Stablecoins, Tokenization, and Financial Intermediation: Federal Reserve Framework for Money-Like Product Vulnerabilities

Why the Federal Reserve Is Rethinking Money-Like Products

The Federal Reserve’s Finance and Economics Discussion Series (FEDS) has released a landmark 2026 paper that fundamentally reframes how regulators, investors, and financial institutions should assess the stability risks posed by stablecoins, tokenized money market funds, and money market exchange-traded funds. At a moment when the paper (FEDS 2026-002) observes these products could be “transformative for finance,” the authors introduce a systematic five-feature vulnerability framework benchmarked against the well-documented fragilities of traditional money market funds.

The timing is significant. With U.S. money market funds holding $7.7 trillion in assets under management—and stablecoins racing past $300 billion in market capitalization—the intersection of traditional finance and digital asset innovation creates systemic risk pathways that did not exist even five years ago. The paper argues that vulnerability stems not from any single feature but from the combination of features that make money-like products susceptible to destabilizing investor runs. This distinction has profound implications for how policymakers and financial professionals approach regulation and risk assessment across an increasingly complex monetary landscape.

Stablecoins at $300 Billion: Growth Trajectory and Market Dynamics

The stablecoin market has undergone explosive growth that puts its trajectory on par with the early years of money market funds themselves. When MMFs were introduced in the 1970s, they represented less than 0.3% of M2 money supply until 1978—then surged to 9% of M2 by the end of 1982. Stablecoins are tracing a remarkably similar adoption curve, growing from $5 billion in market capitalization in 2019 to approximately $300 billion by September 2025.

Market concentration adds a critical dimension to this growth story. Tether and USDC together comprise almost 90% of aggregate stablecoin market capitalization, meaning that problems at either issuer would put an enormous share of total stablecoin assets at immediate risk. This concentration was tested during the Silicon Valley Bank collapse in March 2023, when Circle reported $3.3 billion in SVB exposure—representing 8.3% of USDC reserves. The result was dramatic: USDC’s secondary market price fell to an intraday low of $0.88, demonstrating that even well-managed reserve-backed stablecoins are not immune to banking sector contagion.

Looking at current usage patterns, the FEDS paper notes that roughly two-thirds of stablecoin transactions in 2024 were tied to DeFi and trading-related activities rather than payments. However, with the passage of the GENIUS Act in July 2025, payment-oriented stablecoin usage is expected to accelerate significantly. Industry analysts at the Citi Institute project that stablecoins could reach $1.5 trillion in market capitalization within several years—a scale that would make them a genuinely systemically important component of the financial system.

The Five-Feature Stablecoin Vulnerability Framework Explained

The central intellectual contribution of the FEDS paper is a framework that decomposes vulnerability into five distinct features, each of which can be categorized as structural (arising from business models and legal frameworks, unlikely to change without regulatory intervention), non-structural (reflecting market perception and usage patterns, more malleable), or hybrid (containing elements of both). Understanding this taxonomy is essential because it determines which vulnerabilities regulators can address through rules and which will evolve unpredictably with market adoption.

The five features are: liquidity transformation (structural), where issuers convert illiquid assets into liquid liabilities, creating first-mover advantages for early redeemers; threshold effects (structural), where discontinuous changes in expected payoffs—such as “breaking the buck” or triggering redemption gates—create cliff-edge dynamics; moneyness (hybrid), the degree to which a product is perceived as having the “no-questions-asked” property of money; contagion effects (hybrid), where stress in one product type transmits to related products; and reactive investor bases (non-structural), where the composition of holders determines how quickly confidence shocks translate into redemption pressure.

Crucially, the paper demonstrates that individual features in isolation may not be problematic. Equity mutual funds hold risky but liquid assets and have historically not experienced runs—they lack the combination of threshold effects, moneyness, and reactive institutional investors that made money market funds vulnerable in September 2008 and March 2020.

Liquidity Transformation and Run Risk in Stablecoins

Liquidity transformation—the practice of backing liquid, redeemable liabilities with less-liquid assets—is the foundational vulnerability feature that creates first-mover advantage and run dynamics. For traditional money market funds, this feature is well-understood: funds hold commercial paper, certificates of deposit, and repo agreements while offering daily liquidity to investors. When confidence falters, investors who redeem first get paid from the most liquid assets, leaving remaining investors with an increasingly risky and illiquid portfolio.

For stablecoins, the degree of liquidity transformation is more uncertain and varies significantly by issuer. The FEDS paper highlights that Tether holds 20% of its reserves in non-traditional assets that would be far less liquid during a stress event: secured loans (6.2%), bitcoins (5.5%), precious metals (5.4%), “Other Investments” (3.0%), and a small fraction in corporate bonds. By contrast, the two largest stablecoins collectively hold approximately $137 billion in U.S. Treasury securities and $57 billion in Treasury repo—assets that are highly liquid but still represent a fraction of the $2.7 trillion in Treasury securities and $1.9 trillion in Treasury repo held across the broader MMF industry.

An important structural wrinkle is that stablecoin issuers can impose redemption fees and minimum redemption thresholds. Tether requires a minimum redemption of $100,000 and charges a 0.10% fee. USDC uses a tiered structure: 0.03% for $2–5 million, 0.06% for $5–15 million, and 0.10% for redemptions over $15 million. These fees partially offset run incentives by penalizing early redeemers, but they also create threshold effects that can amplify panic if investors perceive that redemption gates could be imposed during stress.

Tokenized Money Market Funds: Digital Wrappers for Traditional Risk

Tokenized money market funds represent blockchain-based digital representations of traditional MMF shares. First introduced in 2021, they have grown to almost $1.5 billion in net assets, with the broader category of tokenized MMF-like vehicles—including non-registered fund structures—exceeding $6 billion. While still small relative to the $7.7 trillion traditional MMF market, their growth trajectory and the structural innovation they represent demand careful scrutiny.

The FEDS paper identifies a critical insight about tokenized MMFs: their vulnerability profile depends fundamentally on whether tokens can effect ownership transfer of the underlying fund shares. If tokenization merely provides a more convenient wrapper for existing MMF shares—with all transfers still processed through the fund’s traditional transfer agent—then tokenized MMFs add relatively little new risk beyond their underlying fund. But if tokens can broadly transfer MMF share ownership on public blockchains, enabling 24/7 trading, instant settlement, and use as collateral, then tokenization simultaneously increases the product’s utility and amplifies every vulnerability of the underlying fund.

Cross-product contagion is where tokenized MMFs introduce genuinely novel systemic risk. Because tokens trade at market-based prices on secondary markets, a decline in token prices can signal to investors in the traditional MMF that their shares may be overvalued at the stable $1.00 NAV. This creates an arbitrage channel: sophisticated investors can buy discounted tokens, convert them to traditional MMF shares, and redeem at full NAV—exactly the kind of information-driven run that proved devastating during the 2008 crisis. The SEC Crypto Task Force’s ongoing work on enabling token-based ownership transfers will be pivotal in determining whether this risk materializes at scale.

Money Market ETFs and Cross-Product Contagion Channels

Money market exchange-traded funds are the newest entrants to the money-like product landscape, with the first five launched in 2024 and total net assets of approximately $4 billion as of September 2025. Despite their relatively small size, MMETFs introduce a contagion mechanism that the FEDS paper considers among the most important findings of its analysis: the potential for MMETF price signals to destabilize the much larger traditional MMF sector.

The mechanism works as follows: MMETFs trade on exchanges at market-determined prices that fluctuate throughout the day, while government MMFs and retail prime MMFs maintain stable $1.00 NAVs through share-price rounding. If market stress causes MMETF prices to decline visibly—even modestly—MMF investors may interpret the decline as evidence that their own stable-NAV shares are overvalued. This information signal could trigger MMF redemptions even in the absence of any new fundamental information about the quality of MMF assets. The paper characterizes this as a genuinely new cross-product contagion channel that adds to rather than replaces existing MMF vulnerabilities.

There is an important caveat: the paper argues that if MMETFs were to replace traditional MMFs entirely and redeem exclusively in-kind (by transferring portfolio assets rather than cash), aggregate vulnerabilities would likely decrease because in-kind redemptions eliminate most of the liquidity transformation problem. However, four of the five current MMETFs transact in cash, and in-kind redemption of repo agreements—a core MMF holding—faces practical challenges. Moreover, as long as traditional MMFs remain sizable alongside MMETFs, the cross-product contagion effect likely adds net vulnerability to the financial system.

How the GENIUS Act Reshapes Stablecoin Regulation

The Guiding and Establishing National Innovation for U.S. Stablecoins (GENIUS) Act, signed into law in July 2025, represents the most significant U.S. regulatory intervention in digital asset markets to date. The Act creates a federal framework specifically for “payment stablecoins” while leaving non-payment stablecoins—those used primarily for trading, DeFi yield, or speculative purposes—largely unregulated. This dual framework has profound implications for the vulnerability landscape that the FEDS paper systematically maps.

On the risk-reducing side, the GENIUS Act imposes reserve requirements that partially align with MMF rules but with important differences. Payment stablecoin issuers must hold reserves in high-quality liquid assets with Treasury maturity limits capped at 93 days—stricter than the weighted average maturity limits that govern MMFs. The Act also mandates capital requirements, regular auditing, and public transparency standards that should reduce the kind of opacity that allowed Tether to accumulate non-traditional reserve assets without investor awareness.

However, the paper argues that the GENIUS Act is a double-edged sword for financial stability. By creating clear regulatory standards and legitimizing payment stablecoins as regulated financial products, the Act is likely to increase stablecoin moneyness substantially. Greater moneyness attracts the kind of risk-averse institutional users who expect their holdings to function as cash equivalents—precisely the reactive investor base that amplifies run dynamics. Furthermore, greater standardization across payment stablecoins increases the potential for contagion: if one regulated issuer experiences stress, investors may question all regulated issuers more readily because the products are perceived as more homogeneous.

One particularly consequential provision is the GENIUS Act’s prohibition on redemption suspensions for payment stablecoins. While current stablecoins like Tether and USDC retain the right to suspend redemptions during stress—a feature that actually reduces certain run dynamics by removing the first-mover advantage—payment stablecoins under the Act cannot use this tool. Removing the suspension option reduces one type of threshold effect but also eliminates a crisis management mechanism that, however imperfect, gives issuers breathing room during acute stress events.

Threshold Effects and the Breaking-the-Buck Problem

Threshold effects—discontinuous changes in expected payoffs that create cliff-edge dynamics—are among the most dangerous vulnerability features because they convert gradual stress into sudden crises. The canonical example is the MMF “breaking the buck” threshold: when a fund’s net asset value falls below $0.995 and can no longer round to $1.00, a psychological barrier shatters and investors rush to redeem. This dynamic was demonstrated when the Reserve Primary Fund broke the buck in September 2008, holding $785 million in Lehman Brothers commercial paper that became worthless overnight.

For stablecoins, the FEDS paper finds that threshold effects are generally less pronounced than for traditional MMFs because stablecoins already trade in liquid secondary markets where prices fluctuate regularly. There is no abrupt “breaking the buck” moment because the stablecoin’s market price continuously reflects investor sentiment. However, redemption suspensions in current stablecoins represent a meaningful threshold: the announcement that an issuer has suspended redemptions would likely trigger a dramatic price collapse in secondary markets, as investors simultaneously attempt to sell tokens they can no longer redeem at par.

The dynamic liquidity fee mechanism implemented for institutional prime MMFs in October 2024—which imposes a fee when daily net redemptions exceed 5% of assets—represents an innovative regulatory approach to managing threshold effects. Notably, none of the novel money-like products analyzed in the paper replicate this mechanism, suggesting a potential regulatory gap that merits attention as these products grow. The SEC’s evolving approach to MMF regulation could provide a template for addressing similar dynamics in stablecoin and tokenized fund markets.

Financial Stability Implications for Banks and Investors

The FEDS paper’s analysis carries direct implications for banks, asset managers, and institutional investors navigating an increasingly complex landscape of money-like products. For banks, the growth of stablecoins and tokenized funds represents both a competitive threat—potentially drawing deposits away from traditional accounts—and a new source of interconnectedness risk. The two largest stablecoins hold approximately $137 billion in Treasury securities and $57 billion in Treasury repo; forced liquidation of these positions during a stablecoin run could create meaningful price pressure in the very markets that underpin bank Treasury portfolios.

For asset managers operating money market funds, the emergence of MMETFs and tokenized MMFs introduces competitive pressure alongside contagion risk. The paper’s finding that MMETF price declines can signal mispricing in stable-NAV MMFs suggests that asset managers may need to increase the liquidity and credit quality of their portfolios simply to guard against cross-product information effects—even if their own fund is operating perfectly soundly. This represents a new compliance and risk management consideration that was absent before 2024.

For institutional investors, the framework provides a systematic lens for evaluating which money-like products to allocate to and in what proportions. Products with fewer vulnerability features—for example, government MMETFs that redeem in-kind—may offer superior risk-adjusted liquidity characteristics compared to products that combine multiple vulnerability features. However, the paper cautions that because these products are novel and still evolving, current assessments are tentative. Non-structural features like moneyness and investor composition are especially likely to shift as adoption patterns change and the GENIUS Act’s effects become apparent.

What Comes Next: Monitoring Stablecoin and Tokenization Risks

The FEDS paper concludes by identifying the key variables that will determine how vulnerabilities evolve for each product category. For MMETFs, the critical question is whether regulators will require in-kind redemptions to reduce liquidity transformation—and whether the practical challenges of transferring repo ownership can be overcome. For tokenized MMFs, the pivotal issue is whether the SEC Crypto Task Force enables broad token-based ownership transfers, which would dramatically increase both the utility and the systemic risk of these products.

For stablecoins, the paper identifies the GENIUS Act’s implementation as the single most important variable. The dual framework—regulated payment stablecoins alongside unregulated non-payment stablecoins—creates a natural experiment in regulatory design. If payment stablecoins capture the bulk of market growth, the financial system gains better reserve standards and transparency but also acquires a larger pool of assets with increased moneyness and contagion potential. If non-payment stablecoins continue to dominate, the current vulnerability profile persists with less regulatory oversight.

The broader message for financial regulators and market participants is that new money-like products do not simply add or subtract from existing risks—they create entirely new interaction effects and contagion pathways. The $300 billion stablecoin market, the $4 billion MMETF market, and the $1.5 billion tokenized MMF market are all growing rapidly alongside the $7.7 trillion traditional MMF sector. As these markets intersect and evolve, the five-feature vulnerability framework offered by the FEDS paper provides an essential analytical tool for anticipating and managing the systemic risks that accompany financial innovation.