When Redemption Becomes a System Problem

This chapter follows stablecoins through their most important stress transition: the move from ordinary circulation to simultaneous redemption. The question is not whether a token’s market price usually stays close to its reference value, but whether the issuer, reserve assets and payment rails can meet a large exit without exporting losses to banks, money markets or sovereign debt markets. Comparing the main reserve designs shows why par redemption and liquidity backstops must be supported by institutions rather than assumed from a token’s label.

From ordinary redemption to a run

Ordinary redemption is part of a stablecoin’s normal lifecycle. A holder gives the token to the issuer, or to an authorised intermediary, and receives the reference currency under the applicable terms. The issuer reduces the outstanding token liability and reduces or rearranges its reserves. If redemptions are small and predictable, the reserve portfolio can be liquidated or replenished without changing market prices very much.

A run is different because many holders try to leave before others do. Each holder has a reason to ask a simple question: will the issuer still have liquid assets, will the redemption queue remain orderly, and will the next person accept the token at par? If the answer becomes less certain, early redemption can be individually rational even when the reserve portfolio would be adequate under a slower exit. The collective result can make the original fear self-reinforcing.

The transition often becomes visible first as a secondary-market discount. The token trades below its reference value because a buyer now demands compensation for the time, fee, legal or operational risk involved in obtaining redemption. A small discount does not prove that a run is under way. It does show that the token is not being treated as perfectly interchangeable with the reference currency in that market. The BIS Annual Economic Report 2026 notes that current stablecoin prices do deviate from par and that redemption frictions are common. In its assessment, such arrangements can resemble exchange-traded fund shares more than a payment medium accepted with no questions asked.

That distinction matters for the reserve promise. A reserve asset can be safe in credit terms and still be costly to sell quickly. A short-dated government bill has a low expected default risk, but a large seller may move its price, especially if other holders are also seeking cash. A bank deposit may have a stable face value but be concentrated in a few institutions or subject to limits on how it can be used. Central-bank reserves are highly liquid, but an issuer’s ability to hold them requires an account, legal eligibility and rules for access. “Fully backed” describes an amount; it does not by itself describe liquidity at every moment, finality across every ledger or the availability of a backstop.

The design continuum introduced earlier is useful here. A money-like stablecoin promises timely par redemption and aims to support payments. That promise requires high-quality liquid reserves, clear holder rights, operational resilience and some credible way to meet redemptions during stress. An investment-like stablecoin can instead disclose that its price may move, charge redemption fees or impose gates, and hold a broader reserve portfolio. It may serve as a store of value or source of foreign-currency exposure, but it should not be treated as a settlement asset that never requires questions.

A run can also begin outside the issuer.