The European Central Bank (ECB) has published a research report examining the relationship between monetary policy, money market funds (MMFs), and stablecoins. While people often see stablecoins as a safe haven in turbulent crypto markets, the ECB concludes that this is not the case. It was also found that US monetary policy is a major factor determining the amount of stablecoins. “Monetary policy, particularly the US dollar, is the linchpin that connects crypto markets and traditional financial markets,” the authors write.
The analytical model examines a period of up to 12 weeks post-event and finds that stablecoin market capitalization declines by 4% in the three months following a negative crypto shock. Naturally, the same cryptocurrency shock will not affect money market funds. However, if stablecoins continue to grow and become a larger proportion of U.S. Treasuries, we believe that crypto shocks could impact money market funds in the future.
Monetary policy has a bigger impact on stablecoins than crypto shocks
Another key scenario considered was a monetary policy shock, particularly an increase in interest rates. This had a dramatic impact on the stablecoin, which saw its market capitalization decline by 10% in the following 12 weeks. The ECB emphasized that this impact is much larger than the crypto shock. The study concludes that holding non-interest-bearing assets in a rising interest rate environment drives investors toward traditional assets.
The same monetary policy shock also affected money market funds, resulting in an immediate increase in prime money market fund trading volume and further increases over a 12-week period. The ECB noted that there is a lag in bank rates, making MMFs relatively more attractive as a result. For non-prime money market funds, the initial reaction was a decline in trading volume, which then stabilized.
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 on a European ledger for tokenization.
