Stablecoins, money market funds and monetary policy

Summary

Focus

Stablecoins are crypto tokens that exist on distributed ledgers (ie "on-chain") and are designed to maintain a stable value, typically pegged one to one with the US dollar. Issuers back these tokens mostly with fiat-denominated, short-term assets such as Treasuries, high-quality commercial papers, repurchase agreements and bank deposits. This structure, where money-like liabilities are supported by assets that can become illiquid, exposes stablecoin issuers to the risk of liquidity runs. In this way, the balance sheet structure of stablecoins closely mirrors that of money market funds (MMFs).

Contribution

Recent work has shown that in times of stress within crypto markets, stablecoins demonstrate a flight-to-quality behaviour similar to MMFs during past crises, with perceived high-quality stablecoins seeing inflows at the expense of lower-quality ones. However, unlike MMFs, there is no consistent evidence of aggregate inflows into stablecoins during major crypto events. Whether stablecoins serve as a "crypto safe haven" remains an open question. By deriving and analysing a new series of crypto market shocks alongside US monetary policy shocks, we highlight the differing responses of stablecoins and MMFs to these shocks.

Findings

We find that while crypto market shocks have little impact on MMFs or traditional financial markets, they negatively affect stablecoins. Conversely, US monetary policy shocks significantly influence both MMFs and stablecoins, though in opposite ways. Prime MMFs tend to grow following contractionary monetary policy, while the market capitalisation of stablecoins declines. Overall, stablecoins do not act as a safe haven from either crypto or traditional financial shocks. As monetary policy tightens, crypto prices fall, markets turn bearish, and demand for stablecoins – used primarily as a settlement tool in crypto markets – decreases. Thus, US monetary policy plays a critical role in linking traditional and crypto markets.

Abstract

Using a new series of crypto shocks, we document that money market funds' (MMF) assets under management, and traditional financial market variables more broadly, do not react to crypto shocks, whereas stablecoin market capitalization does. U.S. monetary policy shocks, in contrast, drive developments in both crypto and traditional markets. Crucially, the reaction of MMF assets and stablecoin market capitalization to monetary policy shocks is different: while prime-MMF assets rise after a monetary policy tightening, stablecoin market capitalization declines. In assessing the state of the stablecoin market, the risk-taking environment as dictated by monetary policy is much more consequential than flight-to-quality dynamics observed within stablecoins and MMFs.

JEL Classification: E50, F30

Keywords: stablecoins, crypto, Bitcoin, monetary policy shocks, money market funds