Stablecoins are not banks. Regulators treat them as narrow banks, focusing on asset-liability matching and capital requirements. This framework ignores their core utility as a high-velocity settlement layer for DeFi protocols like Aave and Uniswap.
crypto-regulation-global-landscape-and-trends
Blog
Why Money Market Funds Are the Real Regulatory Benchmark for Stablecoins
Stablecoins like USDC and USDT are not banks. Their asset-backed models and liquidity risks mirror money market funds, making the SEC's Rule 2a-7 the correct regulatory framework, not traditional banking rules.
introduction
THE WRONG COMPARISON
Introduction: The Regulatory Mismatch
Stablecoins are regulated like banks, but their economic function aligns with money market funds, creating a dangerous misalignment.
The real benchmark is MMFs. Money market funds offer daily liquidity against a pool of short-term, high-quality assets—the exact operational model of a well-designed stablecoin like MakerDAO's DAI or a fully-reserved USDC.
Regulatory mispricing creates systemic risk. By forcing a bank capital structure onto an MMF product, rules incentivize risky, opaque yield-seeking to generate equity returns, mirroring pre-2008 shadow banking.
Evidence: The 2023 USDC depeg demonstrated that liquidity, not solvency, is the critical failure mode—a lesson from the 2008 Reserve Primary Fund 'breaking the buck'.
thesis-statement
THE REGULATORY MISMATCH
Core Thesis: Stablecoins Are Shadow MMFs, Not Shadow Banks
Stablecoin issuers operate like money market funds, not banks, and regulatory frameworks must reflect this functional reality.
Stablecoins are not fractional-reserve banks. They hold near-liquid assets against liabilities, not long-term loans. This asset-liability structure mirrors a money market fund (MMF), not a commercial bank's maturity-transformation model.
The regulatory risk is misclassification. Treating them as banks imposes capital requirements designed for credit risk, ignoring the liquidity risk that defines MMFs. The 2022 LDI crisis in UK pensions showed this mismatch's systemic danger.
Evidence from DeFi protocols. Platforms like Aave and Compound formalize this MMF logic, creating transparent, over-collateralized lending pools. Their stress tests during market crashes, like the USDC depeg, validated the resilience of this model over opaque bank-like reserves.
The benchmark is SEC Rule 2a-7. This governs MMFs, mandating high-quality liquid assets and daily/weekly liquidity thresholds. Applying this to Tether (USDT) or Circle (USDC) creates a clear, existing regulatory on-ramp, unlike inventing new bank charters.
key-trends
WHY THE SEC IS WATCHING
The Converging Risk Profile: MMFs vs. Stablecoins
Regulators aren't looking at cash; they're looking at prime money market funds as the operational and systemic risk benchmark for large-scale stablecoins.
01
The Problem: The $6 Trillion Shadow
Prime MMFs hold $1.2T+ in assets and are the de facto cash management tool for institutions. Their 2008-era fragility (e.g., Reserve Primary "breaking the buck") established the regulatory playbook now being applied to stablecoins.
- Parallel Structure: Both hold short-term, liquid debt (commercial paper vs. treasuries/repos).
- Systemic Footprint: A run on a top-3 stablecoin would mirror a run on a major MMF.
$1.2T+
MMF Assets
2008
Playbook Origin
02
The Solution: Daily Liquidity & NAV
SEC Rule 2a-7 mandates that MMFs maintain daily liquidity and mark-to-market via a stable NAV. This is the blueprint for stablecoin redemption guarantees.
- Liquidity Buffer: 10% daily, 30% weekly liquid asset requirements.
- Transparent Pricing: NAV prevents the illusion of a permanent $1 peg, forcing risk acknowledgment.
10%
Daily Liquidity Min
Stable NAV
Pricing Model
03
The Problem: Credit & Counterparty Risk
MMFs are only as safe as their underlying commercial paper. Similarly, USDC's collapse of Silicon Valley Bank and USDT's commercial paper portfolio highlighted identical concentrated risk.
- Asset Backing Scrutiny: Regulators demand transparency on the quality, maturity, and concentration of reserve assets.
- Custodian Risk: The failure of a custodian bank (like SVB) is a direct parallel.
SVB
Case Study
Concentration
Key Risk
04
The Solution: Stress Tests & Gates
Post-2008 reforms gave MMF boards power to impose liquidity fees and redemption gates during stress. This is the regulatory expectation for stablecoins under market collapse.
- Circuit Breakers: Halting redemptions to prevent fire sales.
- Fee Structures: Discouraging rapid exits that destabilize the reserve.
Gates/Fees
Run Prevention
Board Discretion
Trigger Mechanism
05
The Problem: Operational 24/7 Demands
MMFs settle in T+1 cycles during business hours. Stablecoins promise instant, global, 24/7 redemptions, creating an impossible operational burden for traditional bank partners.
- Settlement Finality: Blockchain finality vs. ACH reversals.
- Correspondent Banking: The off-chain settlement layer remains a fragile, time-bound chokepoint.
24/7
Settlement Window
T+1
Traditional Lag
06
The Solution: On-Chain Reserve Proofs
The crypto-native answer to MMF disclosure is real-time, verifiable on-chain attestations (e.g., Chainlink Proof of Reserve). This surpasses monthly SEC filings.
- Continuous Audits: Smart contract-based verification of collateral backing.
- Transparency Advantage: A potential regulatory upside if standardized and adopted.
Real-Time
Attestation
On-Chain
Proof Standard
THE REAL REGULATORY BENCHMARK
Asset Composition & Risk Comparison: A Side-by-Side View
Comparing the underlying asset quality, regulatory treatment, and risk profiles of stablecoins against traditional money market funds (MMFs).
| Feature / Metric | Prime Money Market Fund (SEC Rule 2a-7) | Fully-Reserved Stablecoin (e.g., USDC, USDP) | Algorithmic / Crypto-Backed Stablecoin (e.g., DAI, FRAX) |
|---|---|---|---|
Primary Regulatory Oversight | SEC (Investment Company Act of 1940) | State Money Transmitter Laws / NYDFS | Minimal / DeFi Governance |
Underlying Asset Composition | 100% Short-Term Debt (Avg. Maturity < 60 days) | 100% Cash & Short-Term U.S. Treasuries | Mixed (e.g., USDC, ETH, staked assets) |
Credit Risk Exposure | Tier-1 Financial Institutions & Gov't | U.S. Treasury & FDIC-Insured Banks | Counterparty & Smart Contract Risk |
Liquidity Requirement (Daily) | Minimum 10% in Daily Liquid Assets | Theoretically 100% (Practically Varies) | Governance Parameter (e.g., DSR, Stability Fee) |
NAV Stability Mechanism | Stable $1.00 NAV (Amortized Cost) | 1:1 Fiat Peg (Redeemability) | Algorithmic Rebalancing / Overcollateralization |
Transparency & Reporting | Daily NAV, Monthly Holdings, SEC Filings | Monthly Attestation (Grant Thornton) | Real-Time On-Chain Data (Varies by Protocol) |
Direct Redemption Guarantee | Next Business Day at $1.00 NAV | Direct with Issuer (Minimums Apply) | Via Secondary Market or Protocol (Slippage) |
Historical Loss Events | Rare (e.g., 2008, 2020 - "Breaking the Buck") | Depegs (e.g., USDC March 2023) | Collateral Liquidations & Depegs (e.g., UST) |
deep-dive
THE REGULATORY PRECEDENT
Deep Dive: Rule 2a-7 as the Operational Blueprint
The SEC's 1983 Rule 2a-7 for money market funds provides the only proven operational framework for a high-liquidity, low-volatility digital cash equivalent.
Stablecoins are shadow MMFs. Their core function—daily redemptions at par value against high-quality, liquid assets—is identical to a prime money market fund. The regulatory framework for this already exists.
The 2a-7 blueprint is definitive. It mandates weighted average maturity limits, daily/weekly liquid asset minimums, and stress testing. This is the operational spec for a reserve-backed stablecoin like USDC, not banking law.
Crypto-native protocols ignore this precedent. DeFi lending pools like Aave and Compound treat stablecoins as generic collateral, not as liabilities requiring specific liquidity management. This creates systemic fragility.
Evidence: During the March 2020 liquidity crisis, prime MMFs faced massive redemptions but held due to 2a-7's 30% weekly liquidity rule. Terra's UST, with no such rule, collapsed in days.
counter-argument
THE WRONG ANALOGY
Counter-Argument: But They're Payment Instruments, So They Must Be Banks
Regulators incorrectly equate stablecoin payment functions with bank deposit-taking, missing the superior legal and operational parallel to money market funds.
Payment function does not equal banking. A bank’s core activity is maturity transformation—taking short-term deposits to fund long-term loans. Stablecoin issuers like Circle or Paxos hold short-term, liquid assets against liabilities, avoiding this fundamental risk.
The correct analog is a money market fund. These SEC-regulated vehicles, like those from BlackRock or Fidelity, issue shares redeemable at $1, backed by high-quality liquid assets. This is the precise operational and legal model for a fully-reserved stablecoin.
The regulatory precedent already exists. The SEC’s Rule 2a-7 governs MMFs, setting strict standards for asset quality, liquidity, and disclosure. Applying this framework to stablecoins provides immediate legal clarity without inventing new bank charters.
Evidence: The 2023 Clarity for Payment Stablecoins Act explicitly defines issuers as ‘payment stablecoin issuers’ subject to rules akin to MMFs, not banks, recognizing this critical distinction in federal legislative text.
takeaways
STABLECOIN PRIMER
TL;DR: Key Takeaways for Builders and Regulators
The regulatory future of stablecoins is being written by 1940s-era money market fund rules, not crypto-native frameworks. Here's what that means.
01
The Problem: The Custody & Asset Quality Illusion
Most stablecoins claim safety via cash reserves, but the real risk is in the quality and liquidity of the underlying assets. A 1:1 peg means nothing if the backing is commercial paper from a failing firm.
- Key Insight: Regulators see this as a shadow banking liability, not a tech innovation.
- Action for Builders: Audit trails must prove asset composition rivals a Tier-1 MMF (e.g., >95% government securities, <7-day WAM).
- Action for Regulators: Mandate daily attestations and stress tests for liquidity coverage.
>95%
Govt. Securities
<7 Days
Avg. Maturity
02
The Solution: Operationalize the SEC's 2a-7 Framework
The SEC's Rule 2a-7 for Money Market Funds is the de facto blueprint. Compliance isn't optional; it's the price of institutional adoption.
- Key Insight: This means daily mark-to-market NAV, liquidity gates, and mandatory liquidity buffers.
- Action for Builders: Architect for on-chain proof of reserves that auto-calc a shadow NAV. See MakerDAO's RWA vaults for precedent.
- Action for Regulators: Define clear redemption rights and failure resolution processes, treating stablecoin issuers as limited-purpose banks.
2a-7
SEC Rule
Daily
NAV Calc
03
The Arbitrage: On-Chain Transparency as a Weapon
Traditional MMFs report with a 60-day lag. A properly built stablecoin can offer real-time, verifiable proof of reserves and composition, creating a superior product.
- Key Insight: Transparency at scale is crypto's killer app for trust. This flips the regulatory narrative from risk to oversight efficiency.
- Action for Builders: Integrate zk-proofs or trust-minimized oracles (e.g., Chainlink Proof of Reserve) for continuous, fraud-proof attestation.
- Action for Regulators: Embrace programmable compliance—set the rules, let the code enforce them in real-time, reducing supervisory overhead.
Real-Time
Attestation
60-Day Lag
Legacy MMF
04
The Precedent: USDC's March Towards 2a-7 Compliance
Circle's strategic pivot to 100% cash and US Treasuries and its pursuit of a national bank charter is the playbook. They are explicitly aligning with, not fighting, MMF regulation.
- Key Insight: The winning strategy is regulatory arbitrage through over-compliance, not evasion.
- Action for Builders: Model treasury management on BlackRock's USD Liquidity Fund. Partner with registered custodians and auditors.
- Action for Regulators: Recognize that a compliant, transparent stablecoin is a more effective monetary policy tool than opaque shadow banking products.
100%
Cash & Treasuries
Bank Charter
Strategic Goal
05
The Systemic Risk: Redemption Runs & Liquidity Gates
MMF history is defined by runs (e.g., 2008, 2020). The same fragility exists in stablecoins but with global, 24/7 settlement networks amplifying speed.
- Key Insight: Liquidity gates and fees (as seen in 2a-7) are not bugs; they are circuit breakers for systemic protection.
- Action for Builders: Code circuit breakers and tiered redemption fees into the smart contract layer. Study Aave's Gauntlet for parameter risk modeling.
- Action for Regulators: Mandate liquidity stress testing against bank-run scenarios and require clear user disclosure of redemption risks.
24/7
Run Risk
Circuit Breakers
Required
06
The Endgame: Programmable MMFs as a New Asset Class
The convergence creates a hybrid: a programmable money market fund. This isn't just a stablecoin; it's a yield-bearing, regulatory-compliant, on-chain cash equivalent.
- Key Insight: The $6T MMF market is the real TAM. The goal is to cannibalize it with a superior product.
- Action for Builders: Build protocols where the stablecoin is the base yield-bearing layer (e.g., MakerDAO's DSR, Aave's GHO).
- Action for Regulators: Create a new charter category for these entities, enabling innovation within a controlled sandbox that protects consumers and financial stability.
$6T
MMF TAM
Yield-Bearing
Base Layer
ENQUIRY
Get In Touch
today.
Our experts will offer a free quote and a 30min call to discuss your project.
NDA Protected
Confidentiality24h Response
Time to ValueDirectly to Engineering Team
No Sales Fluff10+
Protocols Shipped
$20M+
TVL Overall