Par for the Course: Public Information and Stable Coin Runs

Abstract

Stable coins are money-like tokens residing on distributed ledgers that promise par convertibility to a sovereign unit of account, largely the US dollar. Stable coin issuers lend credibility to that promise by holding reserve (collateral) assets. Public information and perceptions regarding the quality and volatility of reserves are therefore key to stable coins’ ability to maintain par. We provide a general framework to analyze the conditions under which this par promise breaks. The effect of public disclosure on run risk is ambiguous: Greater transparency can lead to increased (reduced) run risk for sufficiently low (high) stable coin holders’ priors about collateral quality or transaction costs of conversion to fiat. If the distribution of collateral assets is fat-tailed, par convertibility is resilient to small shocks but breaks down in the face of large negative public shocks, even for high initial collateral values. We find empirical support for the testable implications of the model using a synthetic control approach to address endogeneity concerns.

Keywords: Stablecoins, crypto, global games, bank runs

JEL Classification: C70, D83, D84, E42, G01, G20