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Federal Reserve: Stablecoins Could Become a Source Of Financial Instability



The Federal Reserve Banks of Boston and New York published a staff report on Sep. 26 comparing stablecoins, such as USDT and USDC, to money market funds. The report compares stablecoins to money market funds and ultimately concludes they have similar shortcomings. Observations in the report stated that stablecoins and money market funds follow similar patterns during runs and that stablecoins could bring about instability into the broader financial system.

The report, titled “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?” includes a comprehensive comparison of investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020.

Per the publication:


“Our findings show that stablecoins are vulnerable to runs during periods of broad crypto market dislocation as well as idiosyncratic stress events. Should 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.”

The researchers also said that stablecoins appear to have a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate and run — periods in which investors flee, potentially causing an asset crash for remaining investors.

A break-the-buck event in money market funds occurs when the net asset value of a fund drops below a dollar, this can lead to investor shares, valued at $1.00, to dip below market price and cause investors to seek safe harbor elsewhere.

The central bank of Italy is also taking action to find the causes and stop stablecoin runs, as Cointelegraph recently reported. The collapse of the 2022 Terra Luna was used by the Italian banking authorities as evidence that stablecoins “have not proved stable at all.”

Italy has reportedly also urged international legislators to establish a regulatory organization to oversee cryptocurrencies, stablecoins, and related technology.


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