The report delves into how stablecoins have performed in the face of changes in U.S. monetary policy, reaching a troubling conclusion: As the Federal Reserve raises interest rates and gradually tightens liquidity, stablecoins’ market capitalization has declined significantly. , showing great vulnerability.
Compiled by: Aiying Aiying Team
In the crypto-finance world, stablecoins were once seen as a safe haven to avoid market volatility. However, a recent report released by the European Central Bank dropped a depth bomb on the industry: under the tightening of monetary policy, these "stable anchors" are not as solid as imagined.
The report delves into how stablecoins have performed in the face of changes in U.S. monetary policy, reaching a troubling conclusion: As the Federal Reserve raises interest rates and gradually tightens liquidity, stablecoin market capitalization has declined significantly. , showing great vulnerability. This not only challenges people's common view of stablecoins as a "stabilizing force" in the cryptocurrency ecosystem, but also sounds the alarm for Web3 companies that rely on stablecoins for capital reserves and payments.
The report points out that the impact of the tightening of US monetary policy on stablecoins has far exceeded market expectations. This means that Web3 companies not only need to face the inherent high volatility of the crypto market, but also need to be vigilant about the unforeseen risks brought about by changes in monetary policy. For stablecoins, a key role in the crypto-financial field, this "shake" is undoubtedly a challenge of life and death.
Aiying believes that it is particularly important for practitioners in the Web3 industry to understand the meaning behind this report. Stablecoins are no longer simply "digital dollars", they are subject to complex changes in macroeconomic policies. In this world where encryption and traditional finance are increasingly intertwined, compliance and risk management are becoming more important than ever. This report undoubtedly provides a "weather vane" for the future of the encryption world, reminding every participant: it is not just Bitcoin and Ethereum that are unstable, even stablecoins themselves are swaying under the shadow of US monetary policy.
1. Comparison between stablecoins and money market funds: superficial similarities and underlying differences
The latest ECB working paper reveals the similarities and differences between stablecoins and money market funds (MMFs). On the surface, these two financial instruments seem to share the same purpose and structure - providing stable, secure value storage and liquidity support, but a deeper analysis shows that they behave very differently in the face of shocks.
1. The support behind stablecoins: on-chain and off-chain assets
Stablecoins are "digital dollars" that live on the blockchain. Their core promise is to keep their value stable, generally at a 1:1 exchange rate with fiat currencies such as the U.S. dollar. To achieve this promise, issuers of stablecoins usually hold a basket of off-chain assets to support their value, including short-term assets such as U.S. Treasury bonds, commercial paper, and bank deposits. Such an asset portfolio is designed to maintain the liquidity and security of stablecoins, ensuring that users can exchange stablecoins for equivalent fiat currencies when needed.
However, the structure of stablecoins has the dual characteristics of "on-chain and off-chain". Their issuance and circulation exist on the chain, while the reserve assets behind them are traditional legal currency assets. This complex structure is destined to face challenges from two different worlds. When the financial system is stable, this arrangement may keep the currency value stable, but in times of market turmoil, the liquidity problem of assets is often magnified - especially when the assets held may not be able to be quickly converted into cash, the stability of stablecoins will also be severely tested.
2. Stablecoins and money market funds: similarities and differences between the two
The ECB report makes a detailed comparison between stablecoins and money market funds. On the surface, the asset structures of the two tools are similar: they both achieve their stability by holding short-term, safe fiat currency assets. However, in terms of their ability to cope with market shocks, the two have different outcomes.
Amid market turmoil, money market funds, especially prime MMFs, are often viewed as a safe haven, attracting large inflows. For example, under the Federal Reserve’s continuous interest rate hike policy in 2024, the asset management scale of MMFs has increased significantly. Behind this growth is investor trust in its strict regulation, high transparency and good liquidity. The asset types of money market funds are strictly limited, and all investment portfolios need to meet high liquidity requirements, which also ensures that they can still meet the needs of investors when interest rates fluctuate or market risks occur.
In contrast, stablecoins are much more vulnerable to the same shocks. The ECB report shows that the market capitalization of stablecoins fell by about 10% against the backdrop of tight monetary policy in 2024. This sharp decline reflects investors' concerns about the liquidity of the reserve assets behind stablecoins and the transparency of their management. Since stablecoin assets are not as strictly regulated as MMFs, the security and liquidity of these assets cannot be fully guaranteed at critical moments, causing investors to be more inclined to sell stablecoins in market panic and turn to more stable safe-haven assets.
3. Risks of stablecoins: lack of transparency and regulation
The risks of stablecoins are not only reflected in their fragility during market shocks, but also in the lack of asset management and transparency behind them. Although most stablecoins claim that their reserve assets are sufficient to cover all tokens in circulation, the actual asset holdings often lack sufficient transparency and third-party audits. This means that in the face of market panic or macro policy changes, investors are not sure whether these assets are sufficient to ensure that their needs are met.
In contrast, money market funds are not only subject to strict supervision, but also need to disclose their asset structure and liquidity on a regular basis. This transparency gives investors confidence, allowing money market funds to serve as a "safe haven" in times of crisis. Stablecoins lack this transparency, and because they are not regulated by traditional financial institutions, they are exposed to greater risks when facing liquidity constraints.
Aiying Aiying revealed a reality from the ECB's report: Although stablecoins operate in the name of "stability", they are more vulnerable to shocks under market pressure, while money market funds show stronger risk resistance due to their strict supervision and high transparency.
2. Stablecoin shock test: Crypto market and monetary policy, vulnerability under the double test
The report deeply analyzes the performance of stablecoins in the face of two completely different shocks - the impact of the crypto market itself and the changes in US monetary policy. The results show a disturbing fact: these seemingly stable currencies are far less solid than imagined when facing external turmoil.
1. Crypto market impact: Are stablecoins really “stable”?
(If the price of Bitcoin drops by 10%)
In the crypto market, stablecoins were once seen as an important tool to combat high volatility and a "safe haven" for investors when the storm hits. However, the data listed in the ECB's report overturned this common sense. The report shows that when the price of Bitcoin fell sharply or the entire crypto market was in turmoil, the market value of stablecoins did not remain strong, but fell by about 4% in three months. This shows that stablecoins have failed to play the role of a hedging tool in responding to the impact of the crypto market, but have become particularly vulnerable in the market panic.
For example, in May 2022, the collapse of TerraUSD triggered wild swings across the crypto market, with massive outflows from stablecoins. Data shows that major stablecoins such as Tether and USDC also suffered massive capital losses following negative crypto shock events, leading to significant declines in overall market capitalization. This market reaction shows that although the stablecoin promises to be pegged to the US dollar, the reserve assets behind it have not completely alleviated market panic, causing investor confidence to waver.
2. The tightening shock of monetary policy: the real challenge of stablecoins
(If the Fed raises interest rates and causes the price of Bitcoin to fall by 10%)
If the shock to the crypto market revealed the "surface cracks" of stablecoins, then the tightening of U.S. monetary policy has completely exposed its "structural fragility." Research from the European Central Bank shows that the market value of stablecoins has fallen by about 10% in just three months amid the Federal Reserve’s continued interest rate hikes. In an environment of rising interest rates, the opportunity cost of holding non-interest-bearing assets such as stablecoins has increased significantly. As a result, investors have gradually abandoned stablecoins and instead pursued traditional financial instruments with higher returns.
Specifically, the tightening of monetary policy means that the liquidity of funds is reduced, and the US dollars available for lending in the market have become more scarce. For stablecoins, the liquidity of the assets behind them (such as short-term government bonds and commercial paper) may also be affected in this environment, making it difficult to quickly cash out when needed. This leads to a vicious cycle: stablecoin issuers find it difficult to guarantee immediate payment capabilities, investor confidence further declines, and funds are withdrawn from stablecoins at an accelerated rate.
This withdrawal is not just the behavior of individual investors, but a group market behavior. Aiying Aiying can see from the analysis of the European Central Bank that since the reserve assets of stablecoins do not pay interest, when interest rates increase, the attractiveness of holding stablecoins decreases rapidly, and investors are more willing to allocate funds to provide higher returns. of money market funds (MMFs). This reallocation of funds will be particularly evident during the 2024 Fed rate hike: inflows into high-quality MMFs increased significantly after monetary policy tightening, while stablecoins showed continued market cap shrinkage. The tightening of monetary policy has caused stablecoins and MMFs to show completely opposite fate trajectories. For Web3 companies, this means that the role of stablecoins as a fund management tool is being weakened, and companies must consider more diversified reserve management and risk prevention measures to cope with future uncertainties.
3. Risks and opportunities for Web3 enterprises: new challenges under the shadow of monetary policy
For Web3 businesses, this situation presents a dual challenge. First, the price volatility of stablecoins means that companies that rely on them for daily transactions and reserve assets may face liquidity issues. This means that when corporate managers consider using stablecoins as a reserve of funds, they must fully understand its risks and should not blindly believe in its "stable" appearance. In an environment of high inflation and gradually tightening monetary policy, holding interest-free digital assets is becoming increasingly challenging.
Aiying suggested that in the face of these challenges, Web3 enterprises need to quickly adjust their financial management strategies and adopt more flexible and diversified approaches to cope with future uncertainties:
1. Diversified reserve management mechanism:
It is obviously no longer safe to rely solely on a single stablecoin. Enterprises should consider establishing a diversified reserve management mechanism to allocate funds to different asset classes, including other cryptocurrencies, legal tender, and highly liquid traditional financial assets. Through this diversified reserve method, the systemic risk brought about by the collapse of a single stablecoin can be reduced and the risk resistance of funds can be increased.
2. Strengthen monitoring of macroeconomics and monetary policy:
In the current macro environment, the close relationship between the change in the market value of stablecoins and monetary policy makes it necessary for companies to pay more attention to changes in global economic policies. Web3 companies should establish a dedicated monitoring and analysis team to pay close attention to macroeconomic signals, including the Fed's policies, so as to make timely adjustments to fund management and asset allocation when the market situation changes. This can not only help companies avoid potential risks, but also seize market opportunities when the policy environment changes.
3. Prepare in advance for stricter regulation:
The fragility of the stablecoin market has attracted the attention of regulators in various countries, and the introduction of stricter stablecoin regulatory policies in the future is almost inevitable. For Web3 companies, planning ahead is the key to survival and development. Companies need to make compliance preparations in advance to ensure that the stablecoins they use and manage meet possible future regulatory requirements, so as to reduce compliance risks and operational uncertainties under tightened supervision.
4. Consider new payment methods and innovative solutions:
As stablecoins face more policy and market risks, Web3 companies should also explore new payment solutions, including the adoption of CBDC (Central Bank Digital Currency) or other more stable encrypted payment methods. These innovations may provide companies with more financial security options and help them remain flexible in market changes.
Although the "stability" of stablecoins has been questioned, this report is not only a challenge for Web3 companies, but also an opportunity to inspire them to change and innovate. The turbulence in the financial market means the survival of the fittest. Only those companies that can adapt quickly and enhance financial resilience can be invincible in future competition. Web3 companies should regard this report as an opportunity to re-examine their financial and risk management strategies, abandon their reliance on a single tool, and instead build a more mature and diversified asset and payment system.
Stablecoins are no longer the infallible "digital dollars" and are becoming increasingly unstable as monetary policy fluctuates. In this ever-changing crypto world, how companies deal with this uncertainty will be the key to future success.
Source: https://www.ecb.europa.eu/pub/pdf/scpwps/ecb.wp2987~1919e51abf.en.pdf
