According to Cointelegraph, a staff report published on Sep. 26 by the Federal Reserve Banks of Boston and New York compares stablecoins, such as USDT and USDC, to money market funds. The report, titled “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?” examines investor behavior during the stablecoin runs of 2022 and 2023 and compares it to investor behavior during the money market fund runs of 2008 and 2020.
The researchers found that stablecoins are vulnerable to runs during periods of broad crypto market dislocation as well as idiosyncratic stress events. They also noted that stablecoins have a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate and runs occur, potentially causing an asset crash for remaining investors. A break-the-buck threshold in money market funds happens when the net asset value of a fund drops below a dollar, leading to investor shares, valued at $1.00, dipping below market price and causing investors to seek safe harbor elsewhere.
The report also highlights concerns that if stablecoins continue to grow and become more interconnected with key financial markets, such as short-term funding markets, they could become a source of financial instability for the broader financial system. Italy’s central bank has also taken measures to identify contributing factors and prevent stablecoin runs, citing the 2022 Terra Luna collapse as an example that stablecoins “have not proved stable at all.” Italy has called for the formation of an international regulatory body to govern cryptocurrency, stablecoins, and related technologies.
