Stablecoin depegging, financial intermediary balance sheet constraints, and liquidity in the U.S. traditional money market

Abstract As the stablecoin market has expanded rapidly, its links with the U.S. traditional money market have become increasingly close. This paper examines the dynamic effects of stablecoin depegging on U.S. money market liquidity. We develop an analytical framework incorporating stablecoins and show that depegging transmits liquidity stress by tightening financial intermediaries’ balance sheet constraints. Using local projections, we find marked heterogeneity across markets: Treasury bill liquidity improves initially before reversing, commercial paper liquidity deteriorates on the shock day, and repo market liquidity worsens with a delayed peak. Further analysis shows that these effects operate mainly through a higher marginal cost of expanding balance sheet capacity, rather than a large capital drawdown. When intermediary capital is under stress, liquidity deterioration is significantly amplified across all three markets. These findings document risk coupling between crypto-asset markets and traditional money markets and offer policy implications for macroprudential stablecoin regulation.