Original title: Stablecoins and the parallels with Money Market Funds
Original article by @shawnwlim, founder of @artichokecap
Original translation: zhouzhou, BlockBeats
Editors note: The regulatory battle over stablecoins is similar to that experienced by money market funds (MMFs) half a century ago. MMFs initially provided cash management for companies, but were criticized for problems such as lack of deposit insurance and susceptibility to bank runs, which affected bank stability and monetary policy. Despite this, MMF assets now exceed $7.2 trillion. The 2008 financial crisis led to the collapse of the Reserve Fund, and the SEC is still pushing for MMF regulatory reforms in 2023. The history of MMFs suggests that stablecoins may experience similar regulatory challenges, but may eventually become an important part of the financial system.
The following is the original content (for easier reading and understanding, the original content has been reorganized):
Stablecoins are exciting, and the upcoming stablecoin legislation in the U.S. represents a once-in-a-generation opportunity to upgrade the existing financial system. Those who study financial history will see similarities to the invention and development of money market funds about half a century ago.
Money market funds were invented in the 1970s as a cash management solution, primarily for businesses. At the time, banks in the U.S. were prohibited from paying interest on balances in checking accounts, and businesses generally could not maintain savings accounts. If businesses wanted to earn interest on idle cash, they had to buy U.S. Treasury bonds, enter into repurchase agreements, invest in commercial paper or negotiable certificates of deposit. To manage cash, the entire process was cumbersome and required a lot of operations.
Money market funds are structured to maintain a fixed share value, fixed at $1 per share. The Reserve Fund, Inc. was the first money market fund. It was launched in 1971 as a convenient alternative for direct investment of temporary cash balances that would normally be invested in money market instruments such as Treasury bonds, commercial paper, bankers acceptances, or certificates of deposit, with initial assets of $1 million.
Other investment giants soon followed: Dreyfus (now BNYglobal), Fidelity, Vanguard Group. In the 1980s, almost half of the growth of Vanguards legendary mutual fund business was due to its money market funds.
Paul Volcker was a harsh critic of money market funds (MMFs) during his tenure as chairman of the Federal Reserve (1979-1987). He continued to criticize MMFs even in 2011.
Many of the criticisms raised by policymakers opposing stablecoins today are similar to those leveled at money market funds half a century ago:
Systemic risk and banking safety issues: Money market funds do not have deposit insurance and do not have a lender of last resort mechanism, unlike insured banks. Due to this, money market funds are prone to rapid runs, which may exacerbate financial instability and cause contagion. There are also concerns that the flow of deposits from insured banks to money market funds will weaken the banking sector because banks lose their low-cost and stable deposit base.
Unfair regulatory arbitrage: Money market funds offer bank-like services, maintaining a stable $1 share, but without the strict regulatory scrutiny or capital requirements.
Weakening the monetary policy transmission mechanism: Money market funds may weaken the Federal Reserves monetary policy tools because traditional monetary policy tools such as bank reserve requirements become less effective as funds flow out of banks and into money market funds.
Today, money market funds hold more than $7.2 trillion in financial assets. For reference, M2 (which largely excludes money market fund assets) is $21.7 trillion.
The rapid growth of money market fund assets under management in the late 1990s was a result of financial deregulation (the Gramm-Leach-Bliley Act repealed the Glass-Steagall Act and unleashed a wave of financial innovation), as well as the Internet boom, which promoted better electronic and online trading systems, increasing the rate at which funds flowed into money market funds.
Do you see a pattern? (I would like to point out that even half a century later, the regulatory battle for money market funds is not over. The SEC passed money market fund reforms in 2023 that, among other things, increased minimum liquidity requirements and eliminated the right of fund managers to restrict investor redemptions.)
Unfortunately, the Reserve Fund came to an end after the financial crisis of 2008. It held some Lehman Brothers debt securities, which were written down to zero, leading to a decoupling event in the fund and a large number of redemptions.
