The post Stablecoins No ‘Safe Haven’ From US Monetary Policy, Says European Central Bank appeared on BitcoinEthereumNews.com.

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 choices. The paper argues that as monetary policy tightens up, investors demand fewer stablecoins for speculative purposes. “Contractionary monetary policy shocks are thus negative for crypto: As the opportunity cost of holding unregulated non-interest bearing assets increases in a rising interest rate environment, investors move (on the margin) towards traditional investment assets,” said the paper. The paper also examined the impact of events in the crypto world on stablecoin market capitalizations. The ECB found that market capitalizations of stablecoins—such as Tether or USDC—experienced pronounced falls during “crypto shocks,” or sudden devaluations in the overall value of Bitcoin. On average stablecoins fell roughly 4% on average in the…

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Filed under: News - @ October 9, 2024 8:15 pm