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Flight to Safety: Evaluating Stablecoin’s Role as a Safe-Haven Asset in DeFi Markets

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Abstract

This study examines the impact of the stablecoin Tether (USDT) on systemic liquidity across the Ethereum and Bitcoin markets, utilizing an event study approach that integrates on-chain wallet data, pricing, and financial metrics. By analyzing cryptocurrency market responses to key protocol and market-moving events, augmented by nonlinear volatility models, we identify distinct, chain-specific flight-to-safety behaviors. Our results show that USDT acts as a primary liquidity lifeline for Ethereum holders during stress, particularly among retail investors, whereas its role for Bitcoin holders is more muted and stabilizing. Notably, we find stronger flight-to-safety evidence in Wrapped Bitcoin (Ethereum-based) than in native Bitcoin, highlighting that USDT’s function is network dependent. These findings imply that effective regulatory frameworks must be differentiated, accounting for chain-specific liquidity, investor composition, and risk dynamics, as a uniform approach would likely be systematically miscalibrated.

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  • Alan Chernoff & Julapa Jagtiani & Nathaniel Yoshida, 2026. "Flight to Safety: Evaluating Stablecoin’s Role as a Safe-Haven Asset in DeFi Markets," Working Papers 26-24, Federal Reserve Bank of Philadelphia.
    • Handle: RePEc:fip:fedpwp:103156
    DOI: 10.21799/frbp.wp.2026.24
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    1. Tobias Adrian & Richard K. Crump & Erik Vogt, 2019. "Nonlinearity and Flight‐to‐Safety in the Risk‐Return Trade‐Off for Stocks and Bonds," Journal of Finance, American Finance Association, vol. 74(4), pages 1931-1973, August.
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    JEL classification:

    • G14 - Financial Economics - - General Financial Markets - - - Information and Market Efficiency; Event Studies; Insider Trading
    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • G28 - Financial Economics - - Financial Institutions and Services - - - Government Policy and Regulation
    • G41 - Financial Economics - - Behavioral Finance - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making in Financial Markets

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