What's the risk?
21 Jan 2026
Karl Loomes, group editor of The Digital Assets Edge, examines how risk is distributed across the stablecoin stack — from issuers and banks to liquidity providers and users — and why treating stablecoins as ‘digital cash’ can obscure where exposure really sits
Image: rapeepat/stock.adobe.com
Often considered to be ‘digital cash’, the ease and convenience of stablecoins often underlies a deeper truth — they are complex technological and financial instruments, whose correct and efficient functioning relies on myriad institutions and rails to work well.
From issuer to end user, every element is linked and essential. When talking about risks however, the story is less uniform. While there are some risk factors, such as legislation and technical issues, that are essentially universal across participants, for the most part, each player faces its own unique concerns.
In the beginning
With stablecoins, it all starts with the issuer. These firms mint their respective stablecoins, backing them up with (usually) high-quality liquid assets (HQLAs), in order to maintain their stated peg. For fully reserved fiat-backed models, issuers aim to maintain reserves at least equal to tokens outstanding. This is the very nature that equates stablecoins to digital cash. In effect, an issuer makes a promise that a stablecoin token can always be exchanged for real money at a specific rate. This promise is where most of the risks for an issuer lie.
Redemption risk. As the name suggests, one key risk issuers face is when demand to exit a stablecoin (and therefore redeem their tokens for cash) exceeds the issuer’s ability to process the requests. This does not mean the underlying assets are not in place, more that throughput, operational capacity, and/or gating mechanisms hinder the process. With pegged assets still existing, this is more likely to cause friction than outright failure, with delays, caps, and redemption prioritisation coming into play. This can, of course, impact the next risk facing issuers.
Confidence risk. As with traditional cash and commercial banks, if sentiment and confidence in a currency or institution start to plummet, it can cause a run. Stablecoins are no different. As with all markets, fear and greed often outweigh fundamentals. The near-instant ability to exit a stablecoin (as opposed to traditional funds, for example), can lead to a self-fulfilling prophecy. Demand to redeem the coins can come in fast, due to a real or perceived problem, and when other holders think there is trouble, they rush to redeem their own tokens before things really do go wrong — bringing about the very problem they were concerned of.
Liquidity risk. While redemption risk can be seen as problems with throughput, liquidity risk related to the pegged assets themselves. Even if the right value of assets for minted tokens is held, problems can still arise. At times of financial stress and uncertainty for example, even the most liquid of assets (such as short-term US Treasury bonds and notes) may struggle to find a buyer. The issuer is obliged to exchange cash for the redeemed token, but if it can not sell assets quickly enough, it fails in this. At the very least, the issuer may be forced to ‘sell them cheap’, suffering a loss in order to meet redemption demand.
Control risks. By their nature, issuers usually hold almost all technical and legal control over stablecoins — the ability to mint, burn, and freeze tokens, for example, and to control blacklist addresses. Errors, misuse, as well as external forces and actions (both legitimate and illegitimate) are all risks an issuer faces.
Regulatory risk. Though regulatory risk may impact all aspects of the stablecoin stack, the issuers are arguably currently most under the spotlight. In many ways this is still an emerging technology, with regulators playing catch up in their response. A shift in the laws and requirements governing stablecoins can hit issuers hard, from additional costs to business-ending activity restrictions. Add to this the global nature of stablecoins and the varying regional regulations they may face, and this risk is exacerbated even further.
Taken together, issuer risks underline a simple but often overlooked point: stablecoins are only as stable as the issuer’s ability to honour its promise under pressure. Most failures are unlikely to come from outright fraud or missing assets, but from friction — delays, uncertainty, or loss of confidence at precisely the wrong moment.
Where the money actually sits
If issuers make the promise, banks and custodians are where that promise is put into practice. These institutions hold the cash and other assets that back stablecoins, provide the accounts through which redemptions are settled, and ensure assets are safeguarded in line with legal and regulatory requirements.
In theory, this layer should be the most stable part of the system — after all, stablecoins are typically backed by cash, government bonds, or similar low-risk instruments held with regulated financial institutions. In practice, however, banks and custodians introduce their own set of risks, many of which only become visible during periods of stress.
Access risk. Perhaps the most misunderstood risk in the stablecoin stack is access risk. This arises not because backing assets are impaired, but because they are temporarily unreachable. Accounts can be frozen, payments delayed, or transfers blocked due to operational issues, compliance checks, sanctions screening, or regulatory intervention. From the outside, this can look identical to liquidity risk faced by issuers, but the distinction matters: the money exists, yet cannot be used.
Bank failure risk. Stablecoin reserves are often concentrated across a relatively small number of banking partners. While these banks are typically well-regulated, their failure or entry into resolution can immediately trap backing assets, even if only temporarily. Importantly, this risk sits outside the issuer’s direct control. An issuer can be solvent, well-capitalised, and operationally sound, yet still be unable to access reserves because a banking partner has failed. In such cases, the stablecoin itself becomes a casualty of traditional financial system fragility.
Operational risk. Banks and custodians run complex systems involving payments, reconciliations, authorisation processes, and human decision making. Outages, processing backlogs, staffing issues, or internal controls can all delay the movement of funds. This risk is amplified by a mismatch in expectations — stablecoins operate continuously, while much of the underlying banking infrastructure does not. The result is a structural tension between always-on digital assets and time-bound, jurisdiction-specific financial plumbing.
Concentration risk. Efficiency often drives issuers to centralise reserves with a limited set of banks, custodians, or money market structures. While this simplifies operations, it also creates single points of failure.
If one institution experiences issues — whether operational, regulatory, or reputational — the impact can ripple across the entire stablecoin system. Concentration turns what might otherwise be a manageable counterparty issue into a systemic vulnerability.
Regulatory spillover risk. Banks and custodians operate under national regulatory regimes that may not align neatly with the global nature of stablecoins.
Changes in supervisory posture, heightened scrutiny of crypto-related activity, or outright restrictions can disrupt reserve access without directly targeting the issuer. These indirect interventions can be just as disruptive as issuer-focused regulation, particularly when they occur with little warning.
Taken together, banking and custodian risks highlight a central reality: stablecoins are only as reliable as the traditional financial infrastructure that supports them.
Even when reserves are high quality and fully funded, disruption can occur if access, control, or legal certainty breaks down at this layer of the stack.
Where stability is tested
If issuers make the promise and banks and custodians hold the backing, liquidity providers are where stablecoins are tested in real time. These firms — market makers, trading desks, and liquidity venues — ensure stablecoins can be bought and sold at their intended value across exchanges, blockchains, and payment rails. Their role is often invisible when things are working well, but it is here that stress first becomes visible to the market.
Market stress risk. Liquidity providers are exposed when demand to sell overwhelms normal trading conditions. In periods of uncertainty, order books thin rapidly, spreads widen, and even modest sell pressure can move prices.
For stablecoins, which are expected to trade at or very close to par, this creates an immediate signal that something may be wrong — regardless of whether reserves remain intact.
Withdrawal risk. Liquidity provision is discretionary. Market makers are not obliged to stand in during periods of stress, and when volatility increases or information becomes uncertain, they may step back to protect their own balance sheets. This withdrawal can be rational from the liquidity provider’s perspective, but it removes the very mechanism that keeps stablecoins trading smoothly. The result is often a sudden deterioration in price stability.
Depeg risk. When liquidity dries up, stablecoins can trade below their intended value even if redemptions remain available. These price deviations are not just technical anomalies; they act as confidence shocks. A temporary depeg can prompt holders to exit preemptively, feeding into redemption demand and accelerating pressure elsewhere in the system.
Feedback loop risk. Stablecoin markets are highly reflexive. Falling prices create fear, fear leads to selling, and selling worsens price dislocation. Liquidity providers sit at the centre of this feedback loop. Once market dynamics turn, restoring stability can require far more liquidity than was needed to maintain it in the first place.
Exposure to upstream failures. Liquidity providers are also indirectly exposed to issuer, banking, and custodial risks. Rumours of reserve problems, access issues, or regulatory action can be enough to alter trading behaviour, even before any concrete failure occurs. In this sense, liquidity providers often react to risk rather than cause it — but their reaction is what makes risk visible to everyone else.
Liquidity provider risk illustrates a critical point: stablecoins do not fail quietly.
Long before redemptions halt or reserves are questioned, stress shows up in the market. Prices move, spreads widen, and confidence erodes. For institutions watching closely, liquidity behaviour is often the earliest warning sign that something in the system is beginning to strain.
Where the risk finally lands
If issuers make the promise, banks and custodians hold the backing, and liquidity providers keep the system functioning day to day, users are where stablecoin risk ultimately crystallises. These users — banks, asset managers, trading firms, payment companies, and corporations — may not control the system, but they rely on it. When something breaks elsewhere in the chain, it is users who feel the impact first and most directly.
Access risk. For users, the most immediate risk is losing access to funds when they are needed. A stablecoin can be fully backed, actively trading, and legally sound, yet still be unusable if transfers are blocked, redemptions are delayed, or intermediaries restrict activity. For institutions using stablecoins in settlement, treasury, or collateral workflows, even short interruptions can have knock-on effects far beyond the digital asset itself.
Timing risk. Stablecoins are often adopted to improve speed and efficiency, but this creates its own exposure. Institutions may find themselves solvent but illiquid at critical moments, unable to move or redeem funds in time to meet obligations. This timing mismatch is particularly acute during periods of market stress, when access constraints and liquidity pressures tend to emerge simultaneously.
Intermediary risk. Most institutional users do not interact directly with stablecoin issuers. Instead, they rely on exchanges, brokers, custodians, or payment providers to access and move funds. Each additional intermediary introduces counterparty, operational, and governance risk.
If any one of these entities fails, restricts activity, or changes its policies, users may be left exposed despite holding what appears to be a low-risk asset.
Legal and claims risk. In the event of a failure elsewhere in the system, users face uncertainty around their legal position. Questions over ownership, priority of claims, and jurisdiction can delay access to funds or alter recovery outcomes. Unlike traditional bank deposits, stablecoin holdings often sit outside well-established resolution frameworks, leaving users exposed to legal ambiguity during stress events.
Operational dependency risk. Stablecoins rely on a long chain of interconnected systems — blockchains, wallets, compliance tools, banking rails, and internal controls. A failure in any one of these components can disrupt the entire workflow. For users, this means that stablecoin risk is not confined to market movements or issuer behaviour, but embedded in the operational complexity of the system itself.
User risk highlights the final and most important reality of the stablecoin ecosystem: control and exposure are rarely aligned. Institutions may adopt stablecoins to reduce friction and increase efficiency, yet remain dependent on decisions and systems they do not control.
When stress emerges, it is users who absorb the practical consequences, regardless of where the original fault lies.
Risk does not disappear
Taken as a whole, the stablecoin stack reveals a simple but uncomfortable truth: risk is not removed by tokenisation, nor by reserve disclosures or real-time settlement.
It is redistributed. Each participant in the system carries a different form of exposure, and while those risks may sit in different places, they are tightly interconnected.
When stress emerges at one point in the chain, it rarely stays contained.
What makes stablecoins particularly challenging from a risk perspective is that failure is more likely to manifest as friction than collapse.
Delays, access restrictions, price dislocations, and operational uncertainty are all enough to undermine confidence, even when no assets are missing and no rules have been broken.
For institutions using stablecoins as settlement tools, treasury instruments, or operational cash, these second-order effects matter just as much as solvency.
The danger, then, is not that stablecoins are inherently unsafe, but that they are often treated as simpler than they are.
Labelled as ‘digital cash’, they are frequently assumed to behave like cash in all circumstances.
In reality, they sit somewhere between money, infrastructure, and financial product, relying on a web of private firms, traditional financial institutions, and technical systems to function as intended. For institutions looking to scale stablecoin usage, the key question is not whether the token itself is stable, but whether the full chain supporting it is resilient under pressure.
Understanding where risk sits and crucially, where it does not, is now a prerequisite for treating stablecoins as anything more than a convenience layer.
From issuer to end user, every element is linked and essential. When talking about risks however, the story is less uniform. While there are some risk factors, such as legislation and technical issues, that are essentially universal across participants, for the most part, each player faces its own unique concerns.
In the beginning
With stablecoins, it all starts with the issuer. These firms mint their respective stablecoins, backing them up with (usually) high-quality liquid assets (HQLAs), in order to maintain their stated peg. For fully reserved fiat-backed models, issuers aim to maintain reserves at least equal to tokens outstanding. This is the very nature that equates stablecoins to digital cash. In effect, an issuer makes a promise that a stablecoin token can always be exchanged for real money at a specific rate. This promise is where most of the risks for an issuer lie.
Redemption risk. As the name suggests, one key risk issuers face is when demand to exit a stablecoin (and therefore redeem their tokens for cash) exceeds the issuer’s ability to process the requests. This does not mean the underlying assets are not in place, more that throughput, operational capacity, and/or gating mechanisms hinder the process. With pegged assets still existing, this is more likely to cause friction than outright failure, with delays, caps, and redemption prioritisation coming into play. This can, of course, impact the next risk facing issuers.
Confidence risk. As with traditional cash and commercial banks, if sentiment and confidence in a currency or institution start to plummet, it can cause a run. Stablecoins are no different. As with all markets, fear and greed often outweigh fundamentals. The near-instant ability to exit a stablecoin (as opposed to traditional funds, for example), can lead to a self-fulfilling prophecy. Demand to redeem the coins can come in fast, due to a real or perceived problem, and when other holders think there is trouble, they rush to redeem their own tokens before things really do go wrong — bringing about the very problem they were concerned of.
Liquidity risk. While redemption risk can be seen as problems with throughput, liquidity risk related to the pegged assets themselves. Even if the right value of assets for minted tokens is held, problems can still arise. At times of financial stress and uncertainty for example, even the most liquid of assets (such as short-term US Treasury bonds and notes) may struggle to find a buyer. The issuer is obliged to exchange cash for the redeemed token, but if it can not sell assets quickly enough, it fails in this. At the very least, the issuer may be forced to ‘sell them cheap’, suffering a loss in order to meet redemption demand.
Control risks. By their nature, issuers usually hold almost all technical and legal control over stablecoins — the ability to mint, burn, and freeze tokens, for example, and to control blacklist addresses. Errors, misuse, as well as external forces and actions (both legitimate and illegitimate) are all risks an issuer faces.
Regulatory risk. Though regulatory risk may impact all aspects of the stablecoin stack, the issuers are arguably currently most under the spotlight. In many ways this is still an emerging technology, with regulators playing catch up in their response. A shift in the laws and requirements governing stablecoins can hit issuers hard, from additional costs to business-ending activity restrictions. Add to this the global nature of stablecoins and the varying regional regulations they may face, and this risk is exacerbated even further.
Taken together, issuer risks underline a simple but often overlooked point: stablecoins are only as stable as the issuer’s ability to honour its promise under pressure. Most failures are unlikely to come from outright fraud or missing assets, but from friction — delays, uncertainty, or loss of confidence at precisely the wrong moment.
Where the money actually sits
If issuers make the promise, banks and custodians are where that promise is put into practice. These institutions hold the cash and other assets that back stablecoins, provide the accounts through which redemptions are settled, and ensure assets are safeguarded in line with legal and regulatory requirements.
In theory, this layer should be the most stable part of the system — after all, stablecoins are typically backed by cash, government bonds, or similar low-risk instruments held with regulated financial institutions. In practice, however, banks and custodians introduce their own set of risks, many of which only become visible during periods of stress.
Access risk. Perhaps the most misunderstood risk in the stablecoin stack is access risk. This arises not because backing assets are impaired, but because they are temporarily unreachable. Accounts can be frozen, payments delayed, or transfers blocked due to operational issues, compliance checks, sanctions screening, or regulatory intervention. From the outside, this can look identical to liquidity risk faced by issuers, but the distinction matters: the money exists, yet cannot be used.
Bank failure risk. Stablecoin reserves are often concentrated across a relatively small number of banking partners. While these banks are typically well-regulated, their failure or entry into resolution can immediately trap backing assets, even if only temporarily. Importantly, this risk sits outside the issuer’s direct control. An issuer can be solvent, well-capitalised, and operationally sound, yet still be unable to access reserves because a banking partner has failed. In such cases, the stablecoin itself becomes a casualty of traditional financial system fragility.
Operational risk. Banks and custodians run complex systems involving payments, reconciliations, authorisation processes, and human decision making. Outages, processing backlogs, staffing issues, or internal controls can all delay the movement of funds. This risk is amplified by a mismatch in expectations — stablecoins operate continuously, while much of the underlying banking infrastructure does not. The result is a structural tension between always-on digital assets and time-bound, jurisdiction-specific financial plumbing.
Concentration risk. Efficiency often drives issuers to centralise reserves with a limited set of banks, custodians, or money market structures. While this simplifies operations, it also creates single points of failure.
If one institution experiences issues — whether operational, regulatory, or reputational — the impact can ripple across the entire stablecoin system. Concentration turns what might otherwise be a manageable counterparty issue into a systemic vulnerability.
Regulatory spillover risk. Banks and custodians operate under national regulatory regimes that may not align neatly with the global nature of stablecoins.
Changes in supervisory posture, heightened scrutiny of crypto-related activity, or outright restrictions can disrupt reserve access without directly targeting the issuer. These indirect interventions can be just as disruptive as issuer-focused regulation, particularly when they occur with little warning.
Taken together, banking and custodian risks highlight a central reality: stablecoins are only as reliable as the traditional financial infrastructure that supports them.
Even when reserves are high quality and fully funded, disruption can occur if access, control, or legal certainty breaks down at this layer of the stack.
Where stability is tested
If issuers make the promise and banks and custodians hold the backing, liquidity providers are where stablecoins are tested in real time. These firms — market makers, trading desks, and liquidity venues — ensure stablecoins can be bought and sold at their intended value across exchanges, blockchains, and payment rails. Their role is often invisible when things are working well, but it is here that stress first becomes visible to the market.
Market stress risk. Liquidity providers are exposed when demand to sell overwhelms normal trading conditions. In periods of uncertainty, order books thin rapidly, spreads widen, and even modest sell pressure can move prices.
For stablecoins, which are expected to trade at or very close to par, this creates an immediate signal that something may be wrong — regardless of whether reserves remain intact.
Withdrawal risk. Liquidity provision is discretionary. Market makers are not obliged to stand in during periods of stress, and when volatility increases or information becomes uncertain, they may step back to protect their own balance sheets. This withdrawal can be rational from the liquidity provider’s perspective, but it removes the very mechanism that keeps stablecoins trading smoothly. The result is often a sudden deterioration in price stability.
Depeg risk. When liquidity dries up, stablecoins can trade below their intended value even if redemptions remain available. These price deviations are not just technical anomalies; they act as confidence shocks. A temporary depeg can prompt holders to exit preemptively, feeding into redemption demand and accelerating pressure elsewhere in the system.
Feedback loop risk. Stablecoin markets are highly reflexive. Falling prices create fear, fear leads to selling, and selling worsens price dislocation. Liquidity providers sit at the centre of this feedback loop. Once market dynamics turn, restoring stability can require far more liquidity than was needed to maintain it in the first place.
Exposure to upstream failures. Liquidity providers are also indirectly exposed to issuer, banking, and custodial risks. Rumours of reserve problems, access issues, or regulatory action can be enough to alter trading behaviour, even before any concrete failure occurs. In this sense, liquidity providers often react to risk rather than cause it — but their reaction is what makes risk visible to everyone else.
Liquidity provider risk illustrates a critical point: stablecoins do not fail quietly.
Long before redemptions halt or reserves are questioned, stress shows up in the market. Prices move, spreads widen, and confidence erodes. For institutions watching closely, liquidity behaviour is often the earliest warning sign that something in the system is beginning to strain.
Where the risk finally lands
If issuers make the promise, banks and custodians hold the backing, and liquidity providers keep the system functioning day to day, users are where stablecoin risk ultimately crystallises. These users — banks, asset managers, trading firms, payment companies, and corporations — may not control the system, but they rely on it. When something breaks elsewhere in the chain, it is users who feel the impact first and most directly.
Access risk. For users, the most immediate risk is losing access to funds when they are needed. A stablecoin can be fully backed, actively trading, and legally sound, yet still be unusable if transfers are blocked, redemptions are delayed, or intermediaries restrict activity. For institutions using stablecoins in settlement, treasury, or collateral workflows, even short interruptions can have knock-on effects far beyond the digital asset itself.
Timing risk. Stablecoins are often adopted to improve speed and efficiency, but this creates its own exposure. Institutions may find themselves solvent but illiquid at critical moments, unable to move or redeem funds in time to meet obligations. This timing mismatch is particularly acute during periods of market stress, when access constraints and liquidity pressures tend to emerge simultaneously.
Intermediary risk. Most institutional users do not interact directly with stablecoin issuers. Instead, they rely on exchanges, brokers, custodians, or payment providers to access and move funds. Each additional intermediary introduces counterparty, operational, and governance risk.
If any one of these entities fails, restricts activity, or changes its policies, users may be left exposed despite holding what appears to be a low-risk asset.
Legal and claims risk. In the event of a failure elsewhere in the system, users face uncertainty around their legal position. Questions over ownership, priority of claims, and jurisdiction can delay access to funds or alter recovery outcomes. Unlike traditional bank deposits, stablecoin holdings often sit outside well-established resolution frameworks, leaving users exposed to legal ambiguity during stress events.
Operational dependency risk. Stablecoins rely on a long chain of interconnected systems — blockchains, wallets, compliance tools, banking rails, and internal controls. A failure in any one of these components can disrupt the entire workflow. For users, this means that stablecoin risk is not confined to market movements or issuer behaviour, but embedded in the operational complexity of the system itself.
User risk highlights the final and most important reality of the stablecoin ecosystem: control and exposure are rarely aligned. Institutions may adopt stablecoins to reduce friction and increase efficiency, yet remain dependent on decisions and systems they do not control.
When stress emerges, it is users who absorb the practical consequences, regardless of where the original fault lies.
Risk does not disappear
Taken as a whole, the stablecoin stack reveals a simple but uncomfortable truth: risk is not removed by tokenisation, nor by reserve disclosures or real-time settlement.
It is redistributed. Each participant in the system carries a different form of exposure, and while those risks may sit in different places, they are tightly interconnected.
When stress emerges at one point in the chain, it rarely stays contained.
What makes stablecoins particularly challenging from a risk perspective is that failure is more likely to manifest as friction than collapse.
Delays, access restrictions, price dislocations, and operational uncertainty are all enough to undermine confidence, even when no assets are missing and no rules have been broken.
For institutions using stablecoins as settlement tools, treasury instruments, or operational cash, these second-order effects matter just as much as solvency.
The danger, then, is not that stablecoins are inherently unsafe, but that they are often treated as simpler than they are.
Labelled as ‘digital cash’, they are frequently assumed to behave like cash in all circumstances.
In reality, they sit somewhere between money, infrastructure, and financial product, relying on a web of private firms, traditional financial institutions, and technical systems to function as intended. For institutions looking to scale stablecoin usage, the key question is not whether the token itself is stable, but whether the full chain supporting it is resilient under pressure.
Understanding where risk sits and crucially, where it does not, is now a prerequisite for treating stablecoins as anything more than a convenience layer.
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