The Federal Reserve Banks of Boston and New York have jointly published a staff report on September 26, comparing stablecoins like Tether and USDC to money market funds. Key findings in the report indicate that stablecoins and money market funds exhibit similar behaviors in their operations and that stablecoins could potentially introduce instability into the broader financial system.
The report, titled "Flight to Safety: Are Stablecoins the New Money Market Fund?", offers a thorough analysis of investor behavior during the stablecoin run in 2022 and 2023, drawing parallels with investor behavior during the money market fund run in 2008 and 2020.
According to the report, "Our findings suggest that stablecoins are vulnerable to runs during widespread crypto market disruptions, as well as during exceptional stress events. If stablecoins continue to grow and become more closely connected to major financial markets, such as short-term funding markets, they may become sources of financial instability in the broader financial system."
The researchers also point out that stablecoins appear to have a distinct "break the bank" threshold, usually around $0.99, below which redemptions can accelerate, leading to a run. This could potentially prompt remaining investors to withdraw their assets during a period of declining asset values. Money market funds encounter similar break-even thresholds when their net asset value falls below $1, which can trigger a rush of investors seeking safer alternatives.
The Bank of Italy is also taking steps to understand the contributing factors to and prevent runs on stablecoins. Italy's banking regulator highlighted the 2022 collapse of Terra as an example of how stablecoins "have not proven to be stable at all."
In addition to these actions, Italy has called upon global policymakers to establish an international regulatory body to oversee cryptocurrencies, stablecoins, and related technologies.
