Schnabel: MMFs offer stablecoin lessons for central banks
ECB Executive Board Member Isabel Schnabel examined parallels between money market funds and stablecoins. She argued that private monetary innovation offers benefits but also heightens financial stability risks and affects monetary policy transmission.
Echoes of past monetary innovations
Isabel Schnabel, Member of the Executive Board of the ECB, explored the evolving nature of money, drawing parallels between historical innovations like the Bank of Amsterdam's 'bank money' and the more recent emergence of money market funds (MMFs).
She highlighted how MMFs, driven by Regulation Q and high inflation in the 1970s US, provided liquid, high-yield alternatives to bank deposits, reshaping financial intermediation.
MMFs became central in wholesale funding, leading to some bank disintermediation as savings shifted from traditional deposits.
While offering benefits like diversified investor bases for sovereign debt and deeper capital markets, their rise also made bank funding more volatile and expensive, as seen in Germany's deposit market competition after 1994.
New fragilities, old risks
Stablecoins, with a global market capitalization near USD 300 billion, share features with MMFs, investing in short-term assets and aiming for par redemption.
Their appeal lies in efficient payment and settlement, primarily in crypto markets, despite generally not paying interest.
Schnabel warned that stablecoins, like MMFs, can trigger runs and fire sales due to liquidity mismatches and potential loss of trust in reserve assets.
She cited the 2008 MMF crisis and the 2023 Silicon Valley Bank incident, which affected USD Coin's peg.
MiCAR aims to mitigate these risks by requiring euro stablecoins to hold significant reserves in bank deposits.
A familiar challenge, new urgency
Schnabel's analysis underscores that private monetary innovation, while beneficial, consistently introduces systemic risks that demand proactive policy responses.
The historical parallels with money market funds highlight the recurring nature of these financial fragilities, requiring central banks to adapt regulation and payment infrastructure.
Therefore, agile and forward-looking regulatory frameworks are crucial to safeguard financial stability and preserve monetary control in the digital age.