Sign In with Google
Sign In with Facebook
Federal Banks Investigate Stablecoin Dynamics
A recent publication from the Federal Reserve Banks of New York and Boston has shed new light on stablecoins, like Tether (USDT) and USD Coin (USDC). Released on September 26, the staff report analyzed the dynamics of stablecoins in comparison to money market funds. The primary observations from the report indicated a similar behavioral pattern in stablecoins and money market funds during periods of runs. The report also suggested that the potential for instability in the broader financial system, as a result of stablecoins, cannot be ruled out.
Stablecoins vs Money Market Funds
The report, aptly named “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?,” offered a detailed analysis of investor behaviour during stablecoin runs in the years of 2022 and 2023. This pattern was juxtaposed with investor behaviour during the runs on money market funds in the years 2008 and 2020.
Stablecoin's "Break-The-Buck" Threshold
A significant conclusion put forward by the researchers was that stablecoins exhibit a specific "break-the-buck" threshold at $0.99. Should this level fall further, a surge in redemptions and runs can be expected, leading to a potential asset crash. The money market funds experience a similar "break-the-buck" scenario when the net asset value of a fund plunges below a dollar. This negatively impacts the valuation of investor shares, previously at $1, and triggers investors to seek financial refuge elsewhere.
Global Regulatory Actions
The central bank of Italy is mobilizing efforts to determine the causes leading to stablecoin runs and devise preventive strategies. With a reference to the 2022 collapse of the Terra stablecoin, the Italian banking authority pointed out that stability in stablecoins is not guaranteed. Italy has made a global appeal for the creation of an international body of regulation for monitoring cryptocurrency, stablecoins, and associated technologies.
