Stablecoins and Money Market Funds: parallel vulnerabilities
This Federal Reserve Bank of Boston working paper demonstrates that stablecoins function like modern money market funds (MMFs)—including their susceptibility to runs and flight-to-safety dynamics. The central thesis is that despite operating in different markets and regulatory environments, both instruments exhibit strikingly similar behavioral patterns during financial stress. The authors analyzed the 12 largest stablecoins (January 2021–March 2023) using the same analytical framework traditionally applied to MMF studies:
- Local projection methods to estimate flow responses to market stress (crypto shocks identified as bottom 5th percentile Bitcoin price movements)
- Event studies around major crises comparable to MMF run episodes
- Within-network substitution analysis mirroring how investors switch between MMF categories
- Weighted regression analysis controlling for asset size
Key findings
- Flight-to-safety hierarchy: Just as MMF investors flee prime funds for government funds during stress, stablecoin investors demonstrate a clear safety hierarchy. During crypto market shocks, algorithmic and crypto-backed stablecoins experienced severe outflows (9.2% and 3.0% cumulative declines respectively), while “safer” US-based asset-backed stablecoins received inflows of 1.9%. This mirrors the classic MMF pattern where perceived riskiness determines investor flight patterns.
- Crisis-dependent safety definitions: The May 2022 TerraUSD run and March 2023 Silicon Valley Bank failure revealed that safety is relative and crisis-dependent—exactly like MMFs. During the TerraUSD collapse, offshore stablecoins were perceived as risky and experienced 2.3 percentage points lower daily circulation changes than US-based alternatives. Eight months later, when USD Coin faced SVB exposure, the hierarchy inverted: offshore stablecoins received 1.3 percentage points higher daily inflows as investors fled the now-unsafe USD Coin. This dual reversal mirrors how MMF investors reassess safety based on specific shock characteristics.
- Within-ecosystem fund family behavior: Similar to how MMF investors switch between fund families’ offerings to minimize transaction costs, stablecoin investors substitute within the same blockchain. On large blockchains (Ethereum and Binance Smart Chain housing 90% of stablecoin circulation), a $1 outflow from offshore stablecoins corresponded to $0.42 inflows to US-based stablecoins during the 2022 run. However, on smaller blockchains lacking sufficient “safe” alternatives, both stablecoin types experienced simultaneous outflows—paralleling how investors facing no attractive alternatives within a fund family may flee the entire family.
Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?
Authors: Kenechukwu Anadu, Pablo 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 Boston, MIT, Federal Reserve Bank of New York, Harvard University, Isenberg School of Management
Liquidity buffers and default risk: Optimal regulation of stablecoin issuers
This paper by Tirupam Goel, Ulf Lewrick, and Isha Agarwal provides a forward-looking policy framework by modeling the fundamental trade-off stablecoin issuers face between meeting current redemptions versus maintaining liquidity for future obligations. The authors use a dynamic optimization model of stablecoin issuers calibrated on real stablecoin data (2020-2023) that tests how liquidity and capital requirements affect portfolio decisions and systemic risk. They then evaluate two regulatory tools: liquidity requirements (LR) (cash-to-stablecoin ratio) and capital requirements (CR) (capital-to-stablecoin ratio), both designed as usable buffers with discipline penalties
Key findings
- Inverted U-shaped liquidity management: For small redemptions, issuers use cash primarily; for medium redemptions, they mix cash and bond sales; for large redemptions, they exhaust cash and face default risk when capital cannot absorb fire-sale losses
- Unregulated issuers hold zero cash when experiencing particularly large subscriptions, as persistent inflows reduce insurance value of liquidity
- Both requirements reduce default risk and spillovers but through distinct mechanisms: LR reduces forced bond sales (lowering expected price impact to ~13-111 bps), while CR helps absorb liquidation costs (reducing default probability to ~0.2%)
- Dual requirements justified: A combination of 1% CR and 30% LR can effectively limit both default probability (0.2%) and market spillovers, supporting the Tinbergen Principle that dual objectives require dual instruments
- Price impact estimation: Flow-induced sales of $100 million reduce weekly Treasury returns by 1-2 basis points, informing calibration of fire-sale costs
Making stablecoins stable(r): Can regulation help?
Authors: Tirupam Goel, Ulf Lewrick, Isha Agarwal
From: Bank for International Settlements, University of Basel, University of British Columbia
