Federal Reserve Report Highlights Stability Risks Posed by Stablecoins Amid Comparisons with Money Market Funds
Summary:
The Federal Reserve Banks of Boston and New York released a report comparing stablecoins and money market funds. The study outlined similarities in patterns during runs and warned of potential financial instability if stablecoins expand and link more closely with key financial markets. Researchers also noted the "break-the-buck" threshold for stablecoins at $0.99, after which redemptions increase, leading to potential asset crashes. Italy's central bank is similarly investigating stablecoin runs, following the 2022 Terra Luna collapse.
On September 26th, a staff report examining the similarities and differences between stablecoins, such as USDT and USDC, and money market funds was released by the Federal Reserve Banks of Boston and New York. The primary conclusions drawn from this report were that both stablecoins and money market funds exhibit comparable trends during runs, and that the proliferation of stablecoins could potentially destabilize the larger financial ecosystem. The report, aptly titled “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?” offered an exhaustive juxtaposition of investor behaviors during the 2022 and 2023 stablecoin runs and the 2008 and 2020 money market fund runs. This report affirms that stablecoins are susceptible to runs during significant disruptions in the broader crypto market or during discrete incidents of pressure. The report further suggested that if stablecoins become increasingly integrated with crucial financial markets, such as short-term funding markets, they might pose a risk to the overall financial stability. The researchers also observed that stablecoins seem to have a distinct "break-the-buck" threshold of $0.99, crossing which redemptions hasten and runs - periods where investors opt-out, potentially causing a crash in the asset's value for existing investors - occur. In money market funds, the so-called break-the-buck threshold happens when the net asset value of a fund descends below a dollar, leading to investor shares, valued at $1.00, dropping below market price, prompting investors to seek safer alternatives. Cointelegraph recently reported that the central bank of Italy is also probing contributory factors to prevent runs on stablecoins. A recent statement from the Italian banking institute referred to the 2022 Terra Luna debacle as an instance of stablecoins failing to uphold stability. The report also mentions Italy's appeal to global regulators to establish an international body overseeing cryptocurrencies, stablecoins, and their associated technologies. Related: The CEO of JPMorgan predicts worsening circumstances for banks due to overregulation.
Published At
9/26/2023 5:30:00 PM
Disclaimer: Algoine does not endorse any content or product on this page. Readers should conduct their own research before taking any actions related to the asset, company, or any information in this article and assume full responsibility for their decisions. This article should not be considered as investment advice. Our news is prepared with AI support.
Do you suspect this content may be misleading, incomplete, or inappropriate in any way, requiring modification or removal?
We appreciate your report.