Stablecoins Are Not Truly “Stable”, New ECB Report Claims

The European Central Bank released a paper challenging a conventional belief held by many investors. According to the ECB, stablecoins, which are often seen as a hedge against market uncertainty, are not exactly safe. The study has attracted several reactions, especially at a time when tensions in the Middle East and the November elections are causing market uncertainties. The argument of the study is that an asset that is influenced by the Federal monetary policies cannot possibly be a safe haven for investors. 

Analysts at the European Central Bank studied the relationship between stablecoins, money market funds, and the monetary policy of the United States. From their study, the U.S. monetary policy is the most important link between traditional money markets and cryptocurrencies. In support of the “instability” of stablecoins, the paper argued that traditional markets have always influenced cryptocurrencies and stablecoins are no exception. This is particularly because most stablecoins are attached to the fiat dollar and U.S. monetary policies directly impact the dollar. 

Judging from data collected between 2019 to date, the ECB noted that the market cap for stablecoins usually dips by 10% within 3 months after interest rates are raised. On the contrary, money market funds or assets that are not related to cryptocurrencies usually receive more investor attention during the same timeframe.

According to the study, monetary policies are not the only influence over the stablecoins. Market fluctuations in the crypto industry also affect the market cap of stablecoins. The researchers explained that stablecoins such as Tether and USDC have been affected during periods of bitcoin devaluations or drastic disruptions in the crypto industry. Some of these drastic disruptions happened when the Chinese government enacted stringent rules on cryptocurrencies or when electric car manufacturer Tesla decided to stop payments from the Bitcoin system. The study revealed that during these periods, the market cap of stablecoins reduced by about 4%.

However, a major talking point of this research by the ECB lies in the exclusion of monetary policies of other powerful economies.