Fed says stablecoins are a lot like money market funds

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Fed says stablecoins are a lot like money market funds

The Federal Reserve said stablecoins are a lot like money market funds - and that could pose a threat to the broader financial system.

The new report by the New York Fed identifies stablecoins as having parallels with money market funds, a type of SEC-registered mutual fund that seeks price stability through relatively low-risk investments.

Over $5 trillion in assets have been invested in money market funds, the authors said.

Like money market funds, stablecoins provide their investors with money-like assets that are vulnerable to runs, and in periods of stress may exhibit a 'flight to safety' in which investors exchange them for other assets they believe are less risky.

Government funds, such as government money, invest in cash treasuries and similar assets, prime funds, which can also invest in commercial paper and certificates of deposit, and tax-exempt funds, which can also invest in debt issued by local governments.

The researchers explored periods of stress for money market funds and stablecoins.

The Great Recession in 2008, the EU's debt crisis in 2011 and the COVID-19 pandemic in 2020 were among the factors that led to the run-off of money market funds. Investors fled from prime funds and government funds, which were considered safer, according to the authors.

The researchers believe runs on stablecoins will include the collapse of Terra in 2020 and Silicon Valley Bank earlier this year.

Besides its commercial paper and other securities, Tether has also suffered.

With Silicon Valley Bank's collapse in March, DollarC wasn't so lucky.

The banks held 8% of the assets supportingUSDC, traders dumped the token, sending its price as low as $0.88. Investors also dumped the stablecoins backed by USDC and FRAX, which are now worth millions of dollars.

Tether prices grew, with inflows pushing its price to $1.03 a share.

There are some major differences between money market funds and stablecoins, such as assets that back them and investors' rights - or lack thereof - to redeem those assets. In contrast with money market funds, stablecoins are not regulated by the SEC and appeal primarily to retail investors.