By Sayee Srinivasan and Yikai Wang
There is a broadly held view that if payment stablecoins are backed one-to-one with safe, liquid assets, users will be able to redeem the stablecoins at par, even during market stress. The presumption is that the underlying assets are safe in the sense of having negligible exposure to credit risk (the risk that the counterparty will not fulfill its obligation) and that they also have little to no market liquidity risk (the risk that the security can’t be sold or monetized at its fair value). A lack of market liquidity would mean that the stablecoin issuer is exposed to funding and liquidity risk and would not be able to raise enough cash to redeem the stablecoin at par (convert $1 of stablecoin into $1 of cash). This assumption about negligible market liquidity risk is especially critical for an instrument designed to serve as a means of payment and rests on the ability of stablecoin issuers to liquidate their T-bills and reverse repo positions at par.
In this essay, we examine the assumption of no market liquidity risk by digging into the market structure for one of the key underlying assets for payment stablecoins: short-term U.S. Treasurys. The general presumption is that short-term Treasurys are highly liquid even during times of stress. Our analysis indicates that this is a highly questionable presumption, especially when there is massive selling pressure, and might not be based on any robust study of secondary market liquidity of T-bills. Because Treasury securities are so widely held, U.S. authorities remain concerned about the lack of resilience (from a trading and liquidity risk perspective) of the broader Treasury securities markets. Accordingly, in times of stress when there will be a dash for cash, with stablecoin customers looking to move around their payment stablecoin holdings and to convert them into cash, payment stablecoin issuers could struggle (and indeed likely will) to liquidate the underlying assets and exacerbate market stress.
Payment stablecoins: akin to money market mutual funds in structure though not purpose
Researchers have compared money market mutual funds and payment stablecoins and concluded that versions of the latter backed by highly liquid assets (as envisioned under the Genius Act), “demonstrate remarkable similarities to MMFs.” This comparison raises the obvious question about whether payment stablecoins will be subject to run risks (the risk that large numbers of holders of these instruments will seek to redeem or convert them into cash at the same time), similar to what has been observed in the past with MMFs. Studies by ABA economists and other researchers have concluded that, as with MMFs, payment stablecoins too are subject to run risk.
There is an important difference though between these two different types of instruments — as reflected in the name, payment stablecoins are custom-designed to serve as a medium of exchange. MMFs serve as a store of value — which is why these funds are allowed to pay interest or return or yield to the holders of these assets. And via the Genius Act, Congress has expressly prohibited issuers of payment stablecoins from paying any interest or return or yield to holders of these instruments.
Liquidity risk in MMFs
Liquidity risks of MMFs are well understood and have been studied deeply by both academics and market participants. There is extensive literature of these risks in the context of equity markets (for example, here, here, here, and here), various fixed income instruments like longer-dated Treasurys (here, here, here) and corporate bonds (here, here and here). A robust regulatory regime for MMFs includes minimum liquidity requirements for the funds, reporting requirements, and the ability to impose liquidity fees “when a fund experiences daily net redemptions that exceed 5 percent of net assets, unless the fund’s liquidity costs are de minimis.” Earlier rules allowed MMFs to “gate their funds” to restrict or even suspend redemptions.
From the perspective of an investor, any gating-style limits on redemptions or liquidity fees for redemption introduces an explicit liquidity risk element in the MMF investment. It causes “investors and managers alike to think twice about risky yield-chasing and would serve as a stark reminder to MMF investors that MMFs are not equivalent to bank accounts.”
But . . . MMFs are not used for payments
MMFs are a store of value, and various investors (retail and businesses) use them as cash or treasury management instruments. While some might offer check-writing privileges, they are viewed as more of a place to park cash than to be used for making payments, or as a medium of exchange. Hence, a gating restriction or a liquidity fee might be acceptable to the investor. But such restrictions will not make sense for payment stablecoins, which are meant to serve as a medium of exchange. Being able to convert the instrument into cash is a necessary condition for it to serve as a medium of exchange. Otherwise, as we describe below, the instrument is akin to a casino chip — a medium of exchange within the casino only.
Per current market practice, retail investors typically transact on crypto trading platforms to convert their stablecoin holdings into cash and vice versa. Given that institutional investors would be willing to take on the risk exposure and associated cost of going to the exchanges to convert their stablecoins into cash, some issuers offer an option of direct redemption. The presumption to date has been that payment stablecoins can be instantaneously converted into cash at par – in risk terms, that payment stablecoins do not have any market or funding risk and that the assets backing them can be liquidated without incurring any losses.
Information about the underlying assets (or reserves composition) of two of the dominant U.S. dollar stablecoins is available here and here; it is instructive to note that as of September 31, 2025, the latter (which is also the largest payment stablecoin) had about 12.57% of its reserves invested in bitcoins and precious metals. Between the two, a substantial fraction of the reserves is held in U.S. T-bills and overnight reverse repurchase agreements. As a matter of fact, reflective of the systemically important footprint of payment stablecoin issuers in the T-bills market, one of the issuers was the seventh-largest buyer of T-bills in 2025.
Liquidity of T-bills during stressed market conditions
The Genius Act requires that if payment stablecoin reserves are invested in Treasury bills, notes or bonds, that these either have remaining maturity of 93 days or less, or be issued with a maturity of 93 days or less. There is a presumption among policymakers and many market participants that T-bills are essentially risk-free, cash equivalents and thus that it should be easy or relatively costless to liquidate a Treasury security that will mature in 93 days or less.
This ought to be true during normal market conditions. But research on secondary market trading liquidity of T-bills appears to be sparse at best; any trading that occurs happens over-the-counter, and is facilitated by dealers. Moreover, given the short-dated nature of these instruments, the expectation is that most investors will hold them until maturity. This will especially be the case for very short-dated T-bills; hence, the under-developed nature of the secondary market for T-bills relative to longer-dated Treasury securities like the 10-year note.
There is little, if any, research on liquidity in T-bills during stressed market conditions. Most of the analytical efforts have been focused on Treasury notes (these have terms of two, three, five, seven or ten years) and bonds (20 or 30 years). Ironically, until as recently as the morning of October 15, 2014, the presumption among relevant U.S. agencies was that liquidity risk for these notes and bonds, and especially the on-the-run (typically the most recently issued series) versions of these securities, was negligible. On that day in 2014 during the so-called “Flash Rally,” U.S. authorities and market participants discovered that the market structure for even on-the-run 10-year Treasury notes can experience extreme intraday volatility. Secondary market liquidity in these systemically important securities remains susceptible to shocks even today (and here).
Unfortunately, these studies have ignored liquidity risk in T-bills during stressed market conditions. Issuance of T-bills (as a share of total Treasury debt issuance) has grown in recent years, but there is no evidence that secondary market trading liquidity has kept pace. Limited capacity or willingness of dealers to allocate risk capital and intermediate when payment stablecoin issuers are engaged in fire sales of T-bills will surely contribute to and exacerbate market dysfunction during stressed market conditions. T-bills can be repo’d, but concerns still remain about the resiliency of overnight money markets, raising questions about the ability of payment stablecoin issuers to convert their T-Bills into cash on days like September 16 and 17, 2019, when overnight money market rates spiked and exhibited significant volatility. These enduring concerns about overnight money markets is one of the reasons why the Federal Reserve has been unable to shrink the size of its balance sheet.
Liquidity risk limits stablecoins’ role in the financial market
An initial assessment from some experts in trading and risk management reflects a lack of confidence in the viability of payment stablecoins to play the role of the “default settlement layer for tokenized markets.” These concerns emanate from the liquidity risks inherent to payment stablecoins. The events of October 10, 2025, provide a telling example, when a confluence of events on that day resulted in a dash for cash in the crypto markets.
Academic research also provides evidence that payment stablecoins are not immune to liquidity and run risks. It highlights the adoption of certain policies, for example, limiting the number of customers who can redeem stablecoins for cash in a month, to mitigate some of this risk among some payment stablecoin issuers. However, these mitigants might actually end up amplifying the run risk for these instruments. Other recent studies highlight the liquidity risks emanating not just from transaction flows in payment stablecoins but also from leverage and other practices common to crypto markets.
Emerging evidence indicates that some institutions are already considering alternatives to payment stablecoins for tokenized or on-chain transactions. The discussion at a Federal Reserve event among a group of market participants on a panel titled “Tokenized Products” at a recent event, especially the discussion starting at 20:00 and 37:50, delves deeper into risk considerations in adopting payment stablecoins for some of these use cases.
The casino chips analogy
One popular analogy used to describe liquidity risks from using stablecoins compares them to casino chips — as long as you are using those chips within that casino, whether to pay for your lodging, for your food and drinks, or for gaming, concerns about the ability to convert the coins into fiat money is a non-issue. As payment stablecoins are being evaluated for use as a potential substitute for fiat money typically represented as bank deposits, seamless, riskless, costless convertibility or exchangeability into fiat and vice versa will be critical. Returning to the casino chip analogy, the chip will have to be fungible with chips issued by other casinos in the neighborhood and accepted at face value.
Casino chips clearly do not have what is called the “singleness of money,” where coins issued by different casinos are accepted by all (other casinos and local businesses for instance) without questioning. Among other reasons, the liquidity considerations highlighted above will prevent payment stablecoins from achieving this singleness of money, at least at this stage of the development of this market.
Conclusion
If the intent of policy makers and market participants is to help position payment stablecoins as near-money or even cash equivalent instruments for broad-based use in the financial system, the liquidity risks inherent to payment stablecoins could potentially amplify risks during episodes like those witnessed in the dash for cash in March 2020. Extensive research provides strong evidence that trading (and hence liquidity) in even the most liquid instruments, Treasury securities for example, can be disrupted during such episodes. Adding another instrument to the mix, one dependent on liquidity in Treasurys and associated repo markets, will likely magnify interconnected risk and the resulting contagion during stressed market conditions. An excellent analysis of the manifestation of these dynamics is available here.
Serious questions remain about the liquidity risks posed by of payment stablecoins and their ultimate role in the global monetary system. Unlike bank deposits, they lack the singleness of money, do not have central bank backing in the form of access to additional reserves, and in their current use case as a means of exchange for illicit activity, lack the integrity of the monetary system. Caveat emptor.
Sayee Srinivasan is chief economist at ABA. Yikai Wang is VP for banking and economic research at ABA.
