Stablecoin balance sheet structures closely resemble those of money market funds. This column finds that despite these similarities, their reactions to crypto and US monetary policy shocks are different. Following a crypto shock, the assets under management of money market funds barely bulge whereas the capitalisation of stablecoins drops significantly. After a monetary policy tightening, prime money market fund assets rise while stablecoin market capitalisation substantially declines. As monetary policy tightens, crypto prices fall, the market turns bearish, and investors demand less stablecoins for speculative purposes. US monetary policy therefore acts as the key nexus between traditional and crypto markets.
Stablecoins are crypto tokens that live on distributed ledgers (i.e. ‘on-chain’) and promise to always be worth a dollar, providing par convertibility on demand. Issuers of major stablecoins defend this promise by holding (mostly) fiat-denominated (i.e. ‘off-chain’) short-term assets, such as Treasuries, high-quality commercial paper, repurchase agreements, and bank deposits. 1 The combination of money-like demandable liabilities with backing assets that may become illiquid implies that stablecoin issuers\’ liquidity transformation exposes them to runs. For this reason, stablecoins have been compared to bank deposits and wildcat banks (Gorton et al. 2023, Gorton and Zhang 2023), fixed exchange rate regimes (Levy Yeyati and Katz 2022), exchange-traded funds (Ma et al. 2023), eurodollars (Aldasoro et al. 2024b), and in particular, money market funds (MMFs) (Anadu et al. 2024, Oefele et al. 2024). Indeed, the balance sheet structure of stablecoins closely resembles that of money market funds, although they typically hold more cash than most government funds. During episodes of stress in crypto markets, some stablecoins exhibit flight-to-quality dynamics, much like those observed for money market funds during the great financial crisis and the COVID-19 pandemic, even though it is still not clear if stablecoins, as a whole, act as a crypto safe haven (Anadu et al. 2024, Oefele et al. 2024, Cipriani and La Spada 2020). 2
To what extent do stablecoins and money market funds resemble each other when shocks hit crypto or financial markets? In a recent paper (Aldasoro et al. 2024a), we document an important distinction between stablecoins and money market funds, specifically their very different response to crypto and US monetary policy shocks since 2019. Using a new series of crypto market shocks and a standard measure of monetary policy shocks, we show that while crypto shocks are inconsequential for money market funds and traditional financial markets, they negatively affect stablecoins. Figure 1 focuses on the impact on prime money market funds – funds that invest primarily in short-term obligations issued by banks and corporations – and stablecoins (the sum of the market capitalisations of Tether, USD Coin, and Dai). Stablecoins exhibit a significant reaction to crypto shocks, with their market capitalisation dropping by around four percentage points after three months following a negative crypto shock (right panel of Figure 1), whereas money market fund assets under management barely bulge (left panel of Figure 1).
Figure 1 The impact of a negative crypto shock on prime money market funds and stablecoins
In contrast, US monetary policy shocks significantly affect money market funds (especially prime MMFs in the roughly three-month horizon we consider) and stablecoins, but in opposite directions. Prime money market fund assets grow after contractionary monetary policy shocks (see left panel of Figure 2). As monetary policy tightens, deposit rates lag policy rates, and the opportunity cost of holding bank deposits increases, causing bank deposits to decline (Drechsler et al. 2017). In turn, the rates paid by money market funds, a close substitute to bank deposits, track policy rates much more closely, and funding to money market funds – reflected in higher assets under management – increases (Xiao 2020, Aldasoro and Doerr 2023). Contrary to money market funds’ assets under management, stablecoin market capitalisation significantly declines after a monetary policy contraction, dropping by around ten percentage points after three months (see right panel of Figure 2). Crucially, the decline is much larger than the impact of crypto shocks that lead to a decline in Bitcoin prices of a similar magnitude (see right panel of Figure 1). As monetary policy tightens, crypto prices fall, the market turns bearish, and investors demand less stablecoins (the settlement means in crypto markets) for speculative purposes. US monetary policy therefore acts as the key nexus between traditional and crypto markets.
Figure 2 The impact of a US monetary policy shock on prime money market funds and stablecoins
Our findings show that negative crypto shocks have no impact on traditional financial markets, including money market funds, but negatively affect stablecoins. In contrast, US monetary policy shocks are more important, leading to inflows into prime money market funds and significantly larger outflows from stablecoins. These results have two implications. First, the role of stablecoins as a crypto safe haven is questionable and does not seem to hold following either crypto or traditional financial market shocks. Second, US monetary policy not only affects traditional financial markets, but also exerts a significant influence on cryptocurrency markets, especially stablecoins.
Source: cepr.org
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