US Federal Reserve Banks say stablecoins could ‘become a source of financial instability’
The Federal Reserve Banks of Boston and New York published a staff report on Sep. 26 comparing stablecoins, such as USDT and USDC, to money market funds. Key findings in the report include the observation that stablecoins and money market funds follow similar patterns during runs and that stablecoins could inject instability into the broader financial system.
The report, titled “Runs and Flights to Safety: Are Stablecoins the New Money Market Funds?” includes a comprehensive comparison of investor behavior during the stablecoin runs of 2022 and 2023 to investor behavior during the money market fund runs of 2008 and 2020.
Per the publication:
“Our findings show that stablecoins are vulnerable to runs during periods of broad crypto market dislocation as well as idiosyncratic stress events. Should stablecoins continue to grow and become more interconnected with key financial markets, such as short-term funding markets, they could become a source of financial instability for the broader financial system.”
The researchers also note that stablecoins appear to have a discrete “break-the-buck” threshold of $0.99, below which redemptions accelerate and runs — periods in which investors flee, potentially causing an asset crash for remaining investors.
A break-the-buck threshold in money market funds occurs when the net asset value of a fund drops below a dollar, this can lead to investor shares, valued at $1.00, to dip below market price and cause investors to seek safe harbor elsewhere.
As Cointelegraph recently reported, Italy’s central bank is also taking measures to identify contributing factors and prevent stablecoin runs. In a recent statement, the Italian banking authority cited the 2022 Terra Luna collapse as an example that stablecoins “have not proved stable at all.”
According to the report, Italy has also called upon global lawmakers to form an international regulatory body to govern cryptocurrency, stablecoins, and related technologies.
Related: ‘It’s going to get worse for banks’ — JPMorgan CEO on overregulation
New York Assemblymember Phil Steck introduced a bill that would see the state tax the sale and transfer of crypto assets.
The US government redesignated Garantex on Thursday to its list of sanctioned entities, along with its successor, Grinex, but TRM Labs suggests it may be ineffective.
Since last year’s general election, Sir Mel Stride has become a familiar face for those of us who like our politics.
During the campaign, he regularly found himself on breakfast TV and radio. So much so, Sir Mel was referred to as the “minister for the morning round” by some of our industry colleagues.
By our count, he was on Sky News Breakfast at least 10 times during the campaign’s 43 days.
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Following the election, and losing the Conservative leadership race to Kemi Badenoch, Sir Mel now puts questions to Rachel Reeves as shadow chancellor.
Still seen as a safe pair of hands, Sir Mel’s penchant for doing the “morning round” hasn’t slowed down either, making regular appearances on breakfast TV and radio.
Luckily, he found some time between all that to sit down for an interview with Sky’s Beth Rigby for the Electoral Dysfunction podcast. He spoke about his transition to Opposition, taking on Reform, and the most controversial topic in Westminster – lunch.
Here’s what we learned:
1. Opposition isn’t ‘awful’ – but it is like ‘warfare’
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‘I think people will see through Reform’s populism’
Before the election, Sir Mel served as work and pensions secretary. Shifting to the Opposition was not “awful”, despite losing the muscle of the civil service.
“But it is like guerrilla warfare,” he said.
“You suddenly lose all the trappings of government. Somebody once said to me, ‘when you get in the back of a car and you sit down and it doesn’t go anywhere, that’s when you realise you’re no longer a minister’.
“So it is that sort of sense of being looked after that disappears.”
There’s also a smaller team of Conservatives in the Commons. Before the election, Rishi Sunak had 343 MPs behind him.
Ms Badenoch currently only has 119.
“When you’re down to 120 MPs – and some set piece events, there might be only a fraction of those people there – it’s much quieter.
“What I actually often do is I can be quite provocative of the Opposition to get them going, because then at least you get something to feed off. Sometimes I do that to, just get the energy in the chamber.”
2. Being at the despatch box on big days can be ‘tricky’ – but he has a ‘secret’
You may remember Sir Mel’s lively response to Rachel Reeves’s spring statement in March. He revealed that, on those big political days, he isn’t told what the chancellor will say until about half an hour before it’s said in the Commons.
“It does give you and your team literally 10 or 15 minutes to… work out what the main things are,” he said.
However, he tells Electoral Dysfunction that you do have to be able to think on your feet in that scenario.
He said: “You are thinking about ‘what are the attack lines I’m going to use?’… and amend what you’re going to do.”
He added that he doesn’t get nervous. That might have to do with Sir Mel having been president of the Oxford Union debating society “many, many years ago”.
“Now the secret’s out. The secret is out Beth, and you’re the first to have gleaned that secret from me,” he said.
To be fair, it is on his website.
3. He’s not a huge fan of Reform
Nigel Farage
As the Conservatives battle with Reform for the right, Sir Mel didn’t have many positive words for Nigel Farage’s party.
“With Reform… these are populists, who peddle fantasy economics,” he said.
“‘Take everybody out of income tax up to £20,000 costs about £80bn according to the IFS [Institute For Fiscal Studies].”
The IFS has said it needed “more detail” to exactly cost Reform’s proposal, but “it could easily be in the range of £50 to £80bn a year”.
“I think ultimately,” Sir Mel says, “people will see through a lot of the populism that Reform stands for.”
He added that he believed that Reform’s 2024 manifesto, was, economically, “a work of fiction”.
“I mean, it’s quite dangerous, actually. I think if they’d been elected… the economy would have gone into a very bad place,” he said.
4. His ideal lunch? A cheese and ham toastie
Ms Badenoch and Sir Mel see eye-to-eye on many things – lunch isn’t one of them. Pic: PA
Sir Mel also addressed the most pressing issue of all – lunch.
If you’re unaware, this has proven a controversial subject in Westminster. Ms Badenoch told The Spectator in December she was “not a sandwich person… lunch is for wimps”.
In March, however, Ms Reeves gave a rebuttal to Electoral Dysfunction, revealing she whips up a cheddar sandwich in 11 Downing Street when she can.
Read more from Sky News:
Labour MP hits out at ‘farce’ anti-corruption trial in Bangladesh
Lammy refers himself to watchdog after fishing with JD Vance
Sir Mel falls more in line with his opposite number than his leader.
“I’ve always liked a sandwich, particularly a toasted sandwich,” he said.
“I’d go with the Cadillac, the Rolls Royce of sandwiches, a ham and cheese.”
Sir Mel has previously, however, been partial to some more peculiar fillings.
“Do you remember those Breville toastie makers? When I went to university, I had one of those, or whatever the equivalent was,” he said.
“You could put baked beans in, eggs in, and all sorts of things.
“It was fantastic.”
To each, their own.
Electoral Dysfunction unites political powerhouses Beth Rigby, Ruth Davidson, and Harriet Harman to cut through the spin, and explain to you what’s really going on in Westminster and beyond.
Want to leave a question for Beth, Ruth, and Harriet?
Email: electoraldysfunction@sky.uk
WhatsApp: 07934 200444
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