Every financial crisis has a villain that nobody saw coming. In 2008, it was mortgage-backed securities. In March 2020, it was prime money market funds, which saw investors pull billions in days as panic spread through the system. Now, researchers at the Federal Reserve Bank of Boston are asking a pointed question: could the next wave of digital financial products trigger a similar stampede?
In a January working paper, economists at the Boston Fed and the Federal Reserve Board introduced a framework for evaluating the financial fragility of three rapidly growing products: money market exchange-traded funds (MMETFs), tokenized money market funds and stablecoins. Their benchmark for comparison is the humble money market fund. It’s a product whose vulnerability is now well documented after two near-collapses in the past two decades.
Money market funds were revolutionary when the SEC approved them in 1972, offering ordinary investors a way to earn competitive returns on short-term debt. Today, they hold $7.7 trillion in assets. But their history reveals a critical flaw: they promise instant cash to investors while holding assets that can become very hard to sell in a crisis. When confidence cracks, everyone rushes for the exit—and the first ones out get better deals than those who wait. The researchers call this “liquidity transformation,” and it sits at the heart of every money-market run.
The new products are promising. MMETFs, which launched in 2024 and now hold about $4 billion, blend the regulatory safety of money market funds with the trading flexibility of ETFs. Tokenized money market funds put those same shares on a blockchain, theoretically enabling around-the-clock payments and use as financial collateral. Stablecoins, meanwhile, have reached $300 billion in market cap and are already embedded in payments and digital asset trading worldwide.
But promising and safe are different things. The researchers evaluated each product against five characteristics that have historically made money-market products prone to crisis:
- Liquidity transformation: promising more liquidity than the underlying assets can deliver
- Threshold effects: sudden, sharp drops in value when certain tripwires are hit (like a money market fund “breaking the buck”)
- Moneyness: how strongly users treat something as equivalent to cash, making panic-selling more likely if that perception shifts
- Contagion: how easily stress spreads from one product to similar ones
- Reactive investors: particularly institutional players who move fast and move big when they sense trouble
The Findings Carry Real Warnings
On the encouraging side, MMETFs and stablecoins both avoid one of the most dangerous features of traditional money market funds: because their prices float in secondary markets, they don’t have the same dramatic cliff-edge “breaking the buck” dynamic. Threshold effects are accordingly muted.
The concern that stands out most, however, involves contagion, and the direction runs in reverse of what you might expect. Rather than new products being infected by money market fund stress, the researchers warn that MMETFs and tokenized money market funds could actually amplify runs on traditional money market funds. When an MMETF’s market price drops visibly, institutional investors in ordinary money market funds may interpret that as a signal that their own funds are overvalued and redeem preemptively, creating the very crisis the signal seemed to predict.
For stablecoins, July’s GENIUS Act introduces long-awaited regulatory guardrails. But the researchers note that standardization cuts both ways: as stablecoins become more similar to each other under new rules, they may also become more susceptible to the kind of sector-wide contagion that has plagued money market funds.
The paper arrives at a moment when policymakers, banks and FinTechs are vying to stake positions in digital cash management. Its core message is measured but clear: the features that make these products attractive like constant liquidity, digital transferability, stable value are precisely the features that have historically made cash-like products vulnerable. Understanding that tension is not just an academic exercise. It is, increasingly, a matter of financial infrastructure.