ECB Report Questions Stablecoins’ Stability as Crypto Safe-Haven

A recent European Central Bank (ECB) study has indicated that stablecoins are particularly susceptible to U.S. monetary policy fluctuations. Stablecoins’ durability is called into doubt in the working paper “Stablecoins, Money Market Funds, and Monetary Policy,” which demonstrates that contractionary U.S. policy has a greater detrimental effect on stablecoins than market shocks.

The ECB study looks at the responses of money market funds (MMFs) and stablecoins to different economic shocks. The analysis disproves the notion that stablecoins are safe havens during volatile times in the cryptocurrency market. Stablecoins respond to shocks in the cryptocurrency markets with minimal lag. But MMFs see a significant drop in market capitalization of up to 4%.

The research highlights that U.S. monetary policy changes have a much greater effect on stablecoins. During contractionary periods, stablecoins like Tether (USDT) and Circle’s USDC saw market cap reductions of up to 10%. In contrast, MMFs gained significantly during these times, attracting inflows as investors moved away from bank deposits.

Stablecoins’ Role as a Safe-Haven in Question

The report challenges the belief that stablecoins are uncorrelated with traditional financial markets. It concludes that U.S. dollar-based monetary policy serves as a “key nexus” between traditional and crypto markets. The authors note, “Stablecoins’ role as a crypto safe-haven is questionable and does not extend to either crypto or traditional financial market shocks.”

As stablecoins face increasing pressure from U.S. monetary policy, their status as a secure option in both crypto and traditional markets is being reevaluated. Investors may turn to more established financial assets during such periods, signaling the limitations of stablecoins as a reliable refuge.