The role of stablecoins as a refuge from shocks involving the crypto and the traditional market is being questioned by a paper published by the European Central Bank (ECB). The “Stablecoins, Money Market Funds, and Monetary Policy” paper examines the movements of stablecoins and money market funds to different market “shocks,” seeking to ascertain the reaction of these to several variables.

The paper first examined the effects of a crypto market “shock” on stablecoins and money market funds, finding that the former had almost no reaction to these; the latter did react negatively, reducing their market capitalization by up to 4% after one of these events.

However, the effect of the U.S. contracting its monetary policy on these was more significant, but in opposite ways. Money market funds benefit from these changes, experiencing significant inflows while bank deposits decline. In contrast, U.S. policy monetary shocks have a pernicious influence on stablecoins, even more than crypto industry shocks.

These policy events affected stablecoin’s market cap by up to 10%, with outflows coming from top stablecoins such as Tether’s USDT and Circle’s USDC in the cases examined in the paper.

In this sense, authors concluded that “stablecoins’ role as crypto safe-haven is questionable and does not extend to either crypto or traditional financial market shocks,” as investors move to more traditional assets as contractionary monetary policy changes occur.

The report also criticized the uncorrelation claims of these assets, assessing that “dollar monetary policy acts as the key nexus between traditional and crypto markets.”

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