The Federal Reserve Banks of Boston and New York recently released a report that closely examines stablecoins such as Tether’s USDT and Circle’s USD Coin. Comparing stablecoins to money market funds, the report identifies worrisome similarities in their behavior, particularly during periods of market stress. The study reveals that these two financial instruments display similar reactions during market panics, highlighting the potential for stablecoins to destabilize the entire financial system.
If stablecoins continue to grow and become interconnected with key financial markets, such as the short-term financing markets, they could become a source of financial instability for the overall financial system.
The in-depth study, titled ‘Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?’, analyzes investor behavior during the turbulent periods of 2022 and 2023 related to stablecoins. These patterns bear a striking resemblance to the reactions observed during the money market fund panics of 2008 and 2020.
The ‘break-the-buck’ phenomenon
The study particularly highlights the stablecoins’ ‘break-the-buck’ threshold set at $0.99. Falling below this value accelerates redemptions and triggers periods of panic, where a massive investor exodus could lead to a sharp drop in assets for the remaining investors. This threshold echoes the scenario of money market funds, where the net asset value falling below a dollar can devalue investors’ shares, prompting them to seek safer alternatives.
In addition, international concerns resonate with those of the Federal Reserve Banks. For example, the Italian central bank is actively investigating the factors leading to stablecoin-related panics. Highlighting the Terra debacle in 2022, Italian authorities have emphasized that stablecoins have clearly shown a lack of stability. Furthermore, in an effort to oversee the rapidly expanding crypto domain, Italy has proposed the creation of a global regulatory body dedicated to cryptocurrencies, stablecoins, and their associated technologies.
