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Stablecoins vs Money Market Funds: How They Differ
Stablecoin vs money market fund comparison on regulation, liquidity, risk, and future convergence.
Dec 19, 2025・21 min read
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Money market funds (MMFs) and stablecoins both shape institutional liquidity. Understanding how the two overlap and diverge is now a central question for businesses, investors, and policymakers.
The key differences between stablecoins and money market funds are:
Stablecoins provide instant, global, programmable settlement while MMFs operate within traditional fund structures and market hours.
Stablecoins are typically backed by cash and Treasuries with direct 1:1 redemption, while MMFs pool diversified short-term instruments.
Stablecoins face evolving but converging oversight, whereas MMFs fall under established securities frameworks.
This article unpacks what makes stablecoins and money market funds similar, where they diverge, and what their convergence may mean for institutional and individual users worldwide.
Key Takeaways
Stablecoins and money market funds both provide short-term liquidity, but they are built on very different foundations of regulation, asset backing, and redemption mechanics.
Stablecoins respond in real time to stress events via constant transparency and direct redemption flows, while MMFs depend on regulatory buffers and central bank tools.
The rise of tokenized MMFs alongside regulated stablecoins signals a future where digital and traditional cash equivalents work side by side in global liquidity management.
What Are Stablecoins?
Definition and Core Features
Stablecoins are digital assets designed to maintain a stable value, usually pegged to the US dollar, gold, or other traditional asset. They combine the reliability of fiat currency with the efficiency of blockchain technology, making them essential to the growing digital economy.
The extent of this adoption is evident in the numbers. By the end of 2024, stablecoins were involved in over two thirds of all onchain transactions and the total stablecoin supply across all major projects now exceeds $230B.
Types of Stablecoins
Fiat-backed
Fiat-backed stablecoins are the widely adopted type of stablecoin. These assets are designed to maintain a 1:1 peg with traditional currencies, such as the US dollar or euro, and achieve their peg through direct fiat reserves and market arbitrage.
Fiat-backed stablecoins are issued by companies that maintain reserves in banks, cash equivalents, Treasury bills, or government securities. For example, Tether’s USD₮, the world's largest stablecoin, is backed by a mix of cash, US Treasury bills, and other secure, liquid assets.
Crypto-backed
Crypto-backed stablecoins use cryptocurrency as collateral instead of fiat. Due to volatility, these must be over-collateralized. For every $1 issued, more than $1 worth of crypto is locked up to ensure backing even during price drops.
These stablecoins are designed to be decentralized and transparent, with verifiable onchain reserves. But their reliance on volatile assets makes them less capital-efficient, and sharp market downturns can trigger cascading liquidations.
Algorithmic
Algorithmic stablecoins aim for price stability through automated supply and demand mechanisms, without collateral. They use economic incentives to keep prices stable.
While they aim for capital efficiency, past failures have shown their fragility during market downturns when confidence breaks. The most infamous example is the 2022 Terra collapse, which showed how reflexive sell pressure can overwhelm algorithmic designs without robust collateral.
Commodity-backed
Commodity-backed stablecoins are backed by physical assets like gold, silver, or other real-world commodities. These stablecoins can be useful for users seeking long-term value preservation and protection against inflation.
The most prominent example of a commodity-backed stablecoin is Tether Gold (XAUt), which represents ownership of physical gold held in Swiss vaults. Each XAUt token corresponds to one troy ounce of gold, and can be transferred and used digitally as well as physically redeemed.
As more commodities are ported onchain, assets like these will be increasingly useful for everything from wealth preservation to decentralized lending and borrowing.
Hybrid
Hybrid stablecoins combine features of collateralized and algorithmic models. Using partial reserves and algorithmic stabilization, they aim for capital efficiency and resilience.
These often employ fractional collateralization, with only part of the supply backed by real assets. The rest relies on a mechanism (like a secondary token) to maintain the peg.
While theoretically sound, hybrid stablecoins rely heavily on market confidence. If trust in their mechanism or secondary token weakens, the peg can break. This makes them less proven at scale compared to fiat- or crypto-backed options.
Yield-bearing
Yield-bearing stablecoins offer a balance of stability and passive income by distributing earnings from staking, arbitrage, or tokenized real-world assets. Two notable examples are Ethena’s USDe and Ondo’s USDY.
These stablecoins are appealing for passive income but carry new risks, including derivative exposure, counterparty issues, and regulatory uncertainty regarding tokenized securities.
Use Cases in Payments and Trading
Stablecoins compress financial quoting, authorization, and settlement into a single transaction. This design reduces reliance on legacy rails, giving businesses and households the ability to transfer value directly and settle in seconds across borders with minimal friction.
Cross-border trade, payroll distribution, vendor payments, and retail remittances all benefit from lower fees and faster settlement. The ability to move value at any hour, across jurisdictions, provides flexibility traditional systems cannot match.
Stablecoins also underpin decentralized finance (DeFi) by serving as base collateral and settlement currency. They make lending, derivatives, and liquidity pools viable at scale by offering a stable unit of account. This programmable foundation enables automated, complex strategies to operate securely.
Traditional finance is beginning to apply stablecoins to its own trading workflows. Broker-dealers can use stablecoins in repo markets, custodians are exploring them for faster clearing, and funds can pilot them for intraday liquidity.
What Are Money Market Funds?
Definition and Investment Structure
Money market funds (MMFs) are pooled investment vehicles that allocate capital into short-term, high-quality instruments such as Treasury bills, repurchase agreements, and commercial paper. Their purpose is to deliver stability, daily liquidity, and modest returns to investors.
Investors hold redeemable shares in the fund rather than direct ownership of the underlying assets. MMFs are regulated investment products, and their structures are subject to prospectus rules, diversification limits, and oversight from securities regulators.
Role in Traditional Financial Markets
MMFs are a traditional cornerstone of global funding markets. They channel investor capital into instruments that support government financing and corporate liquidity. Banks also rely on them for short-term funding, making MMFs integral to financial stability.
For corporate treasurers, MMFs have also long been a tool for segmenting liquidity across operating, reserve, and contingency needs. Their diversification, scale, and transparent reporting provide reliable balance sheet management.
Historical Context: 2008 Crisis and COVID-19 Runs
Past stress events have highlighted vulnerabilities in MMFs.
In 2008, the Reserve Primary Fund’s net asset value (NAV) fell below $1 after losses tied to Lehman Brothers, dropping to $0.97. This triggered a run that saw more than $234 billion in redemptions from prime MMFs, and the US treasury had to step in to restore market confidence.
The lessons from 2008 led to tighter regulations, including liquidity fees and redemption gates. But vulnerabilities reappeared in 2020 when COVID-19 market stress led to significant outflows.
The COVID-19 shock drove investors to pull ~$139 billion from prime MMFs in a matter of weeks, equal to nearly 17% of fund assets. To contain the fallout, the Federal Reserve created an emergency facility to backstop redemptions and restore order.
These episodes reinforced the fact that even highly regulated MMFs remain exposed to run risk under stress, and have led to further reforms such as tighter liquidity requirements and mechanisms to discourage runs.
Key Similarities Between Stablecoins and Money Market Funds
Balance Sheet Structures
Stablecoins and MMFs are both engineered to be liquid and low-risk, and rely on high-quality, short-duration assets to maintain stability. For stablecoin balance sheets, this often means cash and Treasuries. On the other hand MMFs holdings can also also assets like repos and commercial paper.
Transparency is similarly important for both asset classes. Stablecoins publish reserve attestations and breakdowns, while MMFs disclose maturities and liquidity levels. Though the formats differ, the shared principle is the same: investors must believe that assets cover obligations in full.
Run Risk and Investor Behavior
Both MMFs and stablecoins are exposed to confidence shocks, but the mechanisms differ. In MMFs, investors hold redeemable shares backed by short-term securities. If trust in the portfolio falters, redemption requests surge and funds must liquidate assets, often at a loss.
Stablecoins, by contrast, circulate as bearer digital tokens that promise redemption at par. In times of stress, holders sell on exchanges or seek direct redemption from the issuer. This creates rapid price discovery on secondary markets, where even a small deviation from $1 can spark widespread sell-offs.
The responses also diverge. MMFs have built regulatory safeguards such as liquidity minimums, redemption fees, and gates, which can delay or limit access to cash. Stablecoins rely on onchain transparency of reserves, market-maker liquidity, and redemption guarantees to maintain confidence in real time.
For users, this means MMFs provide regulated protections but may restrict access in crises, while stablecoins offer immediacy but depend on reserves and issuer credibility. Each structure reflects a trade-off: rules and slower exits in MMFs versus speed and market-driven discipline in stablecoins.
Dependence on Confidence and Liquidity
Both MMFs and stablecoins rely on investor confidence as much as reserve quality. With MMFs, liquidity comes from access to short-term debt markets. When redemptions spike, funds may be forced to sell assets quickly, crystallizing losses and creating the risk of contagion.
Stablecoins, by contrast, tie confidence to onchain transparency and direct redemption at par. Market data reveals stress almost instantly, which can restore trust more quickly but also accelerate volatility if doubts spread.
Crucial Differences Between Stablecoins and Money Market Funds
Regulation and Oversight
SEC Regulation of MMFs
MMFs benefit from decades of mature oversight. In the United States, the SEC defines strict rules around portfolio quality, liquidity floors, diversification requirements, and investor disclosure.
In 2023, the SEC also finalized several reforms requiring liquidity fees for certain funds and removing gates tied to weekly liquid assets. The purpose of these changes was to reduce run incentives and align costs with redeeming investors in stress.
Limited and Evolving Oversight of Stablecoins
Stablecoin oversight is converging but remains inconsistent across borders. Different jurisdictions are introducing licensing, reserve, and redemption standards, but the scope and enforcement vary.
For instance, the US GENIUS Act and the EU’s MiCA framework are bringing clarity to their respective markets, while Asia and the UK advance their own regimes. As a result, teams planning cross-jurisdiction stablecoin activity should build for adaptability.
Asset Backing and Transparency
MMF portfolios hold diversified short term instruments such as Treasury bills, repos, and high grade commercial paper. Disclosure is standardized, with metrics like weighted average maturity and weekly liquid assets helping investors assess resilience and liquidity under changing conditions.
Fiat-backed stablecoins typically hold cash and very short duration government securities in segregated accounts tied to redemption operations.
Responsible issuers like Tether now publish frequent attestations or onchain proofs, providing higher frequency visibility than traditional fund reports and factsheets.
Sensitivity to Market Shocks
Reaction to Crypto Market Shocks
Crypto markets face shocks from many sources, from protocol failures to sudden exchange outages. These events can trigger mass redemptions, widen spreads, and drain liquidity in hours rather than days, testing whether stablecoins can truly hold their peg under stress.
As a result, stablecoin issuers have built playbooks around these risks. Onchain flows reveal stress almost instantly, allowing market makers and pre-positioned dealers to act quickly.
Coupled with redemption windows and standardized disclosures, these tools shorten recovery time and help stabilize confidence in volatile moments.
Reaction to Monetary Policy Shifts
MMFs are directly shaped by central bank decisions. Rate hikes can boost yields but also reduce portfolio values, pressuring funds when investors redeem at scale. Liquidity buffers and regulatory limits are meant to cushion this, but shocks can still ripple through the system.
For stablecoins, the effects of monetary policy flow through more indirectly. Pegged tokens do not adjust yields for holders, but shifts in interest rates influence the performance of reserve assets and, in turn, the economics of issuance.
By publishing reserve composition and income disclosures, leading issuers provide clarity that helps investors assess resilience even as macro market conditions change.
Redemption Mechanisms and Guarantees
Money market funds offer redemptions at net asset value, but in times of stress, gates or fees may be imposed to slow outflows. These tools protect fund stability, though they can frustrate investors who expect immediate access to their cash.
The balance between liquidity and preservation has long been a challenge.
On the other hand, tablecoins frame redemption more directly. Holders expect one-to-one conversion into fiat on demand, often facilitated by issuers or approved intermediaries. When this promise holds, confidence is reinforced. When redemption channels falter, doubts spread quickly.
With stablecoins, clear policies, transparent reserves, and reliable settlement partners are what ultimately ensures the price peg remains intact.
The Future Landscape
Impact of New Legislation
While MMF regulations are largely settled and just occasionally revised, policymakers are moving quickly to define guardrails for stablecoins.
In the US, the GENIUS Act sets strict requirements for reserve assets, redemption rights, and issuer licensing. Like Europe’s MiCA, this law gives institutions clear parameters for how stablecoins can operate within the financial system and marked a turning point for global stablecoin regulation.
Asia has also introduced several stablecoin frameworks, from Hong Kong’s recent Stablecoin Ordinance to Singapore’s Payment Services Act amendments. These policies bring stablecoins closer to the standards of regulated financial products while strengthening Asia’s role as a hub for digital finance.
Together, these measures reflect how regulation is converging around transparency, full reserve backing, and redemption certainty. For investors and institutions alike, the result is a more predictable environment where stablecoins can operate as credible complements to traditional short-term instruments.
Rise of Tokenized Money Market Funds
One of the most notable recent shifts has been the arrival of tokenized MMFs. By putting shares of regulated funds directly on blockchain rails, these products extend the reach of traditional finance into the digital asset ecosystem while maintaining established safeguards Franklin Templeton.
Franklin Templeton pioneered the space with its US Government Money Fund, giving investors onchain access to short-term Treasuries. That momentum grew when BlackRock launched its BUIDL fund in 2024, which quickly surpassed $1 billion in AUM in early 2025, underscoring growing institutional appetite.
The promise of these vehicles lies in the combination of both worlds: the transparency and legal protections of MMFs with the settlement speed and programmability of tokenized assets.
For investors, the proliferation of tokenized MMFs signals a future where traditional cash management tools are seamlessly interoperable with digital finance.
Implications for Investors and the Financial System
For investors, the convergence of stablecoins and tokenized MMFs expands the menu of available liquidity instruments. Each offers distinct tradeoffs between regulatory certainty, settlement speed, and global portability. Portfolios may combine both depending on operational needs.
For the broader system, these developments point toward a future where cash equivalents circulate more efficiently across both traditional and digital rails.
The integration of programmable money with regulated fund structures has the potential to reshape, and improve, global liquidity management at scale.