The European Central Bank (ECB) published a working paper exploring the link between monetary policy, money market funds (MMFs) and stablecoins. While people often view stablecoins as a safe haven in turbulent crypto markets, the ECB concludes they are not. It also finds that U.S. monetary policy is a major factor determining the volumes of stablecoins. “Monetary policy, in particular for the U.S. dollar, is the linchpin that connects crypto and traditional financial markets,” wrote the authors.
The analytical models explore a horizon of up to 12 weeks after an event, and found that stablecoin market capitalization drops by four percent in the three months following a negative crypto shock. Unsurprisingly, the same crypto shocks have no impact on money market funds. However, we’d observe that should stablecoins continue to grow and account for a larger proportion of Treasuries, it’s conceivable a crypto shock could impact money market funds in the future.
Monetary policy impacts stablecoins more than crypto shocks
The other major scenario explored was a monetary policy shock, particularly the rise in interest rates. It had a dramatic impact on stablecoins, leading to a 10% drop in capitalization over the following 12 weeks. The ECB highlighted that this impact was far more substantial than the crypto shock. It concludes that holding non interest bearing assets in a rising interest environment drives investors towards traditional assets.
The same monetary policy shock also impacted money market funds, resulting in an immediate increase in prime money market fund volumes, rising further over the 12 week period. The ECB noted that there’s a lag in bank interest rates, resulting in MMFs being relatively more attractive. For non-prime money market funds, the initial reaction was a drop in volumes followed by a stabilization.
Meanwhile, beyond this research paper, ECB Director Piero Cipollone gave an important speech today outlining the ECB’s vision for a Digital Capital Markets Union based around a European Ledger for tokenization.
