Stablecoin Stability Improves, but Tail Risk Remains

A stablecoin trading at one dollar appears to be doing its job. For someone moving money between exchanges, paying a supplier, or holding collateral, that familiar price offers reassurance. But a price quote cannot reveal how reliably the token can become spendable dollars when markets become unsettled.

A new study by Edson Pindza, accepted for publication in the International Review of Economics and Finance, examines this gap between apparent stability and changing market conditions.¹ Using daily USDT, USDC, DAI, and USDS data from January 2021 through May 2026, it finds that wider peg deficits precede stronger reported supply contractions and that larger price movements cluster into persistent statistical states.

The research also rejects several stronger interpretations, including a claim that its model predicted the beginning of TerraUSD’s collapse. That restraint makes the findings useful. They point toward better monitoring without suggesting that stablecoin failures have become predictable.

What Stablecoin Peg Deviations Can Reveal

A peg is the target value a stablecoin seeks to maintain. A dollar stablecoin priced at $0.995 is half a cent below that target, a deviation of 50 basis points. Small differences can arise from trading conditions, transaction costs, or temporary imbalances between buyers and sellers.

The study tests whether a larger shortfall below the peg precedes greater contraction in reported circulating supply. Across its full sample, that association is statistically significant. The reverse relationship, supply contraction preceding subsequent peg changes, is not.

This is evidence about sequencing, rather than proof of causation. It does not show that falling prices force holders to redeem or that redemptions then generate further declines. Reserve news, trading liquidity, and operational constraints could contribute to the observed patterns.

Supply data require particular care. A reduction can reflect redemptions, but also token burns, migrations, collateral deleveraging, or protocol mechanisms. Treating every contraction as money fleeing an issuer would turn a useful indicator into an unreliable narrative.

The distinction becomes clearer when considering stablecoin reserves, custody, and redemption. Selling a token on an exchange transfers ownership. Redeeming through an eligible issuer channel converts the token into another asset and can reduce outstanding supply. These processes interact, but they are not interchangeable.

Stablecoin Tail Risk Changes Over Time

The paper compares models that describe everyday fluctuations with models allowing different patterns of volatility. Its preferred latent Markov model infers persistent statistical states from the data, rather than assigning stress labels using a fixed price threshold.

In the broad panel, the estimated scale of daily peg changes is 17.82 basis points in the higher-scale state, compared with 1.95 in the lower-scale state. The higher-scale state occupies 33.8% of the full sample. This is not a finding that stablecoins were failing on one-third of days. It describes a fitted distribution of price changes, not an independently verified crisis condition.

The following results are drawn entirely from the study:

The improvement after 2022 supports cautious optimism. Observed deviations became smaller and the higher-scale state less prevalent. However, the study does not establish which changes caused that improvement. Its parameter-stability tests also indicate that relationships changed across periods, limiting the usefulness of treating the entire sample as one permanent rule.

Why Stablecoin Monitoring Is Not Collapse Prediction

The TerraUSD exercise provides an important boundary. A model estimated using information through December 2021 detects the May 8, 2022 movement once it occurs and increases its estimated probability for May 9. It does not warn of the May 8 movement beforehand.

That distinction separates recognizing deteriorating conditions from forecasting their onset. A system that reacts to an observed price drop can still help risk managers, but describing that response as advance prediction would exaggerate its capability.

There is another limitation: daily observations cannot describe every intraday liquidity problem. A payment operator may need to settle obligations within minutes. A model built around daily prices and aggregate supply should therefore complement operational information rather than determine decisions alone.

Reliable Redemption Is the Next Stablecoin Test

The broader implication is that stability has several dimensions. A token can trade near one dollar while a particular holder faces limited redemption access. Conversely, a temporary exchange discount does not automatically establish that an issuer lacks sufficient assets.

The Bank for International Settlements’ recent discussion of trust in digital money emphasizes dependable exchange at par and settlement finality. That framework helps explain why institutional users care about the arrangements behind a token, alongside its quoted price.

For practical monitoring, the study suggests a starting point that can be expanded with independently verified operational data:

• Track the size and persistence of peg deviations across trading venues.
• Investigate supply changes before classifying them as redemptions.
• Check redemption eligibility, settlement timing, and available liquidity.

Consider a business holding stablecoins for a Monday supplier payment. Its exposure depends on whether it can obtain the required currency by the deadline, not simply whether the token moved a few basis points over the weekend. Cash buffers and alternative settlement arrangements could be valuable even while the peg remains close to target.

This operational perspective extends beyond the paper’s findings. Standard Chartered’s (STD.DE ) recent analysis of 24/7 capital markets makes a related distinction: continuous token transfers do not guarantee continuous conversion into fiat. Blockchain availability and funding availability need to be assessed separately.

Circle Offers Exposure to Stablecoin Infrastructure

As stablecoins become more integrated into payments and settlement, companies connecting tokens with regulated financial services offer a relevant investment angle. Circle Internet (CRCL ) Group, which issues USDC through its regulated affiliates, provides direct equity exposure to that infrastructure.

Circle’s second-quarter 2026 results reported $73.3 billion of USDC in circulation and $701 million in total revenue and reserve income. The company also described expanded institutional minting and redemption access through BNY and Standard Chartered. Those connections address the conversion arrangements that matter when evaluating a stablecoin’s practical usefulness.

Recent Securities.io commentary on stablecoin market share and payment activity argues that outstanding supply alone does not capture institutional adoption. For investors, this suggests examining usage, distribution relationships, and economics together rather than assuming that a larger token supply automatically produces a stronger business.

Circle’s results illustrate that distinction. Reserve income reached $668 million, while distribution, transaction, and other costs totaled $412 million. Growth in average USDC circulation supported reserve income, but a lower reserve return rate partly offset it. Interest rates and distribution costs therefore matter alongside adoption. A reliable peg does not guarantee attractive equity returns, and this study neither ranks Circle against competitors nor establishes a valuation case.

Latest Circle (CRCL) News and Developments

Better Stablecoin Risk Data Can Support Adoption

The opportunity is to make stablecoins easier to evaluate as financial infrastructure. The study contributes evidence that peg deficits and supply changes deserve joint attention, while showing why aggregate indicators need careful interpretation.

Smaller observed deviations after 2022 are encouraging. Sustaining that progress will require measurable performance under changing conditions, including dependable conversion and clear explanations of supply movements. Better monitoring can support adoption by giving businesses and investors a more realistic understanding of what stability means.

References:

¹ Pindza, E. (2026). Stablecoin peg fragility and latent tail-risk regimes: Evidence from peg deviations and supply contractions. International Review of Economics and Finance. Advance online publication. https://doi.org/10.1016/j.iref.2026.105928