Are Stablecoins the New Money Market Funds? Report Compares and Highlights Similarities

Findings from a report comparing stablecoins to money market funds highlight potential instability and investor behavior patterns. Stablecoins could impact the broader financial system. Italy's central bank calls for global regulation.

Posted 8 months ago in Blockchain


Comparison between stablecoins and money market funds

The Federal Reserve Banks of Boston and New York recently published a staff report comparing stablecoins like Tether (USDT) and USD Coin (USDC) to money market funds. The report, titled 'Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?', highlights several key findings.

According to the report, stablecoins and money market funds exhibit similar patterns during runs, which could potentially inject instability into the broader financial system. The researchers draw comparisons between stablecoin runs in 2022 and 2023 and money market fund runs in 2008 and 2020 to analyze investor behavior.

One crucial observation is that stablecoins appear to have a 'break-the-buck' threshold of $0.99. If the value of a stablecoin drops below this threshold, redemptions accelerate, leading to runs where investors flee the asset. This phenomenon can cause an asset crash for remaining investors.

The report also emphasizes that stablecoins are not without their flaws. Italy's central bank has recently highlighted the instability of stablecoins, referencing the collapse of Terra in 2022 as an example. Italy is now urging global lawmakers to establish an international regulatory body for governing cryptocurrencies, stablecoins, and related technologies.

Last updated 9/26/2023, 12:40:23 PM

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