The IMF’s Framework for Stablecoin Stability and Regulation

A working paper titled Making Stablecoins Stable, released by the International Monetary Fund develops a theoretical economic model to study how policymakers can make stablecoins safer while still encouraging enough issuance and innovation. The analysis builds on the classic Diamond and Dybvig (1983) bank run model and offers practical insights for ongoing regulatory discussions.

Background and Purpose

Stablecoins are privately issued digital tokens designed to keep a stable value, usually one-to-one with a fiat currency such as the US dollar. They aim to improve payment efficiency, lower costs, support cross-border transfers, and increase financial inclusion. However, they carry a serious risk of running into  situations where many users suddenly demand redemption, which can cause the stablecoin to lose its peg.

The US GENIUS Act of July 2025 and other regulations worldwide have brought stablecoins into sharper focus. Issuers often hold a mix of safe and risky assets. Risky holdings can boost profits but raise the chance of failure during stress. At the same time, very strict rules requiring 100% safe reserves could reduce issuer profits and limit the supply of stablecoins. The paper creates a formal model to examine this trade-off between stability and adequate issuance.

The Economic Model

The model features households that value stablecoins for convenient payments and a monopolistic issuer that chooses how much to issue and what assets to hold as reserves. The issuer can invest in safe liquid assets (such as central bank reserves) and risky illiquid assets. Households decide how much to hold based on expected returns, transaction benefits, and run risk.

In the private equilibrium, issuers act to maximize their own profits. They tend to hold too many risky assets and limit issuance to control costs. This leads to higher run probability and lower stablecoin supply than what would be best for society.

In the social planner equilibrium, the goal is to maximize overall welfare. The planner accounts for how issuer decisions affect household well-being through run risk and transaction convenience. The model shows that the private outcome is inefficient. Households gain from stablecoins, but issuers do not fully consider the negative effects of runs on users.

Key Insights

The paper presents five important findings:

1. Private markets alone lead to too much risk and too little issuance, and thus, regulation is needed.

2. Full safe-asset backing is not always socially optimal without additional revenue sources, because issuers need some returns to supply enough stablecoins.

3. Multiple policy tools are required. Liquidity and reserve rules control run risk, while other measures support issuance.

4. Allowing issuers to earn revenue from non-investment sources - such as payment data (subject to privacy rules) or interest on reserves - makes full safe backing viable and achieves both stability and sufficient supply.

5. If central banks pay interest on reserves held by issuers, 100% backing with central bank reserves becomes attractive and can eliminate run risk while supporting innovation.

   
   

The model also explores economies of scale, where larger networks make stablecoins more valuable, and draws lessons from China’s e-money experience, where providers effectively became narrow banks with full central bank reserve backing.

Current Policy Landscape

Many jurisdictions now require stablecoins to be backed by high-quality liquid assets such as cash, deposits, or short-term government securities. The EU’s MiCA regulation, UK proposals, and US rules emphasize full backing, timely redemption at par, and restrictions on risky assets. Some central banks are exploring giving issuers access to reserves for payments or overnight backing. The paper notes that these steps move in the right direction but highlights the need for coordinated tools to balance safety and innovation.

Analysis and Implications

This working paper provides a clear framework for regulators. It shows that stablecoins can function as reliable digital money if properly designed, but they require careful policy support. Full backing with safe assets, especially central bank reserves, strengthens stability and the “no questions asked” property of money. At the same time, allowing reasonable returns for issuers prevents under-supply and supports new payment services and inclusion.

For emerging markets, the findings are particularly relevant. Strong rules can reduce risks of currency substitution and volatile flows while capturing benefits for cross-border payments. Central banks must weigh advantages against challenges such as increased supervision needs and potential effects on traditional banking.

Overall, the paper argues that stablecoins are not automatically stable. Policymakers must actively shape the right incentives and safeguards. With the right mix of reserve requirements, remuneration, and revenue options, stablecoins can deliver meaningful benefits without creating major financial risks. This analysis serves as a useful guide for countries refining their digital asset frameworks in 2026 and beyond.

Source:

1. IMF. Asset Tokenization: Financial Stability Risks and Policy Options. https://www.imf.org/-/media/files/publications/wp/2026/english/wpiea2026074-source-pdf.pdf