Runs and Flights to Safety: Are Stablecoins the New Money Market Funds? 
The paper documents how stablecoins are similar to money market funds (MMFs) in that both are susceptible to runs and flights to safety. Stablecoins and MMFs both engage in liquidity transformation to provide investors with money-like assets that have a stable nominal rate, and issuing these liquid liabilities renders stablecoins and MMFs vulnerable to runs. Also, similar to MMFs, some stablecoins are riskier than others. Some are reportedly backed by cash, US Treasuries, or other safe assets that maintain or tend to increase in value during times of stress; others are said to be backed by riskier collateral, such as corporate debt or other crypto assets. If the collateral backing a stablecoin loses value, the stablecoin will likely lose its peg and potentially trigger a run.
Key Findings
- Flight-to-safety dynamics in stablecoins resemble those in the MMF industry. During periods of stress in crypto markets, safer stablecoins experience net inflows, while riskier ones suffer net outflows. This is true on average and for specific periods of high stress in the market.
- During flights to safety, flows across stablecoins tend to occur within the same blockchain—just as flows across MMFs occur within the same fund family—unless the blockchain is small and relatively risky.
- When a stablecoin’s price hits a threshold of 99 cents (falling from its stable price of $1), investor redemptions accelerate significantly, similar to how investors respond when an MMF “breaks the buck,” that is, falls below $0.995, the price below which regulation mandates that a fund’s board address the deviation.
Implications
The paper’s findings show that stablecoins are vulnerable to runs during periods of broad crypto market dislocation as well as idiosyncratic stress events. If investment in stablecoins continues to grow and they become more interconnected with key traditional financial markets, they could add more instability to the broader financial system.
Abstract
Similar to the more traditional money market funds (MMFs), stablecoins aim to provide investors with safe, money-like assets. We investigate similarities and differences between these two investment products. Like MMFs, stablecoins suffer from ``flight-to-safety'' dynamics. We document net flows from riskier to safer stablecoins on days of crypto-market stress and estimate a discrete ``break-the-buck'' threshold of $1, below which stablecoin redemptions accelerate. We then focus on two specific stablecoin runs, in 2022 and 2023, showing that the same flight-to-safety dynamics also characterized these episodes. Finally, as flight-to-safety flows occur within MMF families, stablecoin flows tend to occur within blockchains.