CM – Authorities are unlikely to be storing stablecoins in the event of a disruptive event: Fitch

MUMBAI: The rapid growth in stablecoin issuance could have an impact on the functioning of short-term credit markets, and in the event of a disruptive event, authorities are unlikely to step in to save stablecoins, in part due to moral hazard, according to Fitch Ratings / p>

A stablecoin is a digital currency that is linked to an underlying asset such as a local currency such as the US dollar or a precious metal such as gold.

Tether is the largest stablecoin in the world and, even more than Bitcoin, is the most traded cryptocurrency today. Tether is commonly referred to as USDT and is a stable currency that can theoretically be redeemed for a dollar. In other words, if an investor holds 100 USDT, they can redeem it for 100 USD.

« Less risk is posed by coins that are fully backed by safe, highly liquid assets, although authorities may still be concerned if the footprint is potentially global or systemic, » the rating agency said.

For example, USD Coin, the second largest stablecoin pegged to the US dollar, is covered 1: 1 by the US dollar that is held in deposits

However, stablecoins that use partial reserves or apply a riskier asset allocation may be at greater risk.

« Tether, the largest stablecoin issuer, has announced that as of March 31, 2021, it has only 26.2% of its reserves in cash, escrow, reverse repo and government bonds and an additional 49.6% in commercial paper (CP ) held. « added the note.

Tether’s CP holdings were $ 20.3 billion as of March 31, while consolidated assets were $ 41 billion and may grow rapidly. Total assets related to its US dollar pegged stablecoin (USDT) reached US $ 62.8 billion as of June 28.

Fitch Ratings said a sudden, mass redemption of USDT could affect the stability of short-term credit markets if it occurs during a period of greater selling pressures in the CP market, especially when coupled with larger redemptions of other stablecoins holding reserves in similar assets.

The rating agency believes that potential asset contagion risks related to liquidation of stablecoin reserves could increase pressure for stricter regulation of the emerging sector.

Meanwhile, US regulators have determined that if short-term credit spreads widen significantly, companies with an asset allocation similar to that reported by Tether may not be stable.

Oops! It looks like you’ve exceeded the limit to bookmark the image. Remove some to bookmark this image.

You are now subscribed to our newsletter. If you cannot find an email from our site, please check the spam folder.