Home > News > Finance > Stablecoins are susceptible to macroeconomic monetary policy: ECB
A new European Central Bank (ECB) research paper examines the contrasting effects of digital currency market shocks and US monetary policy on stablecoins and traditional money market funds. has challenged commonly accepted notions about the role and reliability of stablecoins during this period. Unexpected market conditions.
“Stablecoins, Money Market Funds and Monetary Policy”, written by a team of joint researchers from the ECB and the Bank for International Settlements (BIS), states that while “cryptocurrency shocks” have little impact on traditional finance, The policy was found to have a significant impact on both sectors. , but in the opposite direction. Their conclusions highlight the major role of greenback monetary policy in linking traditional financial markets with digital currencies, and go against long-held assumptions about stablecoins within the digital currency community. It is.
The findings are based on a comprehensive dataset that combines traditional financial market variables, digital currency market indicators, and two sets of economic shocks.
An economic shock is an unexpected event that affects the economy, whether positive or negative. In the context of this paper, cryptocurrency shocks and monetary policy shocks are defined as sudden changes that arise from external factors and have a noticeable impact on the market.
Cryptocurrency shocks can include unexpected regulatory announcements, major hacks, sudden changes in investor sentiment, etc., while monetary policy shocks typically involve unexpected interest rate decisions or changes in bond issuance. Refers to unexpected changes in central bank policy, such as changes in central bank policy.
In this study, the monetary policy shock was identified by measuring a surprise of US Treasuries Futures Ren before and after the Federal Reserve’s policy, but the cryptocurrency shock is the Bloomberg Galaxy Crypto Index (BGCI). Unpredictable elements of, that is, cannot otherwise be explained by known factors or traditional financial metrics. This uses a machine learning technique called elastic net.
This data covers the period from January 2019 to July 2023, including the prolonged global shock caused by COVID-19, which led to several significant events in the digital currency market, and a significant tightening of US monetary policy. It covers the period up to.
One of the headlines from this study is that shocks originating from digital currency markets have virtually no impact on traditional financial markets, including money market funds (MMFs). The researchers found that stock prices, US Treasury yields, and money market funds assets did not respond significantly to a 12-week crypto shock.
In contrast, stablecoins have had a significant and measurable response to disruptions in the crypto market, with the report stating that “stablecoin market capitalization has declined significantly due to the significant reaction of Tether (USDT). Three months after the crypto shock, it fell by about 4 percentage points.” and USDC. ”
The conclusions here cast serious doubt on the idea that stablecoins serve as a “crypto safe haven” during times of market stress. The authors declare that “our evidence does not support the claim that stablecoins as a whole have the potential to serve as a safe haven for cryptocurrencies.”
In contrast to the limited impact of crypto shocks, this study shows that US monetary policy has a wide range of effects on both traditional financial markets and crypto markets, and that monetary policy contraction affects stock markets. It turns out that this has led to a decline in the economy and an increase in short-term interest rates.
More interestingly, the researchers observed different reactions between prime money market funds and stablecoins. They point out that “yields and assets of prime MMFs increase after monetary policy contractionary shocks,” likely because investors moved funds from bank deposits to high-yield MMFs as interest rates rose. are.
In contrast, stablecoins saw significant outflows after monetary tightening. The paper reports that “the market capitalization of stablecoins fell by about 10 percentage points after three months” due to the shock of policy cuts. This decline was “statistically significant and persistent, and far greater than the impact of crypto shocks that caused similar magnitude of Bitcoin price declines.”
The authors argue that this reaction is due to the opportunity cost of holding interest-free stablecoins increasing as interest rates rise, leading investors to shift to traditional assets. They conclude that “monetary policy, especially the US dollar, is the linchpin that connects crypto markets and traditional financial markets.”
Such fluctuations in response to policy changes undermine stability, one of the key selling points of stablecoins, and should serve as a stark warning to participants in the digital currency market.
“Stablecoins as a whole do not serve as a ‘safe haven’ against cryptocurrencies or regular financial shocks,” the report said.
“As monetary policy tightens, crypto prices have fallen, markets have turned bearish, and investors have reduced demand for stablecoins for speculative purposes.”
The strong negative correlation between stablecoin market capitalization and tightening of macroeconomic policy suggests that these assets are far more volatile in the face of changing economic conditions than their name suggests. It shows that there is a possibility (and often shady publishers would have you believe).
“Our results first suggest that the role of stablecoins as a safe haven for cryptocurrencies is questionable and does not extend to shocks in cryptocurrencies or traditional financial markets.” It is written in the book.
“Second, US monetary policy not only affects traditional financial markets, but also has a significant impact on the crypto market, especially stablecoins.”
The result is that stablecoins ultimately appear to be much more vulnerable to macroeconomic influences, particularly changes in US monetary policy, than previously advertised. These findings question, or should challenge, the way we view stablecoins, both in relation to crypto markets and the broader financial system.
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