Programmable features that control how and when stablecoins redeem can alter liquidity dynamics and, under stress, can increase the risk of runs. Evidence from policy research and central banking analysis shows that rules embedded in smart contracts change incentives for holders and market intermediaries in ways that can be destabilizing.
How programmable rules change incentives
Hyun Song Shin at the Bank for International Settlements has warned that automation and pre-set redemption logic can create a first-mover advantage when market participants expect difficulty in future redemptions. Automated rules that prioritize certain counterparties, impose phased redemptions, or allow on-chain freezes remove discretionary forbearance and shift the burden of judgment into code. That removes trusted intermediaries who would otherwise smooth redemptions, making runs more likely if participants fear delay or haircut. The result is accelerated withdrawal pressure and concentrated demands on underlying reserves.
Causes and mechanics of elevated liquidity risk
John Kiff at the International Monetary Fund has noted that programmable redemption clauses can be procyclical when they trigger asset sales. If a stablecoin’s contract forces rapid conversion of backing assets to cash, market makers face fire-sale conditions. This produces a liquidity spiral: forced redemptions depress asset prices, which weakens collateral valuations and prompts further redemptions and margining. Information asymmetries amplify the problem; when on-chain signals show growing queue length or shrinking reserves, uninformed holders may rush to redeem preemptively.
Relevance extends beyond code: different legal regimes and cultural trust in institutions shape behaviors. In jurisdictions with strong deposit insurance and banking relationships, holders may prefer bank deposits over on-chain claims, reducing run propensity. In emerging markets where digital currency use surges for payments and savings, a stablecoin run can rapidly produce human consequences: lost savings, disrupted payments, and reduced access to remittances.
Environmental and territorial nuance matters too. Rapid on-chain redemptions increase transaction volumes and energy use on some networks, and cross-border stablecoins can propagate stress between financial systems, creating regulatory and sovereignty concerns for small economies reliant on dollar-like tokens.
Policy responses include clear settlement rules, minimum liquidity buffers, and supervisory access to off-chain remedies. Empirical work and central bank commentary make clear that programmability is powerful but not neutral: its operational details materially affect the probability and severity of runs. Design choices matter as much as the underlying reserves.