How do stablecoins compare to money market funds?
In this paper, Anadu et al. look at the similarities and differences between stablecoins and Money Market Funds (MMFs), comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the MMF runs of 2008 and 2020. A basic similarity between the two is that they both provide money-like assets to investors by engaging in liquidity transformation. But they are both vulnerable to runs. In particular:
- During a stress event, investors identify a driver of risk and run away from MMFs that are more exposed to such risk toward relatively safer MMFs. In a similar fashion, investors run from riskier stablecoins to safer ones. For example, the March 2023 stablecoin run had at its epicenter USD Coin (USDC), which had been previously considered among the safest stablecoins due to its portfolio of Treasury securities and bank deposits. The run spilled over into Dai and Frax, both of which were partially collateralized by USDC. Investors ran from USDC to other stablecoins that they perceived as safer at the time, namely traditional-asset-backed stablecoins, especially Tether (USDT).
In terms of differences:
- MMFS are regulated by the SEC, whereas stablecoins are not. In addition, MMFs are typically sponsored by large banks or fund families, while stablecoins are sponsored by digital asset issuers.
- The clientele of stablecoins and MMFs are different: MMF investors include large, traditional, institutional investors, such as financial and non-financial corporations, whereas stablecoin investors are mainly either retail investors or crypto-related companies.
- MMFs are not traded on secondary markets and can be redeemed at par with the fund, while stablecoins are traded in secondary markets (crypto exchanges), and redemption rights and mechanisms vary across stablecoins.
- MMFs are only backed by traditional financial assets, while stablecoins may also be backed by digital assets or an algorithm.
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.
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Authors: Kenechukwu Anadu, Pablo D. Azar, Marco Cipriani, Thomas M. Eisenbach, Catherine Huang, Mattia Landoni, Gabriele La Spada, Marco Macchiavelli, Antoine Malfroy-Camine, J. Christina Wang
From: Federal Reserve Bank of New York, Federal Reserve Bank of Boston, Isenberg School of Management
The IMF’s crypto risk assessment matrix
In this paper, Hacibedel and Perez-Saiz propose a conceptual framework and a tool to integrate macro financial risks from crypto assets into regulatory and systemic risk assessment frameworks. The Crypto-RAM (C-RAM) i.e. the proposed framework consists of a three-step approach:
- The first step involves a decision tree to assess the crypto sector’s macro-criticality in an economy. The authors define macrocriticality as an economic issue that significantly influences the present or prospective balance of payments or domestic stability. The assessment of such risk should cover household and corporate exposure to identify the vulnerabilities and risks in the real sector as well as the significance of macro-linkages stemming from these. Financial sector exposure should also be assessed in light of vulnerabilities and risks coming from private crypto assets in a similar manner.
- The second step focuses on quantifying the crypto risks in an economy via country risk mapping. The mapping is based on a risk matrix that identifies vulnerabilities, triggers, risk implications, and policy options for crypto risk mitigation.
- The third step covers the global macro-financial risks from crypto assets that would have implications for a country’s systemic risk assessment. It implies an assessment of the global risks within each country and lays out the policy options for risk mitigation.
Assessing Macrofinancial Risks from Crypto Assets
Authors: Burcu Hacibedel, Hector Perez-Saiz
From: IMF
