Back in the middle of the financial crisis, the reserve fund (a legendary fund among money market funds) broke the ball. It was forced to be valued at 97 cents per share, rather than $1 per share. This event sent shock waves through the financial markets. In response, the Securities and Exchange Commission tightened rules regarding underlying investments in money market funds.
Compare the reserve fund valuation of 97 cents with the aforementioned stablecoin valuations of 95 cents and 30 cents. The difference is significant. In fact, for perspective, money market rules allow a spread of only 50 basis points ($0.995) before the fund is forced to break the ball, as in the case of the reserve fund.
The commitment to maintain a stable value of $1/share for the money markets requires significant resources, expertise and regulatory oversight. The $4.5 trillion in assets invested in the money markets (as reported on June 21 by the Investment Company Institute) speaks to the well-deserved confidence earned by the money market industry.
With cryptocurrencies, on the other hand, there are no regulations tied to the dollar peg of stablecoins. In fact, tether resisted disclosing financial statements related to collateral pools supporting the dollar peg until it was forced by a settlement with the New York Attorney General’s office to release reports of certificate disclosing the assets of the guarantee pools.
Thus, 401(k) plan trustees must demand continued transparency from all cryptocurrency sponsors before opening the floodgates for ERISA-qualified assets in this asset class. But transparency is only a first step in building trust in this asset class.
When assessing the prudence of a cryptocurrency investment, they must take the disclosed data and run it through analyzes similar to the requirements for money market funds; assess the parameters related to the duration, liquidity and credit quality of collateral pools, as well as the difference between book and market values.
Indeed, the rules for money market funds are best practices related to dollar-indexed investments. Before plan trustees commit ERISA-qualified assets to cryptocurrencies, it would be their responsibility to ensure that best practices are followed.
Of course, the specific details do not have to be exactly the same as those relating to money market funds, but any measure, at a minimum, must meet the same principles reflected in the money market requirements. In fact, all of the analytical procedures used for stable value funds can be a good starting point.
No one knows what the future holds for cryptocurrencies. We can look back 10 years and cryptocurrencies may have been an exciting financial fad. On the other hand, cryptocurrencies can form the foundation of the global monetary system. To date, the future is unknown. But if the asset class moves towards the latter, pension trustees can actually play a constructive role for the broader market.
Mitchell Shames is founder and CEO of Trustee Harrison.