This paper provides a general framework for analyzing the stability of stablecoins, cryptocurrencies pegged to a traditional currency. We study the problem of a monopolist platform that can earn seigniorage revenues from issuing stablecoins. We characterize stablecoin issuance-redemption and pegging dynamics under various degrees of commitment to policies. Even under full commitment to issuance, the stablecoin peg is vulnerable to large demand shocks. Backing stablecoins with collateral helps to stabilize the platform but does not provide commitment. Decentralization of issuance, combined with collateral, can act as a substitute for commitment.

We estimate the run risk of fiat-backed stablecoins. A run on stablecoins would lead to the fire sales of US dollar assets like bank deposits, Treasuries, commercial papers, and corporate bonds. Our model shows that the possibility of panic runs persists even though general investors only trade stablecoins in competitive secondary markets with flexible prices. This is because stablecoins engage in liquidity transformation and the fixed price at which a set of authorized participants (APs) redeem stablecoins for cash from the issuer reinstates run incentives among secondary-market investors. A more concentrated AP sector acts as a firewall between secondary and primary markets to mitigate runs but gives rise to larger secondary market price dislocations, implying a tradeoff between run risk and price stability. We collect a novel dataset on stablecoin redemptions, trading, and reserve assets to calibrate our model. For the largest stablecoin, Tether (USDT), our estimates imply a run probability of 17.04% in September 2021 which decreases to 3.45% in March 2022 as reserve assets became more liquid.

I show that the growing trend in financial services digitalization has introduced a novel dimension along which commercial banks compete. Based on the analysis of newly hand-collected data on the launch date of banks' smartphone apps, I show that small community banks (SCBs) have been slow to provide mobile banking services to their customers. As a consequence, when the local mobile infrastructure improves--a positive shock to smartphone apps' usage and value--they lose deposits to larger, better-digitalized banks. Further, this dynamic negatively affects their small business lending, for these institutions have historically relied on information and liquidity synergies with deposits to maintain their competitive advantage in such markets. Larger banks and FinTech firms prove to be imperfect substitutes in this setting, and the local economy benefits less from digitalization in areas where SCBs had an important presence before its advent.