NY Fed Research Warns Stablecoins Could Amplify Systemic Risk — But the Data Tells a More Nuanced Story

The New York Federal Reserve published a research note on 31 July that should give anyone paying attention to stablecoin regulation pause for thought. Not because it sounds the alarm on systemic risk — the authors are careful not to — but because of what it reveals about the channels through which traditional finance and digital assets now flow into each other.

The paper, published on the Fed’s Liberty Street Economics blog, is a follow-up to earlier work examining stablecoins’ response to crypto-native shocks. This time, the researchers flipped the question: what happens to a major stablecoin when the shock comes from outside the crypto industry?

The SVB Stress Test

Their case study is the March 2023 failure of Silicon Valley Bank and its impact on USD Coin (USDC), the second-largest stablecoin by market capitalisation. The choice is instructive. USDC, issued by Circle, is often cited as the ‘safer’ stablecoin — its reserves consist primarily of cash and short-term US government securities, unlike Tether’s more heterogeneous portfolio of corporate bonds, gold, Bitcoin, and secured loans.

When SVB collapsed, Circle disclosed that approximately 8% of USDC’s reserves were held at the failed bank. The market reaction was swift: USDC’s secondary market price dropped below $1.00, and the stablecoin experienced notable net outflows. The de-pegging was temporary — USDC recovered within days — but the structural changes to its reserve management were lasting.

Interest-Rate Risk Swapped for Counterparty Risk

The NY Fed’s researchers tracked what happened inside the Circle Reserve Fund (CRF), the BlackRock-managed money market mutual fund that holds approximately 86% of USDC’s reserve assets. Three findings stand out.

First, the fund’s weighted average maturity — a measure of interest-rate sensitivity — dropped sharply after SVB’s failure and has remained below the 5th percentile of comparable Treasury-only money market funds ever since. In plain terms: Circle shortened the duration of its reserves to reduce sensitivity to rate moves.

Second, and more significantly, the CRF’s holdings of repurchase agreements (repos) spiked from zero to over 90% of its net assets in the immediate aftermath. That figure has since retreated to 69%, but it remains well above the distribution for comparable Treasury-only funds. Repos are secured lending arrangements — they carry lower interest-rate risk, but they introduce counterparty risk. You are, in effect, lending your cash to someone else and holding their collateral.

Third, the composition of those repo counterparties shifted over time. By the fourth quarter of 2025, 77% of the CRF’s repo holdings were FICC-sponsored, meaning the ultimate counterparties were generally entities with a net demand for funding — such as hedge funds.

The GSIB Concentration

The changes were not limited to the CRF. USDC also holds roughly 12% of its reserves as direct bank deposits outside the fund. Before SVB’s collapse, these deposits were spread across a mix of Global Systemically Important Banks (GSIBs) and non-GSIBs, including SVB and Signature Bank. After the crisis, Circle restructured to hold in excess of 90% of its cash at GSIBs.

This is a rational response from a risk-management perspective. GSIBs are subject to the most stringent capital and liquidity requirements in the global banking system. But it also means that USDC’s banking relationships are now more concentrated — and more directly coupled to the health of the largest financial institutions in the world.

The $308 Billion Question

The broader context makes this more than an academic exercise. Since the researchers’ previous update in April 2025, US dollar stablecoin market capitalisation has grown by $71 billion — a 30% increase — to approximately $308 billion. The passage of the GENIUS Act in July 2025, which established the first federal regulatory framework for payment stablecoins, has accelerated institutional adoption. The industry remains highly concentrated: Tether and USDC together account for over 80% of all stablecoin assets.

The NY Fed’s central finding is not that stablecoins pose an imminent threat to financial stability. It is subtler than that. The researchers demonstrate that a traditional banking shock — SVB’s failure — caused one of the world’s largest stablecoin issuers to fundamentally restructure its risk profile, shifting from interest-rate exposure toward counterparty exposure. The stablecoin did not cause the shock. But the shock changed the stablecoin. And the stablecoin’s response — shortening maturities, piling into repos, concentrating deposits at GSIBs — created new connections between the digital asset ecosystem and the traditional financial system.

Why This Matters Now

The timing is not coincidental. On the very same day the NY Fed published its research, Circle secured a limited-purpose trust charter from the New York Department of Financial Services — complementing its existing federal OCC national trust charter. USDC is moving deeper into regulated territory, even as the data shows its reserve management remains in flux.

The GENIUS Act’s licensing machinery is now being built out. The OCC has published its proposed information collection for stablecoin licensing applications, with comments due by 25 September. The regulatory framework is taking shape around an asset class whose reserve behaviour, as the NY Fed’s research makes clear, is still evolving in response to real-world events.

The paper’s authors are careful to note that their views do not necessarily reflect those of the New York Fed or the Federal Reserve System. But the data speaks for itself. Stablecoins are no longer a parallel financial system operating in isolation. They are a mirror — one that reflects traditional finance’s risk events back into the crypto ecosystem, and, increasingly, the crypto ecosystem’s structural choices back into traditional finance.

For regulators, the implication is clear: supervising stablecoin issuers means supervising their connections to the broader financial system, not just the quality of their reserves on any given day. For market participants, it is a reminder that the next banking shock will not stop at the edge of the crypto industry. It will flow straight through it.