The Federal Reserve Bank of Boston posted a research paper, "A Framework for Understanding the Vulnerabilities of New Money-Like Products." It states, "Money and money-like assets are central components of our financial system and economy. As such, the recent emergence of new types of nonbank money-like products, such as stablecoins, tokenized money market funds (MMFs), and money market exchange-traded funds (MMETFs), could be transformative for finance. These nonbank products may offer significant potential benefits, such as enhanced liquidity and higher returns for investors as well as reduced costs for a wide range of transactions, from everyday consumer purchases to large international deals. At the same time, like other money-like assets, such as uninsured deposits and MMFs, the new products can be susceptible to costly, disruptive runs and thus contribute to financial system vulnerabilities."
It explains, "In this paper, we introduce a general framework for analyzing the vulnerabilities in novel money-like products. Our framework builds on the well-documented vulnerabilities in an older nonbank innovation with wide-ranging benefits and well-understood risks -- MMFs -- and the features that contribute to MMF vulnerabilities. To illustrate the utility of the framework, we focus on three promising novel money-like products and examine the extent to which each: (1) engages in liquidity transformation, or the conversion of illiquid assets into liquid liabilities; (2) is subject to threshold effects, which are sharp discontinuities in investors' expected payoffs amid stress; (3) serves as a private money-like asset, that is, the degree to which it has 'moneyness' because it is perceived as safe and liquid; (4) poses contagion risks because problems in one product trigger runs on similar products; and (5) has a base of reactive investors who are more prone to run during periods of stress."
The paper tells us, "These features include structural attributes that arise directly from the core business model of a product or the legal framework that governs it, as well as other features reflecting how a product is perceived and used. Structural features, such as liquidity transformation and threshold effects, are unlikely to change significantly without changes to laws or rules. Non structural features that reflect how a product is used or perceived are more malleable, more likely to evolve, and thus more difficult to predict. Notably, MMF vulnerabilities stem from the presence of combinations of these features, so a novel product with just one or two of them may not be particularly susceptible to runs."
It continues, "Because our framework builds on the literature on MMF vulnerabilities, it is best suited for study of potential vulnerabilities arising from store-of-value functions of money-like products, that is, from their role as cash-like investments. Money-like products may also provide payment functions that facilitate transactions. Although the features we discuss would be less relevant for a product purely used for payments, in practice a product employed at very large scale would probably also have a significant store-of-value function for some users."
The Boston Fed piece says, "As reported in Table 1, using this framework, we find that features that contribute to vulnerabilities are present to varying extents in U.S. MMETFs, tokenized MMFs, and stablecoins. For example, although MMETFs may have the flexibility to redeem largely in-kind (which would reduce liquidity transformation), they currently redeem mostly or exclusively in cash, so their liquidity transformation is similar to that of MMFs. Threshold effects in MMETFs are smaller than those in MMFs, largely because ETFs use market pricing, which also probably diminishes their money-like status relative to most MMFs. MMETFs can increase contagion effects if ETF price discounts signal that MMF investors should redeem their shares. Finally, the reactivity of the MMETF investor base is probably less than that of MMFs because ETFs' fluctuating market prices are unlikely to attract institutional investors that can hold stable-NAV government MMFs."
It states, "We illustrate our framework by focusing on U.S. MMETFs, tokenized MMFs, and stablecoins because these products may grow rapidly in scale and scope and be offered to a wide range of investors, from households to large financial institutions. Some other money-like products, such as specialized investment funds that offer cash-management options for a narrow set of investors -- notably, tokenized private funds -- could be analyzed using the framework we offer in this paper. However, to demonstrate the utility of our framework, we limit our examination to instruments that are more widely available and may have meaningful potential effects on aggregate financial vulnerabilities."
The paper adds, "To be sure, the new products we examine are still evolving rapidly, and their nascency limits our ability to foresee the full range of possible uses and how they might affect financial stability. In particular, the structural features of these products may change if laws, regulations, or business models are altered, while non-structural features are likely to shift as products become more familiar in the marketplace, and both types of changes could affect our assessments of vulnerabilities considerably. Yet, even as products' features vary, the framework itself remains useful: By comparing the new products' features to those of MMFs, which have vulnerabilities that are extensively documented in both the academic and official-sector literatures, we can learn much about how new products may contribute to financial vulnerabilities as they evolve."
Finally, the piece explains, "Moreover, the analysis provides some key insights into what to watch for as products develop. For example, a pivotal issue for MMETFs is whether they can continue to redeem in cash, and a key issue for tokenized MMFs is whether transferring the token can effect a transfer of the underlying MMF, which would make this product more money-like. Section 2 of this paper provides a brief introduction to each of the novel products we examine. Section 3 describes our framework for assessing how these products may contribute to financial vulnerabilities. Section 4 analyzes each product using our framework. Section 5 concludes."
In other news, Federated Hermes' Deborah Cunningham writes in her monthly commentary on "Maintaining Momentum." She tells us, "The last few years have been remarkable for stable value investments. Even as the Federal Reserve has pivoted to easing rates, assets in liquidity products have marched steadily upward. Depending on your sources, which all calculate it differently, total industry money market fund assets hit record highs in 2025. How investors view money funds this year will probably be influenced by recency bias."
She comments, "With the Fed's latest Summary of Economic Projections (SEP) indicating at least one 25 basis-point cut in 2026, yields are likely to slide. Behavioral economics posits that some investors will focus on the decline, despite the likelihood that yields across the industry will remain attractive. We expect most investors, however, will remain happy with money funds even if the terminal fed funds rate rests in the lower 3% area, as the SEP dot plot forecasts. Total assets might decline, but if they do, it should be gradual."
Cunningham adds, "The adoption of tokenized money funds and the progress toward stablecoin shares that began last year should expand in 2026. It is an exciting time for the industry as digitalization is increasing investor opportunities and indicating that liquidity products can be attractive no matter the wrapper."
