S9 Ep4: Do stablecoins threaten financial stability?

Episode Summary

Executive Summary: Richard Portes warns that multi-issuer stablecoins create a regulatory loophole and a financial-stability risk in Europe. He argues that separate reserve pools across jurisdictions can fail in a run, with U.S. holders potentially draining European reserves, while cross-border transfers could be blocked. He urges either a ban or much stricter limits.

Main Topics: What stablecoins are and why they exist (Priority: 4/5): Stablecoins are digital tokens pegged to fiat currency, designed to be more stable than native crypto assets and useful for fast, hard-to-trace transfers within the crypto ecosystem. How stablecoins make money (Priority: 5/5): Portes explains the business model: issuers take customer funds, pay no interest, invest reserves in safe assets like sovereign bonds, and capture the spread as profit. Multi-issuer stablecoins and the Circle model (Priority: 5/5): The discussion centers on a stablecoin with U.S. and European branches that are intended to be fungible but in practice are backed by separate reserve pools, creating a fragmentation problem. Why EU regulation may not cover the loophole (Priority: 5/5): Under MiCAR, a multi-issuer stablecoin can be regulated within the EU, but the law does not explicitly address cross-border reserve and redemption issues in this structure. Run risk and cross-border transfer blockage (Priority: 5/5): Portes argues that in a crisis, U.S. holders could seek redemption via Europe’s more favorable rules, but Europe would lack enough reserves, and U.S. authorities might block transfers from U.S. reserves. Lobbying, politics, and regulatory capture (Priority: 4/5): He says the crypto industry has heavily lobbied in the U.S. and benefited from a favorable post-2024 political environment, producing the Genius Act and crypto-friendly regulators. Broader financial stability concerns (Priority: 5/5): Beyond multi-issuer designs, Portes warns that stablecoins generally resemble bank-like run-prone liabilities, especially when reserve assets are not instantly liquid.

Key Arguments: Stablecoins are profitable because issuers earn yield on reserves while paying token holders no interest, creating strong incentives to expand issuance. Their practical appeal is speed and opacity on blockchain networks, which also makes them attractive for sanctions evasion, capital-flow restrictions evasion, and other illicit use. Multi-issuer stablecoins appear fungible on the surface, but separate reserve pools in different jurisdictions break the assumption of seamless redemption. In a stress event, European reserves could be exhausted by redemption demands from U.S. holders seeking the most favorable exit route. Cross-border transfers of reserves are vulnerable to legal or political blocking by national authorities, as seen in past financial crises in Europe. The European Systemic Risk Board and ECB leadership see this structure as a systemic risk, while parts of the European Commission have been more permissive. If the EU does not ban multi-issuer stablecoins, Portes says regulators would need tight constraints to make issuance very difficult or impossible. Stablecoins more broadly can face bank-run dynamics because redemption depends on truly liquid assets and immediate settlement, which is not always assured.

Data Points: EU regulation: MiCAR (Markets in Crypto-Assets Regulation) - The EU framework governing cryptoassets and stablecoins. U.S. policy date: 4 August 2025 - Date mentioned for the SEC launching Project Crypto. U.S. legislation: July 2025 - The Genius Act was passed in July of the year referenced in the interview. Expected yield on reserves: 4% - Example of the kind of return issuers can earn from reserves while paying token holders nothing. Reserve settlement timing: Immediate in Europe - Under MiCAR, redemption in Europe must be settled immediately. Money market fund liquidity: Several days - Portes notes that shares in money market funds cannot be cashed overnight or same day, making them unsuitable for instant-run resilience.

Pivotal Quotes: "You take people's money, you give them a token... And you don't pay them any interest. And you get the interest from the sovereign bonds or whatever it is that you buy as reserves" — Richard Portes: Explaining the stablecoin business model and why it is highly profitable. "the trouble is that there wouldn't be the volume of reserves held in Europe to meet such redemption requests" — Richard Portes: Describing the core vulnerability of multi-issuer stablecoins during a run. "These are bearer instruments that are supposedly backed by sufficient reserves that are liquid, easily realizable to meet the demands of investors. This is all false." — Richard Portes: Warning that stablecoins may not be able to honor immediate redemptions under stress.

Implications: Listeners should understand stablecoins as potentially run-prone financial products, not risk-free cash substitutes. For regulators, the key question is whether to ban multi-issuer models or impose strict limits before a cross-border redemption crisis exposes the system.