Stablecoins Show the Problem With Crypto in 401(k)s
Back in the midst of the financial crisis, the Reserve Fund (a storied fund among money market funds) broke the buck. It was forced to be valued at 97 cents per share, rather than $1 per share. This event sent shock waves through financial markets. In response, the Securities and Exchange Commission tightened the rules around the underlying investments in money market funds.
Compare the Reserve Fund’s valuation of 97 cents with the stablecoin valuations mentioned above of 95 cents and 30 cents. The difference is significant. In fact, for perspective, the money market rules allow a deviation of only 50 basis points ($0.995) before the fund is forced to break the buck, as in the case of the Reserve Fund.
The commitment to maintain a stable value of $1/share for money markets takes significant resources, expertise and regulatory oversight. The $4.5 trillion of assets invested in money markets (as reported June 21 by the Investment Company Institute) stands as a testament to the well-deserved trust earned by the money market industry.
Fiduciary Process
With cryptocurrencies, on the other hand, there are no regulations related to the dollar peg of the stablecoins. In fact, tether resisted disclosure of the financial statements related to the collateral pools supporting the dollar peg until it was forced by a settlement with the New York attorney general’s office to issue attestation reports disclosing the holdings of the collateral pools.
Thus, 401(k) plan fiduciaries must demand continued transparency from all cryptocurrency sponsors before they open the floodgates of ERISA-qualified assets into this asset class. But transparency is merely a first step in building trust in this asset category.
When assessing the prudence of a cryptocurrency investment, they must take the disclosed data and run it through analytics that are similar to the requirements applicable to money market funds; assessing metrics related to the duration, liquidity and credit quality of the collateral pools, as well as the deviation between book and market values.
Effectively, the rules pertaining to money market funds constitute best practices related to dollar-pegged investments. Before plan fiduciaries commit ERISA-qualified assets to cryptocurrencies, it would behoove them to ensure that best practices are being followed.
Of course, the specific details do not have to be precisely the same as those pertaining to money market funds, but any metrics, at a minimum, should address the same principles reflected in the money market requirements. In fact, any analytic procedures used for stable value funds may be a good place to start.
No one knows what the future holds for cryptocurrencies. We may look back 10 years from now and cryptocurrencies may have been an exciting financial fad. On the other hand, cryptocurrencies may form the bedrock of the global monetary system. As of today, the future is unknown. But if the asset class is heading toward the latter, retirement plan fiduciaries can actually play a constructive role for the market as a whole.
Mitchell Shames is founder and managing director of Harrison Fiduciary.
