Systemic bank run risk looms over Congressional stablecoin bills

Reports revealed that the boom in stablecoins like USDT and USDC has renewed fears about the looming risks these tokens bring to the crypto industry and the overall financial system. Ongoing debate has focused on how the coins could be vulnerable to the kind of bank runs that paralyzed the financial system during past financial crises.

Bloomberg noted that the Trump administration and Congress were both pushing to cement the growing importance of stablecoins, with two bills designed to give stablecoins a bigger role in the global payments infrastructure already running through the House and Senate. Washington’s interest, including vocal support from President Donald Trump, helped encourage the steady flow of new money into the stablecoins sector—even as other sectors of the crypto industry struggled—bringing the total value to over $230B.

However, Senator Elizabeth Warren said that the bill lacked the basic safeguards necessary to ensure that stablecoins did not blow up the entire financial system. She added that the bill allowed stablecoin issuers to invest in risky assets, including assets that were bailed out in 2008. The Reserve Primary Fund broke its intended peg to the dollar as investors lost confidence in the $785M in Lehman Brothers’ debt backing it, which triggered the broader run on money-market funds that spread chaos through the financial system.

Stablecoin bill faces systemic bank run risk

President Trump’s latest push for stablecoin regulation at the Digital Asset Summit signalled major catalysts ahead for crypto markets. The Senate Banking Committee voted 18-6 on March 13th to advance the bill regulating stablecoin. GC Cooke, the founder and CEO of Brava, claimed that banks were desperately launching stablecoins to save themselves, adding that JP Morgan, Citi, and Charles Schwab knew what was coming.

However, Senator Warren expressed less faith in the bill, saying that anyone who thought the U.S. taxpayer would not be called on–whether directly or indirectly–to bail out these guys was kidding themselves. Reportedly, researchers at the Federal Reserve Bank of New York and the Financial Stability Oversight Council called attention to these run risks in multiple papers published last year, and various central bankers have spoken about the risks in recent speeches.

“If a run on a large stablecoin were to occur, liquidation of the assets backing the stablecoin could be disruptive, especially if those assets were linked to other funding markets.”

-Lisa D. Cook, a governor on the Federal Reserve’s board

Matthew Bisanz, a financial regulatory partner at Mayer Brown, doubted whether a U.S. dollar-backed stablecoin that is denominated in U.S. dollars could be vulnerable to a run because the coin can always pay the redeemer in U.S. dollars. 

He, however, acknowledged that if those dollars were deposited at a bank and the bank needed to liquidate assets to fund withdrawals by the stablecoin holders, then there could be a run. But that would be the same type of run that could happen to any fractional reserve depository.

Lutnick and Bessent say legitimizing stablecoins helps strengthen the U.S. dollar

📣 Congress is hashing out the stablecoin scene while kicking CBDCs to the curb! During a March 11 hearing, lawmakers dug into how stablecoins could jazz up payments without Uncle Sam breathing down our necks. They believe stablecoins keep the dollar king 🏆, while CBDCs just… pic.twitter.com/hlWOiEfIiD

— Crynet (@crynetio) March 23, 2025

Howard Lutnick, Trump’s Secretary of Commerce, and Treasury Secretary Scott Bessent said that legitimizing stablecoins helped firm up the U.S. dollar’s dominance as a global reserve currency. If the bill is passed, stablecoin issuers would need to be licensed and back their tokens one-to-one with approved assets like cash, short-term US Treasury bills, repurchase agreements and money-market funds.

However, a professor emeritus at George Washington University Law School, Arthur E. Wilmarth Jr., published a policy report last month calling attention to some of the vulnerabilities that the proposed legislation did not address. Wilmarth pointed out that even safe, short-term US Treasury bills, which would be allowed into reserves in the proposed legislation, were vulnerable to bank runs and had been frozen up during previous crises. He also noted that Circle’s USDC only managed to recover its peg in 2023 after federal regulators stepped in to cover all of Silicon Valley Bank’s uninsured depositors.

Former Federal Reserve board member Nellie Liang held a different opinion, saying that the recent amendments to the GENIUS Act would force stablecoin issuers to hold cash-like assets, which should be safe even in the run. She added that reserve assets had to be ‘very safe and very liquid’ for stablecoins to function without causing or posing risk to financial stability, 

Cryptopolitan Academy: Tired of market swings? Learn how DeFi can help you build steady passive income. Register Now