can generate a chain reaction of mass withdrawals, leading to a loss of peg. This risk is enhanced by the interconnectedness of the crypto asset market, where stablecoins are widely used as a medium of exchange and collateral in smart contracts, amplifying the impacts of a crisis.

In addition, the absence of a clear regulatory and enforcement framework amplifies the risks associated with stablecoins. While traditional financial systems rely on decades of experience accumulated by central banks and regulators in crisis management, the stablecoin market operates in a decentralized environment, often beyond the reach of conventional supervisory mechanisms. This regulatory gap makes implementing effective measures to contain crises difficult and increases investors' exposure to systemic failures, especially in high-volatility scenarios.

Recognizing these challenges, the European Union recently implemented the Markets in Crypto-Assets Regulation (MiCA), which seeks to tackle the problems of stablecoins through a traditional command-and-control approach. This regulation sets strict requirements, including the need for prior authorization to operate in the European market, regular audits, greater transparency about the reserves that back these currencies, and the submission of risk management plans. In addition, intending to mitigate risks to financial stability and the payment system, MiCA limits the use of stablecoins as a means of payment when they reach significant levels of circulation.

MiCA had already significantly impacted the stablecoin market before it came into force. Tether, for example, announced the discontinuation of its euro-pegged stablecoin (EURT). Although he denies it, many believe this action responds to new regulatory requirements. In addition, Coinbase, one of the largest European exchanges, communicated the delisting of USDT from its platform, claiming compliance with the latest regulations in force. By imposing too many restrictions, European regulation has passed the optimal point. This, in a way, keeps the debate on how to find a balance between ensuring the security of the financial system and fostering technological innovation in the crypto asset sector.

It is undeniable that stablecoins represent a promising innovation in the global financial landscape, offering solutions to problems such as the volatility of traditional cryptocurrencies and the need for faster domestic and international digital transactions at lower costs. However, these digital currencies are not immune to problems, including the risk of speculative runs and attacks. As in the traditional financial system, trust is central to its stability.

The traditional financial system has undergone decades of evolution and refinement to deal with crises, developing mechanisms such as deposit insurance, financial safety nets, and the role of central banks as lenders of last resort. While these advances have reduced the frequency and intensity of crises, they still occur, demonstrating that even consolidated systems remain vulnerable to shocks and uncertainties.

On the other hand, the stablecoin market is still in its early stages of learning and development. As these digital currencies gain relevance, the challenge lies in identifying and implementing the best practices and frameworks that ensure their stability and security. This requires an ongoing effort to address issues such as transparency, reservation management, and user trust.

For stablecoins to reach their full potential, regulation must balance strict supervision and stimulating innovation and competition. In this sense, a regulatory approach that ensures investor protection but does not inhibit technological development will be essential for the continuous improvement of this market. With a solid governance foundation and robust practices, stablecoins can consolidate as reliable financial instruments integrated into the global financial system, promoting benefits for users, issuers, and the financial ecosystem.

Cristiano Oliveira – Head of Research at Rivool Finance