How Stablecoins Manage Risk: Collateral, Redemption and Reserves

Stablecoins are an increasingly popular type of cryptocurrency due to the fact that they avoid the volatility of cryptocurrencies like Bitcoin and Ethereum. Stablecoins are pegged in value to a particular fiat currency, such as the USD. While this limits the potential return on investing in these currencies, it can also reduce exposure to potential risks.

However, this isn’t to say that stablecoins are completely immune to risk. Stablecoins can and have lost their pegs, as in the case of TerraUSD. Stablecoin issuers can take various actions to address and reduce this risk.

Stablecoins are popular with financial institutions and regulators because they remove some of the common risks of other cryptocurrencies. Tying their value to a fiat asset reduces volatility and introduces an element of regulation since these currencies are regulated. These perks are reasons why the GENIUS Act in the U.S. and similar laws supporting stablecoin development have been introduced.

However, stablecoins are exposed to various risks. Some of the most significant include:

• Credit Risk: Stablecoins have value because they are pegged to a fiat asset and allow users to redeem their stablecoins for that asset. If a stablecoin issuer loses the ability to perform these redemptions due to insufficient reserves, the stablecoin’s value can spiral.

• Market Risk: Stablecoin issuers may invest their reserves in various assets to reduce risk exposure and maintain the value of their reserves and peg. However, a rush of redemption requests may force the issuer to liquidate these reserves on unfavorable terms, reducing the value of their reserves.

• Custody Risk: Stablecoin issuers may hold crypto in reserves, including both their own coin and other assets. This crypto is held in on-chain wallets whose private keys must be protected against unauthorized access.

• Liquidity Risk: Liquidity is key to ensuring a stablecoin’s ability to be redeemed for the fiat asset. Issues such as holding insufficient liquidity on a particular blockchain could harm redemptions and the peg.

• Transparency Risk: Stablecoin pegs rely on user trust that the issuer maintains sufficient reserves. A lack of transparency could cause a bank run if this trust is violated.

• Regulatory Risk: A lack of regulatory clarity and evolving regulatory requirements can make it difficult for stablecoin issuers to maintain compliance. Lawsuits can harm finances, and regulatory restrictions may limit the market of potential buyers.

• Operational Risk: Stablecoins depend on smart contracts and backend infrastructure to function. Cyberattacks, operational errors, and similar issues could put reserves and the peg at risk.

S&P Global has developed a framework for measuring the risk exposure of various stablecoins, including the various factors that impact asset quality and the ways that a stablecoin issuer can manage these risks. Beyond reducing exposure to the main stablecoin risks, a stablecoin issuer can mitigate the impacts of an incident via overcollateralization, robust liquidation mechanisms, and reserve funds.

To maintain their pegs, stablecoins need to maintain a certain amount of collateral. Some stablecoins keep full reserves, maintaining a 1:1 ratio between their issued coins and held fiat assets. Algorithmic stablecoins, on the other hand, may not maintain full reserves and can use a variety of different currencies, including other crypto assets.

Overcollateralization is when a stablecoin issuer deliberately holds more collateral than is required for their issued stablecoins. For example, they may maintain a 1:1.01 ratio rather than 1:1 of issued coins vs. collateral.

By doing so, they reduce the risk that a successful attack, market movement, or other incident could cause their currency to depeg. If, even after the fact, the collateral ratio is at least 1:1, the stablecoin maintains its value since it can theoretically allow holders to liquidate their stablecoins for the backing fiat asset at a 1:1 ratio.

Support for liquidation at that 1:1 ratio is a critical element of a stablecoin’s ability to maintain a peg. If a stablecoin issuer can’t meet a user’s liquidation request due to insufficient solvency or similar issues, then the perceived value of the token is reduced. This can lead to a bank run and cause the value of the cryptocurrency to depeg and spiral downward.

The liquidation process could be impacted by a variety of different factors. An attack on the stablecoin’s smart contract or the issuer’s backend infrastructure may involve stealing collateral or performing a denial of service (DoS) attack that blocks liquidation. Alternatively, a stablecoin issuer may invest collateral in illiquid assets or ones that suddenly lose value, making it difficult to rapidly respond to liquidation requests. In the event of a bank run, this challenge will rapidly increase in difficulty, as a failure to meet early requests will cause many users to try to liquidate to extract their funds before it’s too late.

To manage this risk, a stablecoin issuer should implement robust liquidation processes to ensure that it always has sufficient liquidity to meet requests. This requires a combination of governance — ensuring that an adequate percentage of collateral is held in liquid assets — and security — protecting key accounts, systems, and processes against potential attacks that could lead to stolen funds or DoS attacks.

While a stablecoin issuer may have implemented various controls to manage its risk exposure, there’s still the potential that something can go wrong. A successful social engineering attack could provide an attacker with privileged access to the token’s smart contract, allowing them to steal funds.

Maintaining a reserve enables a stablecoin issuer to manage the potential impacts of these thefts on the strength of the stablecoin’s peg. For example, an October 2025 hack of Abracadabra enabled the theft of about 1.8 million MIM, the project’s stablecoin. Since the protocol was able to purchase an equivalent amount of the currency from the market using its reserves, it was able to mitigate the potential effects of the attack on the health of the cryptocurrency.

Stablecoins are exposed to a wide variety of potential risks, including market, governance, and operational risks. An effective risk management policy considers all of these potential threats to a stablecoin’s peg and implements effective controls to manage them.

Halborn’s advisory services can help stablecoin issuers to manage custody and operational risks by ensuring compliance with security best practices and regulatory requirements. Get in touch to learn more about our services.