Financial Stability and Systemic Risks of Stablecoins

Stablecoins represent a defining innovation in twenty-first-century finance. Their market capitalisation, which peaked above USD 180 billion in 2022, continues to hover around USD 150–160 billion. These instruments now sit at the intersection of technology, money, and systemic risk. While their adoption accelerates financial innovation and cross-border efficiency, their rapid growth introduces challenges analogous to those historically associated with unregulated money-market instruments and private banknotes. This chapter provides a comprehensive examination of the financial-stability implications of stablecoins, integrating the policy and legal logic embedded within the Commonwealth Model Law on Stablecoins (July 2025). It expands prior analyses by introducing explicit macroprudential stress-testing regimes, systemic-risk surveillance, and potential central-bank liquidity arrangements to ensure complete conceptual convergence between economic assessment and legislative design (Financial Stability Board, 2023).