Stablecoin Runs and the Centralization of Arbitrage

Abstract

Stablecoins are cryptoassets designed to be pegged to the dollar, but they are backed by imperfectly liquid USD assets. We show that stablecoins feature concentrated arbitrage: the largest issuer, Tether, allows only six agents in an average month to redeem stablecoins for cash. We argue that the issuers’ choice of arbitrage concentration reflects a trade-off: efficient arbitrage improves stablecoin price stability in secondary markets but amplifies run risks by reducing investors’ price impact from selling stablecoins. Our findings imply that policies designed to improve stablecoin price stability may have the unintended consequence of increasing stablecoin run risks.