What Are the Main Causes of Illiquidity in a Stablecoin’s Reserve Portfolio?

Illiquidity in a stablecoin's reserves occurs when the assets backing the coin cannot be quickly and efficiently converted to cash to meet redemption demands. This is typically caused by holding assets that are not short-term, highly liquid cash equivalents, such as long-term corporate bonds, illiquid commercial paper, or volatile cryptocurrencies.

During a market panic, the stablecoin issuer may be forced to sell these illiquid assets at a steep discount, potentially causing the reserve value to drop below the stablecoin's market capitalization, leading to a depeg and a run.