Stablecoin risks: why ‘safe’ digital currency could trigger financial crisis
- Robin Powell
- Sep 8
- 9 min read
Updated: Sep 9
Remember when your bank promised your savings were "completely safe" because they were backed by solid assets? Then 2008 happened, and suddenly those "solid" mortgage securities turned out to be anything but. You watched your pension shrink whilst taxpayers bailed out the very institutions that had gambled with supposedly secure deposits.
Now imagine that same scenario, but this time involving £280 billion of digital tokens that millions believe are as safe as government bonds. Welcome to the stablecoin revolution — a financial innovation that Nobel Prize-winning economist Jean Tirole warns could force governments into "multibillion-dollar bailouts" and which accounting professor Richard Murphy describes as a fundamental threat to economic stability.
If you've never heard of stablecoins, you're not alone. Yet these digital assets now represent a sum equivalent to a major bank failure — the kind that triggered the last global financial crisis. The question isn't whether you should worry about them; it's whether you're prepared for what happens when they unravel.
The new shadow banking: dressed up with blockchain branding
Stablecoins are cryptocurrencies designed to maintain a stable value, typically pegged to the US dollar. Unlike Bitcoin's wild price swings, stablecoins promise the stability of traditional money with the efficiency of digital transactions. Think of them as digital IOUs: you hand over real dollars, and in return receive tokens supposedly backed by an equivalent amount of safe assets like US Treasury bonds.
The appeal is obvious. Stablecoins offer faster, cheaper cross-border payments without the volatility that makes other cryptocurrencies unsuitable for everyday transactions. Major companies now accept them for payments, and they've become the backbone of the cryptocurrency trading ecosystem.
But Tirole, winner of the 2014 Nobel Prize in Economics, sees troubling parallels to the pre-2008 financial system. In a recent Financial Times interview, he warned that stablecoins are creating the conditions for runs and bailouts because they function as "perfectly safe deposits" in the public mind whilst lacking the regulatory protections of actual bank deposits.
Murphy, Emeritus Professor of Accounting Practice at Sheffield University Management School, goes further. In a new video, he argues that stablecoins represent "shadow banking with new branding" — recreating the same dangerous dynamics that nearly destroyed the global financial system in 2008.
The comparison isn't hyperbolic. Just as mortgage-backed securities were marketed as safe investments whilst hiding significant risks, stablecoins present themselves as fully backed by secure assets whilst operating outside traditional banking regulation. The result is the same: privatised profits, socialised losses.
The yield temptation that could destroy everything
Here's where the mechanics become frightening. Stablecoin issuers face the same problem that doomed many financial institutions in 2008: the search for yield.
Tirole explains the trap: backing stablecoins with US government bonds provides relatively low returns, especially when real (after-inflation) yields on Treasury debt can be "negative for a number of years." This creates what he calls the "temptation" to invest in riskier assets with higher returns.
The largest stablecoin issuer, Tether, already demonstrates this drift. With over £120 billion in circulation — representing more than 60% of the entire stablecoin market — Tether's reserves include not just US Treasuries but also gold, Bitcoin, and secured loans. The company recently invested £160 million in a gold-royalty firm, moving further from the simple Treasury-backed model that supposedly guarantees stability.
This is shadow banking in action: promising depositor-like safety whilst chasing returns through increasingly risky investments. When Treasury yields disappoint, the pressure to "enhance" returns becomes irresistible. Sound familiar?
Circle, the second-largest issuer with £48 billion in circulation, maintains simpler reserves of cash and short-term Treasuries. But even Circle faced crisis in 2023 when £2.6 billion of its reserves were frozen at the failed Silicon Valley Bank, briefly causing its stablecoin to lose its dollar peg.
If a "conservatively" managed stablecoin like USDC can face redemption pressure during a single bank failure, what happens when Tether's more exotic reserve mix faces stress?
The political corruption accelerating the crisis
Murphy identifies a crucial factor that makes this crisis more likely: political capture. The Trump administration isn't just enabling stablecoin growth — key officials have direct financial interests in their success.
"Much of their personal wealth will be dependent upon the success of the stablecoin market," Murphy notes. Trump and family members have backed several crypto businesses, including World Liberty Financial, which issues a stablecoin called USD1.
This creates a feedback loop of regulatory weakness precisely when stronger oversight is needed. Tirole warns that "some key members of the [US] administration have a personal financial interest in [cryptocurrency]. And beyond the personal interest, there's ideology."
The result is predictable: regulations designed to protect issuers' profits rather than financial stability. The new US federal framework, whilst requiring full reserve backing, still permits state-level licensing that could create regulatory arbitrage. Multiple supervisors will oversee different aspects of the market, increasing the likelihood that risks fall through bureaucratic cracks.
Compare this to 2008, when regulators looked the other way as banks pursued unsustainable yield strategies. Except this time, the people setting the rules have direct financial stakes in maintaining the bubble.
The illusion of stability hiding in plain sight
The term "stablecoin" itself represents one of the financial industry's most successful marketing campaigns. Academic research reveals that these tokens are far less stable than their name suggests, exhibiting the same dangerous patterns that have preceded previous financial crises.
Comprehensive analysis of the five largest stablecoins from 2018-2022 found that "stablecoins show different extents of deviations from the $1 value, indicating clear evidence of instability" (Duan & Urquhart, 2022). The study documented extreme price swings — one major stablecoin fell to $0.61 whilst another spiked to $6.29. Most concerning, the research found that DAI, a popular crypto-collateralised stablecoin, showed "non-convergent behaviour" where price deviations failed to correct even over long periods.
This instability isn't a technical glitch — it's a fundamental feature of how stablecoins operate under pressure. During the March 2020 COVID-19 crisis, academic researchers documented severe stress in the stablecoin ecosystem. Crypto-collateralised tokens like DAI experienced "mass triggering automatic liquidations" that created price instability and amplified volatility precisely when users needed stability most (Jeger et al., 2020).
Even Tether and USDC, considered the most reliable stablecoins, regularly trade at premiums or discounts to their $1 peg. The research found that "all stablecoins appear to show positive skewness... stablecoins tend to be overpriced more of the time rather than be underpriced," suggesting systematic demand pressures that push prices away from their theoretical anchor.
The implications are profound. If stablecoins cannot maintain stable value during relatively mild market stress — a single bank failure, pandemic-driven volatility, or normal cryptocurrency market fluctuations — how can they be trusted to preserve value during a genuine financial crisis?
The answer lies in understanding what Murphy calls "performance theatre." Stablecoins maintain apparent stability through a combination of market maker intervention, reserve management, and user confidence. But as academic research demonstrates, this stability is conditional rather than guaranteed. When conditions deteriorate, the mechanisms designed to maintain pegs can amplify rather than dampen volatility.
The £182 billion Treasury market bomb
Perhaps most alarming is the scale of stablecoin holdings in government bond markets. Collective stablecoin issuers now hold approximately £145 billion in US Treasuries — making them among the largest government creditors globally, comparable to medium-sized nations.
This creates a dangerous feedback loop. In a crisis, massive stablecoin redemptions would force fire sales of Treasury bonds precisely when government funding markets need stability. The resulting price volatility could spill into pension funds, money market funds, and any institution relying on short-term government debt for liquidity.
Murphy warns that stablecoins "link themselves to the US dollar, but at the same time, they are not dollars." This creates a parallel private currency that undermines central bank control over money supply whilst concentrating systemic risk in unregulated private hands.
When the crisis hits — and both Tirole and Murphy consider it likely rather than possible — the scale ensures it won't remain contained. A £280 billion market meltdown would immediately threaten:
Money market funds holding similar Treasury securities
Banks using short-term government debt for liquidity management
Pension funds exposed to any volatility in government bond markets
Any institution assuming stablecoins are equivalent to cash
The international regulatory patchwork hiding stablecoin risks
Your exposure to stablecoin risks doesn't depend on whether you personally own any digital tokens. The interconnected nature of modern finance means stablecoin instability could reach you through your pension fund, bank, or any financial institution touching global markets.
Yet regulatory responses remain fragmented and inadequate. The EU's Markets in Crypto-assets Regulation requires stronger reserves and oversight, but only for EU-based issuers.
The largest stablecoin operators remain primarily US-based, operating under the new federal framework that prioritises industry accommodation over systemic risk management.
The UK is still consulting on its approach, with implementation planned for later this year. Regulators privately worry about "payment-system contagion" if stablecoins become integrated into retail payment systems, but their proposed rules focus on conduct and safeguarding rather than the systemic risks Murphy and Tirole identify.
This regulatory arbitrage enables the problem to grow. Stablecoin issuers can shop for the most permissive jurisdiction whilst serving global markets. When crisis hits, the costs will be borne by taxpayers worldwide, not just in the countries that failed to regulate properly.
Banking regulators across jurisdictions share common private fears about "run dynamics" and "who backstops whom" when the crisis arrives. Yet political pressure to accommodate "innovation" repeatedly trumps prudential concerns.
The democracy versus oligarchy question
Murphy frames the stablecoin threat in broader terms: this isn't just about financial stability, but about democratic sovereignty. "The debate is not about financial stability. It is about political power. Who controls money creation? governments or private speculators."
Stablecoins effectively privatise money creation, shifting control from democratically accountable central banks to unregulated "crypto oligarchs." When these private currencies inevitably face crisis, democratic governments will face pressure to socialise the losses whilst the oligarchs retain their profits.
This represents a fundamental transfer of economic power from public to private hands. Central banks lose influence over monetary conditions whilst private issuers gain the ability to create money-like instruments without corresponding responsibilities.
The long-term implications extend beyond any single financial crisis. If private money creation replaces public monetary authority, economic policy becomes subordinate to the profit motives of token issuers. Democratic governments lose one of their most fundamental tools for managing economic conditions.
What investors need to know and do
Whether you own stablecoins directly or not, their systemic risks affect your financial security. Here's what the evidence suggests you should do:
Immediate protective actions:
Review any exposure through cryptocurrency holdings, fintech apps, or payment services using stablecoins
Check whether your pension fund or investment portfolio has any direct or indirect cryptocurrency exposure
Ensure your emergency fund and near-term liquidity needs are held in traditional bank deposits or government-backed savings products
Avoid treating any cryptocurrency, including stablecoins, as equivalent to cash or bank deposits
Portfolio positioning for potential crisis:
Maintain adequate cash reserves in traditional banks protected by deposit insurance schemes
Consider that a stablecoin crisis could create volatility in Treasury and government bond markets, affecting any fixed-income holdings
Remember that "flight to quality" during financial crises typically benefits the safest government bonds, but initial volatility is likely
Avoid platforms or services that blur the lines between traditional banking and cryptocurrency services
Political and regulatory awareness:
Support calls for proper regulation of systemically significant stablecoin issuers
Contact your MP about the need for strong UK regulation that prioritises financial stability over industry accommodation
Recognise that weak regulation in any major jurisdiction creates risks for the global financial system
Long-term perspective:
The evidence-based approach that guides sound investing applies equally to monetary systems. Just as diversification reduces portfolio risk, monetary systems need proper regulation, transparency, and democratic accountability to remain stable.
Stablecoins may offer technological advantages for payments and settlement, but these benefits cannot justify recreating the conditions that caused the 2008 financial crisis. The scale and interconnectedness of modern stablecoin markets mean any failure will have far-reaching consequences.
The choice ahead
Tirole and Murphy are warning us about a preventable crisis. The technology behind stablecoins isn't inherently dangerous — the risk lies in allowing private money creation without corresponding public oversight and responsibility.
The political economy of stablecoins mirrors every previous financial bubble: private actors capture enormous profits whilst socialising risks through implicit government guarantees. The difference this time is that the profits flow to crypto oligarchs rather than traditional banking executives, and the regulatory capture operates through ideological sympathy rather than just revolving-door employment.
We can choose to heed these warnings and demand proper regulation that treats systemically important stablecoin issuers like the banks they effectively are. Or we can repeat the 2008 pattern of ignoring expert warnings until taxpayers are forced to clean up the mess.
The £280 billion stablecoin market represents shadow banking with digital branding. Nobel laureates and accounting professors are telling us the emperor has no clothes. The question is whether we'll listen this time, or wait for another crisis to prove them right.
Murphy concludes his analysis with a stark warning: "If we value stability and democracy, governments must act now to shut them down." The alternative is another round of privatised profits, socialised losses, and weakened democratic control over our economic future.
The choice is ours. The consequences will be everyone's.
References
Duan, K., & Urquhart, A. (2022). The instability of stablecoins. Finance Research Letters, 45, 102175.
Jeger, C., Rodrigues, B., Scheid, E. J., & Stiller, B. (2020). Analysis of stablecoins during the global COVID-19 pandemic. In 2020 IEEE International Conference on Blockchain and Cryptocurrency (pp. 1-9).
Klages-Mundt, A., & Minca, A. (2020). While stability lasts: A stochastic model of stablecoins. Proceedings of the 1st ACM Conference on Advances in Financial Technologies, 295-310.
Kjær, T., Nielsen, K., & Sørensen, O. (2021). MakerDAO and decentralized stablecoins during crypto market turbulence. Journal of Risk and Financial Management, 14(8), 347.
Murphy, R. J. (2025, January). Are stablecoins about to crash our economy? [Video]. Tax Research UK.
PREVIOUSLY ON TEBI
TEBI ON YOUTUBE
Have you visited the TEBI YouTube channel lately? There’s already a wide selection of high-quality videos on there. Why not subscribe and be one of the first to see our latest content? You'll also find our videos on Instagram and TikTok.
