The risks of stablecoins: What JPMorgan and Big Tech won’t tell you about their stablecoins

On May 11, 2022, the TerraUSD (UST) stablecoin collapsed overnight, losing more than 99% of its value and wiping out billions, leaving investors with nothing. It was a top-10 crypto project just weeks earlier, before its founder, Do Kwon, went into hiding. The price plunged from $120 to less than $1. The Luna Foundation Guard had even bought $1.5 billion worth of bitcoin to shore up confidence. It didn’t work. Terra went under.

That was three years ago.

Now, stablecoins are back in the spotlight. The U.S. Senate has just passed the GENIUS Act, a bill aimed at regulating them. And suddenly, everyone wants in. JPMorgan launched the JPMD deposit token. PayPal has PYUSD. Walmart just announced its own plans. Even Amazon, Target, and other retail giants are exploring options.

“Kinexys by J.P. Morgan has launched a USD J.P. Morgan Deposit Token (JPMD) proof-of-concept (PoC) on public blockchain, as an alternative to stablecoins for native cash settlement and payments use cases for J.P. Morgan institutional clients,” J.P. Morgan said on its website.

Today, stablecoins are being pitched as the future of money. But before we all jump in, let’s talk about the risks. Not the theoretical kind. The kind that blows up people’s savings.

The Hidden Dangers of Corporate Stablecoins

After fading from headlines in the wake of the TerraUSD collapse, stablecoins are making a comeback — this time with backing from some of the biggest names in finance and tech. But here’s the catch: the problems that brought down stablecoins like UST haven’t gone away — they’ve just been repackaged with corporate logos. From redemption risk to reserve opacity to regulatory blind spots, the risks are still very real. And this time, the stakes might be higher.

What Are Stablecoins and Why Do They Exist?

Stablecoins are digital tokens meant to stay stable. Most are pegged 1:1 to the U.S. dollar, which means one token equals one dollar. The idea is to offer the benefits of crypto—fast transfers, global reach, and 24/7 access, without the wild price swings.

They sit at the center of crypto and fintech. Think of them as the digital glue between traditional banking and the blockchain. People can move money faster, trade assets, pay for goods, or store value without dealing with high volatility or waiting for bank wires to clear.

There are different types of stablecoins:

• Fiat-backed: Supported by reserves in banks (e.g., USDC, USDT)
• Crypto-backed: Overcollateralized with other crypto (e.g., DAI)
• Algorithmic: Peg maintained by code and market incentives (most have failed, like TerraUSD)

Stablecoins first gained traction as a way to move between crypto assets without having to cash out into dollars. But they’ve grown into something bigger—now used in cross-border payments, e-commerce, remittances, and increasingly in traditional finance.

Why They’re Popular:

• Payments across borders without traditional fees
• Traders use them to hedge or move funds
• People in unstable economies use them to store value in dollars

Who’s Issuing Them:

Some of the most well-known players in the stablecoin space include:

• Tether (USDT): The largest by market cap, widely used in crypto trading, but often criticized for its lack of full audits and reserve clarity.
• Circle (USDC): A U.S.-based issuer seen as more transparent, offering monthly attestations and strong ties to institutional DeFi.
• MakerDAO (DAI): A decentralized option with no central issuer, backed by crypto collateral and governed by a DAO.
• PayPal (PYUSD): A newer stablecoin issued through Paxos, aiming to bring stablecoins to millions of retail users through an existing payment ecosystem.
• JPMorgan (JPMD): A bank-issued deposit token built for institutions to handle internal transfers and settlements.

These coins solve real problems—but they’re not bulletproof.

Despite their utility, stablecoins are not risk-free, especially as they move from the crypto-native world into the hands of corporate giants.

The Hidden Risks of Stablecoins: Why the GENIUS Act Could Backfire

1. Illusion of Safety: Big Brand, Bigger Trust?

People assume that if a stablecoin is backed by a bank or a company like PayPal, it must be safe. That’s not how it works. The coin’s peg still depends on how reserves are managed, how redemptions are handled, and whether the issuing company can survive a crisis.

We’ve already seen what happens when things go sideways. TerraUSD (UST), from the small startup Terra Luna, wasn’t the only stablecoin to lose value. USDC, backed by a publicly traded company, Circle, also lost its peg when Silicon Valley Bank collapsed. It recovered, but only because regulators stepped in. Not every stablecoin will get that kind of safety net.

“The U.S. cryptocurrency firm Circle’s USD Coin lost its dollar peg and fell to a record low Saturday morning after the company revealed it has nearly 8% of its $40 billion in reserves tied up at the collapsed lender Silicon Valley Bank,” CNBC wrote.

“If USDC, backed by a publicly traded company with regular attestations, can lose its peg, then no stablecoin is truly safe. The trust isn’t just about the issuer — it’s about the fragility of the entire system beneath it.”

Stablecoins issued by major institutions carry a veneer of credibility. Consumers assume that if a name like JPMorgan is behind it, the product must be safe. But history shows that even trusted financial firms miscalculate risk. These tokens still depend on:

• Reserve transparency
• Counterparty trust
• Operational integrity

If the issuer mismanages reserves or faces a banking crisis, the token may depeg, just like what happened with USDC during the SVB collapse.

2. Regulatory Gaps and the GENIUS Act

The recently passed GENIUS Act aims to create a stablecoin framework. While a step in the right direction, critics argue it:

• Doesn’t go far enough on audit transparency
• Leaves room for shadow banking
• Fails to address systemic risks in times of market stress

In short: the law makes it easier to issue stablecoins. That doesn’t make them safer. Without strict, bank-grade guardrails, corporate-issued tokens could introduce a parallel financial system that regulators struggle to control.

3. Reserve Opacity and Redemption Risk

Tether has long faced questions about its reserves. Even the more transparent players like Circle still depend on outside banks and partners. And PayPal’s coin? It’s technically regulated through Paxos, but users don’t always understand who holds what risk.

If you can’t cash out 1:1 instantly, the system doesn’t work.

Some issuers disclose vague or incomplete reserve information. Tether, for example, has long been criticized for lack of full audits. If users can’t confidently redeem their stablecoins for dollars at any time, the entire system breaks down.

4. Centralization: Not Your Token, Not Your Money

Corporate stablecoins are centralized. This means the issuer can freeze, reverse, or block your transactions, often without warning. In contrast, decentralized stablecoins like DAI offer more censorship resistance but introduce their own risks (smart contract vulnerabilities, collateral volatility).

If a centralized issuer decides you’re a problem—or gets pressure from regulators—they can freeze your account or reverse transactions. It’s not your money if someone else controls it.

DAI, the decentralized alternative, avoids this problem. But it has its own issues, like reliance on crypto collateral that can lose value fast.

5. Contagion Risk: What Happens in a Crash?

Terra’s collapse wasn’t just a fluke. It was a lesson in how quickly trust can disappear. And while today’s stablecoins are fiat-backed, they’re still exposed to liquidity crunches, redemption runs, and market freakouts. Once the peg breaks, it’s hard to get it back.

The collapse of Terra’s algorithmic stablecoin UST showed how quickly confidence can evaporate. While JPMorgan and PayPal aren’t launching algo-stablecoins, even fiat-backed coins are vulnerable to:

• Bank runs
• Market panic
• Liquidity mismatches

These risks don’t disappear just because a trusted brand is on the label.

6. Geopolitical and Monetary Sovereignty Concerns

Central banks worry that widespread use of private stablecoins could undermine monetary policy and capital controls, especially in emerging markets. Widespread adoption of corporate tokens could lead to regulatory backlash or political intervention.

Governments see private stablecoins as a threat. If PayPal and JPMorgan control too much of the money supply, what happens to monetary policy? In countries with weak currencies, stablecoins could lead to dollarization, forcing regulators to push back.

Don’t be surprised if the next wave of regulation comes hard and fast.

7. Expert Alarm Bells: UC Berkeley Voices Caution

In an NPR interview and Berkeley op-ed, Professor Barry Eichengreen, a respected economist at UC Berkeley, warned that the U.S. may be repeating dangerous monetary history by greenlighting stablecoins through weak regulation like the GENIUS Act.

“Every $1 stablecoin will be worth exactly a dollar only if the system operates infallibly… If regulators have this much trouble keeping an eye on insured banks, how can they be expected to exercise perfect oversight of hundreds, if not thousands, of stablecoins issued not just by banks but by tech firms and crypto start‑ups?”

Eichengreen compared today’s rush to issue stablecoins to the “free banking” era of the 1800s, when private currencies led to confusion, bank runs, and widespread financial instability. That era ended badly. He’s not alone in thinking this one could, too. His warning underscores the long-term risks of allowing corporate-issued tokens to scale without ironclad safeguards.

Final Thought: Proceed with Caution

Stablecoins aren’t inherently bad. They’re a powerful innovation. Stablecoins are useful. But they’re still just promises—promises backed by companies, code, or collateral that can fail. But they require clear standards, strong transparency, and thoughtful adoption. As corporations roll out their own tokens, we must ask:

Are we building a better financial system—or repeating old mistakes with a shinier interface?

Trust in tech should never replace trust in truth.

What Policymakers and Users Must Do Next

For regulators: Create uniform standards that enforce full reserve audits, redemption rights, and clear limitations on who can issue stablecoins. Guardrails must be in place before widespread adoption invites systemic risk.

For users: Don’t confuse brand names with safety. Research what backs the token you hold. Ask who controls it, how reserves are managed, and whether redemptions are guaranteed.

For innovators: Innovation without responsibility is dangerous. Design with transparency, decentralization, and auditability from the start.

The next financial crisis won’t start with a Wall Street bank—it could start with a stablecoin. Let’s not wait to find out the hard way. Stablecoins aren’t inherently bad. They’re a powerful innovation. But they require clear standards, strong transparency, and thoughtful adoption. As corporations roll out their own tokens, we must ask:

Are we building a better financial system—or repeating old mistakes with a shinier interface?

Trust in tech should never replace trust in truth.

Written with research support from ChatGPT DeepResearch. Sources include BIS reports, SEC commentary, The New Yorker, Financial Times, Chainalysis, and more.