A new report from the Federal Reserve Banks of Boston and New York draws parallels between stablecoins and traditional money market funds. It suggests that these coins could transmit instability to the wider financial system, akin to money market stresses during previous crises.
Published on September 26th, the report analyzes investor behavior during recent stablecoin runs in 2022–2023. Researchers found patterns resembling investor flights to safety from money market funds during the 2008 Great Financial Crisis and the 2020 COVID-19 turmoil.
JUST IN: 🇺🇸 Federal Reserve says stablecoins could become a source of financial instability for the broader financial system.— Watcher.Guru (@WatcherGuru) September 26, 2023
Federal Reserve report a “break-the-buck” threshold for stablecoins
Notably, the report identified a discrete “break-the-buck” threshold for stablecoins around $0.99. The report states that below this price, redemptions accelerate rapidly as investors panic that the $1.00 peg will be lost. This mirrors tipping points in money market fund runs.
According to the report, “stablecoins are vulnerable to runs during periods of broad crypto market dislocation as well as idiosyncratic stress events.”
Stablecoin models differ, and algorithmic coins like TerraUSD lack reserves backing major rivals like Tether. It is also possibly one of the reasons that caused the downfall of TerraUSD in 2022.