Stablecoins Have a Money Market Fund Problem

The technological novelty defense has a shelf life. For stablecoins, it’s expiring.

And while stablecoin issuers have traditionally argued that their products represented something beyond traditional finance, central banks are looking past the programmable flash of blockchain and focusing on something far more familiar underneath the hood.

One of the more revealing aspects of a recent speech by a governor at the European Central Bank (ECB) was its repeated comparison of stablecoins to money market funds. At first glance, the analogy may seem obscure or even forced. Money market funds (MMFs) are conservative cash-management vehicles used by corporations and institutional investors, while stablecoins emerged from crypto markets and blockchain infrastructure.

But central bankers see a structural similarity. Both stablecoins and MMFs are private-sector instruments designed to function as cash substitutes. The ECB’s comparison suggests monetary policymakers fear stablecoins could replicate the same structural weaknesses that once transformed money market funds into systemic risks.

See also: Stablecoins’ Shadow FX Market Is Becoming a Corporate Treasury Issue

A Promise of Cash-Like Stability

Officials at the Federal Reserve, the ECB, and the Bank for International Settlements have repeatedly invoked the money market fund industry when discussing stablecoin oversight, arguing that decades of experience managing liquidity risks in short-term funding markets offer a blueprint for regulating digital dollars.

Money market funds became enormously successful because they solved a practical problem. They offered investors a place to park cash that appeared highly liquid, highly stable, and marginally more productive than traditional bank deposits. Investors treated shares in money market funds as near-equivalents to dollars because the funds invested in short-term, low-risk assets such as Treasury bills and commercial paper.

Businesses used them for treasury management, and financial institutions integrated them into liquidity operations. Over time, these funds became deeply embedded in the plumbing of global finance.

Stablecoins are attempting to achieve something structurally similar in digital markets. They promise users a tokenized instrument that maintains stable value, remains redeemable on demand, and can move quickly across digital networks.

Still, “the economic function matters more than the technology,” has become a recurring message from central bank officials. In their view, stablecoins may use distributed ledgers rather than traditional fund structures, but they still perform a familiar form of maturity and liquidity transformation.

Read also: Behind the Stablecoin Buzz, Old-School Infrastructure Still Runs the Show

While stablecoins are becoming more mainstream, the PYMNTS Intelligence report “Waiting for Certainty: Why Most CFOs Are Holding Back on Crypto and Stablecoins” found that many chief financial officers are reluctant to adopt them because of regulatory uncertainty.

That uncertainty was mentioned by 67%  of CFOs as an obstacle to using stablecoins for business payments or treasury functions, while 77% said the same of cryptocurrencies.

Like money market funds, stablecoins derive trust not from sovereign backing directly, but from the credibility of reserve assets, redemption mechanisms, and stability. Both systems therefore depend heavily on confidence. As long as users believe redemption will occur smoothly at par value, the structure functions efficiently. Once confidence weakens, fragility emerges rapidly.

The money market fund industry’s defining trauma, for example, came during the 2008 financial crisis, when the Reserve Primary Fund “broke the buck” after suffering losses tied to Lehman Brothers debt. Investors rushed to redeem shares, triggering fears of broader contagion across short-term funding markets.

The industry faced renewed pressure again in March 2020 during the onset of the pandemic, when investors again fled prime money market funds in search of safer government-backed assets. Once more, the Federal Reserve stepped in with emergency liquidity facilities.

For central bankers, the lessons have been sobering. Money market funds demonstrated how seemingly conservative financial products can create hidden systemic interdependencies even when heavily regulated, and underscored how they remain susceptible to runs when market confidence evaporates.

See also: New SEC Guidance Pushes Stablecoins Closer to Cash Status

Stablecoins Are Becoming Relevant

Another lesson from money market funds is that scale transforms regulatory tolerance. Financial innovations are often permitted broad flexibility while they remain relatively small. But once they become systemically important, governments impose stricter oversight because failures begin carrying macroeconomic consequences.

Originally designed primarily as settlement tools for digital asset trading, stablecoins now function as payment rails, savings vehicles, and cross-border transaction instruments. Major issuers now collectively hold tens of billions of dollars in U.S. Treasurys, making them meaningful participants in short-term funding markets.

To policymakers, the key question is no longer whether stablecoins are part of finance. It is whether the financial system can absorb them safely at scale.

If stablecoin reserves are heavily invested in short-duration sovereign debt, commercial paper, or banking instruments, large-scale redemptions could transmit stress into traditional financial markets. Conversely, instability in traditional markets could undermine confidence stablecoin reserves themselves.

The history of money market funds offers a warning: Financial products that appear stable during expansionary periods can reveal structural fragilities during moments of stress. But it also offers another lesson. Instruments that survive regulatory scrutiny often become permanent components of the financial system.