By Shelly Melancon (Switzerland)
American credit rating agency, Fitch, has warned that stablecoins that grow without the support of safe assets could cause a destabilization of short-term credit markets.
Fitch Warns About Unbacked Stablecoins
The rating agency noted that stablecoins backed by safe assets wouldn’t cause as much risk to the financial market as those not backed. The agency cited the USD stablecoin (USDC) example as a fully backed coin since it’s held in custody accounts and backed by U.S. Dollars.
However, it warned that the government still “be worried if it has a systemic footprint.” Conversely, Tether’s march 2021 reserve disclosure shows that 26.5% of its reserves are government securities, reverse repo notes, and fiduciary deposits. The rating agency remarked that the biggest stablecoin’s commercial paper (CP) holdings “might be larger than the majority of prime money market funds (MMF) in Europe, the Middle-east, Africa (EMEA), and the United States.”
As of this writing, these CP holdings are almost 55% of its reserve (or about $20.5 billion). “If there is a mass redemption of USDT in the general selling pressure of the CP market, the short-term credit markets might become unstable even if it is for a temporary period. If it should now occur at the same time when other stablecoins with similar asset reserves are being redeemed, then the instability would be of enormous proportion.”
Also read:Fitch also used Diem (a Facebook-supported stablecoin) to illustrate its point further. Diem proposes holding 20% of its reserves in cash invested in short-term government securities via MMFs. Fitch remarked that projects like Diem and similar ones could quickly become systemic and cause stricter regulations for the stablecoin space.
Liquidating Stablecoin Reserves at Once Poses Waves of Risks
A part of the agency’s notes read that “the liquidation of stablecoin reserves can cause asset contagion risks and strengthens the authorities’ resolve to tighten policies of the growing industry further.” Fitch further stated that the American regulators have warned that a continuous expansion of short-term credit spreads will cause instability to projects whose asset reserves are similar to Tether.
Analysts from the rating agency opined that the way Stablecoins are advertised the market audience differs from American regulators’ perspective. Late June 2021, when Eric Rosengren (president of Boston federal reserve) ‘s opinion was sought about the continued rise of stablecoins, he opined that it has become necessary to consider Stablecoins as possible disruptors of the short-term credit market time.
USDC On the Rise
The U.S. Dollar coin (USDC) ‘s rapid growth continues to astound most people. The high-yield interests that it offers through decentralized finance (DeFi) protocols might be a major reason for its continued growth.
Instead of slowing down, its prominence might rise further once the compound treasury is launched. Investors in this treasury will receive a 4% USDC interest on circle-built projects with DeFi API. Since crypto exchange giants, Coinbase announced that its USDC holders would earn 4% annual percentage yield (APY), the USDC momentum also received a huge boost.
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