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Stablecoins might “become a source of financial instability,” according to US Federal Reserve Banks.

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The report delves into a comparative analysis between stablecoins and money market funds, ultimately concluding that they share analogous deficiencies.

On September 26, a staff report jointly authored by the Federal Reserve Banks of Boston and New York unveiled an in-depth examination comparing stablecoins—such as USDT and USDC—to the workings of money market funds. The report’s notable revelations include the discovery that stablecoins and money market funds exhibit parallel behaviors during periods of heightened demand, and it raises concerns about the potential for stablecoins to introduce instability into the broader financial ecosystem.

The report, intriguingly named “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?” presents an exhaustive juxtaposition of investor behaviors during the stablecoin market upheavals of 2022 and 2023 against those during the money market fund crises of 2008 and 2020.

“Our research illuminates the vulnerability of stablecoins to market upheavals in the wider cryptocurrency landscape, as well as isolated stress incidents. If stablecoins persist in their expansion and deepen their integration within critical financial arenas, such as short-term financing markets, they may emerge as a potential source of financial instability for the broader financial realm,” the report cautions.

The researchers also highlight an intriguing observation, noting that stablecoins appear to possess a distinct “break-the-buck” threshold at the precarious mark of $0.99. When stablecoin values dip below this threshold, redemption accelerates, triggering runs—instances in which investors hurriedly exit, potentially precipitating an asset collapse for those who remain.

In the realm of money market funds, a “break-the-buck” scenario arises when the net asset value of a fund plunges below one dollar. This phenomenon can lead to investor shares, initially valued at $1.00, falling beneath their market price, prompting investors to seek refuge elsewhere.

As recently reported by Cointelegraph, Italy’s central bank is also taking proactive measures to identify contributing factors and avert potential stablecoin crises. In a recent statement, the Italian banking authority cited the 2022 Terra Luna debacle as a poignant example of stablecoins proving to be anything but stable.

According to the report’s findings, Italy has extended its call to global policymakers to establish an international regulatory body tasked with overseeing the realms of cryptocurrency, stablecoins, and related technologies.

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