The Federal Reserve Banks of Boston and New York recently highlighted potential risks linked to stablecoins, comparing them to traditional money market funds and their impact during financial crises.
Stablecoins and Financial System Instability
Released on September 26th, the report delves into the behavior of investors during notable stablecoin runs between 2022 and 2023. Researchers observed behaviors reminiscent of the panic-driven exodus from money market funds witnessed during the 2008 financial crash and the 2020 pandemic upheaval.
The Significance of the “Break-the-Buck” Threshold
One standout finding from the report was the identification of a critical “break-the-buck” threshold for stablecoins, set around $0.99. If the value dips below this mark, there’ll be a surge in redemptions as investors fear the stablecoin will no longer maintain its $1.00 peg. This situation is eerily similar to critical junctures in money market fund collapses.
Vulnerabilities in Different Stablecoin Models
The report goes on to mention that during times of widespread crypto market upheaval or specific stress events, stablecoins can become particularly susceptible. The models that these coins follow can differ greatly. For instance, algorithmic stablecoins such as TerraUSD do not have the reserve backing seen in prominent competitors like Tether. This lack might have contributed to TerraUSD’s decline in 2022.
