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Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?

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Abstract
Stablecoins and money market funds both seek to provide investors with safe, money-like assets but are vulnerable to runs in times of stress. In this paper, we investigate similarities and differences between the two, comparing investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020. We document that, similarly to money market fund investors, stablecoin investors engage in flight to safety, with net flows from riskier to safer stablecoins during run periods. However, whereas in money market funds, run risk has historically materialized only in prime funds, with stablecoins, runs occurred in different stablecoin types across the 2022 and 2023 episodes. We also show that, similar to intrafamily flows in money market funds, stablecoin flows tend to be within blockchains. Finally, for stablecoins, we estimate a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate.

Suggested Citation

  • Kenechukwu E. Anadu & Pablo D. Azar & Catherine Huang & Marco Cipriani & Thomas M. Eisenbach & Gabriele La Spada & Mattia Landoni & Marco Macchiavelli & Antoine Malfroy-Camine & J. Christina Wang, 2023. "Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?," Working Papers 23-11, Federal Reserve Bank of Boston.
    • Handle: RePEc:fip:fedbwp:97050
    DOI: 10.29412/res.wp.2023.11
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    References listed on IDEAS

    as
    1. Emily A Gallagher & Lawrence D W Schmidt & Allan Timmermann & Russ Wermers, 2020. "Investor Information Acquisition and Money Market Fund Risk Rebalancing during the 2011–2012 Eurozone Crisis," The Review of Financial Studies, Society for Financial Studies, vol. 33(4), pages 1445-1483.
    2. Marco Cipriani & Gabriele La Spada, 2020. "Sophisticated and Unsophisticated Runs," Staff Reports 956, Federal Reserve Bank of New York.
    3. Antoine Bouveret & Antoine Martin & Patrick E. McCabe, 2022. "Money Market Fund Vulnerabilities: A Global Perspective," Staff Reports 1009, Federal Reserve Bank of New York.
    4. Emily A Gallagher & Lawrence D W Schmidt & Allan Timmermann & Russ Wermers, 2020. "Investor Information Acquisition and Money Market Fund Risk Rebalancing during the 2011–2012 Eurozone Crisis," Review of Finance, European Finance Association, vol. 33(4), pages 1445-1483.
    5. Victoria Ivashina & David S. Scharfstein & Jeremy C. Stein, 2015. "Dollar Funding and the Lending Behavior of Global Banks," The Quarterly Journal of Economics, President and Fellows of Harvard College, vol. 130(3), pages 1241-1281.
    6. Burcu Duygan-Bump & Patrick Parkinson & Eric Rosengren & Gustavo A. Suarez & Paul Willen, 2013. "How Effective Were the Federal Reserve Emergency Liquidity Facilities? Evidence from the Asset-Backed Commercial Paper Money Market Mutual Fund Liquidity Facility," Journal of Finance, American Finance Association, vol. 68(2), pages 715-737, April.
    7. Cipriani, Marco & La Spada, Gabriele, 2021. "Investors’ appetite for money-like assets: The MMF industry after the 2014 regulatory reform," Journal of Financial Economics, Elsevier, vol. 140(1), pages 250-269.
    8. Lei Li & Yi Li & Marco Macchiavelli & Xing (Alex) Zhou, 2021. "Liquidity Restrictions, Runs, and Central Bank Interventions: Evidence from Money Market Funds [Dealer financial conditions and lender-of-last-resort facilities]," The Review of Financial Studies, Society for Financial Studies, vol. 34(11), pages 5402-5437.
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    Full references (including those not matched with items on IDEAS)

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    More about this item

    Keywords

    stablecoins; money market mutual funds; financial stability; crypto assets; runs; liquidity transformation;
    All these keywords.

    JEL classification:

    • G10 - Financial Economics - - General Financial Markets - - - General (includes Measurement and Data)
    • G20 - Financial Economics - - Financial Institutions and Services - - - General
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors

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