Federal Reserve paper outlines framework for new money-like products
A new Federal Reserve paper introduces a framework to analyze the vulnerabilities of novel money-like products such as stablecoins and tokenized money market funds. The framework compares these products to traditional money market funds to assess their impact on financial system resilience.
Unpacking novel financial instruments
New money-like products, including tokenized money market funds, money market exchange-traded funds, and stablecoins, offer potential benefits but also carry vulnerabilities.
This paper introduces a framework to understand these risks by comparing their features to those of traditional money market funds.
Five pillars of vulnerability assessment
The framework specifically examines five key factors: liquidity transformation, susceptibility to threshold effects, function as a money-like asset, potential for contagion risks, and the behavior of reactive investors.
This analysis helps assess their impact on financial stability.