Narrow Stablecoins: Redemption, Runs, and Risk

Stablecoins have drawn significant criticism following their recent proliferation, both in public discourse and academic literature. This paper critically evaluates common arguments that overstate stablecoin weaknesses and misrepresent their interaction with contemporary financial systems. A narrow stablecoin framework, where access to central bank reserves is extended to stablecoin issuers, would foster competition between payment service providers and mitigate many of the remaining risks. Alternate designs of the narrow stablecoin framework featuring partial collateralization with central bank reserves are explored. • The narrow stablecoin proposal addresses prominent sources of risk in the contemporary stablecoin market. • Partial collateralization with bank reserves minimizes the costs of this proposal with few additional tradeoffs. • Properly collateralized stablecoins pegged to fiat currencies are not inherently run-prone. • Runs are not systemic among stablecoin issuers or between stablecoin issuers and the contemporary financial system. • Common arguments related to market concentration or monopoly in the stablecoin market do not conform to basic microeconomic theory or current evidence.