The European Central Bank (ECB) has challenged the idea that stablecoins are a “safe haven” for investors in times of market turmoil, finding they are actually highly impacted by U.S. monetary policy.

The working paper examined the link between U.S. monetary policy, money market funds (MMFs), and stablecoins. “Monetary policy, in particular for the U.S. dollar, is the linchpin that connects crypto and traditional financial markets,” the authors concluded.

The paper argued that stablecoins—which have a fixed price and are typically pegged to a fiat currency, often the U.S. dollar—were vulnerable to shocks coming from within traditional financial markets, such as changing U.S. monetary policy, for example increasing interest rates. 

Evaluating data since 2019, the ECB claimed the U.S. government raising interest rates led to a 10% drop in the market capitalization of stablecoins over the following 12 weeks. Meanwhile, it found that traditional non-crypto assets, such as money market funds, actually received a significant influx of new capital during this same period.

A money market fund is a type of fund that invests in short-term debt securities such as U.S. Treasury bills, generally regarded as one of the most conservative, low-risk investment choice

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Author: Will McCurdy