Stablecoin Stability Hinges on Federal Reserve Access

Stablecoins have gained popularity as a way to bridge the gap between traditional fiat currencies and cryptocurrencies, but they come with risks. The July 2025 GENIUS Act aims to regulate stablecoin reserves, but it's silent on whether non-bank issuers can hold balances at the Federal Reserve.

A recent study by researchers from the University of California, Washington University in St. Louis, Drexel University, and Hong Kong University of Science and Technology analyzed the risks associated with stablecoins' reserve structures. The study found that how reserves are kept, either in bank deposits or in treasury, can impact their stability.

The study used a Diamond-Dybvig-style reserve-fragility model to compare four different setups: pre-GENIUS status quo, GENIUS-compliant arrangement with deposit-eligible bank balances, GENIUS-compliant arrangement with short Treasuries, and a hypothetical regime where the issuer's reserves are held in their entirety at the Federal Reserve.

The study found that direct Federal Reserve access could provide an additional layer of stability for stablecoins. The largest modeled improvement came from the hypothetical Federal Reserve master-account scenario, which reduced median peak deviation by 65% compared to Treasury-heavy GENIUS-compliant reserves.