American credit rating agency Fitch Ratings, one of the ‘Big Three’ credit rating agencies, has published a report that says stablecoin growth could affect securities and commercial paper (CP) markets. The agency says stablecoins could be “disruptive” and “stablecoin-related turbulence” could “transmit shocks” to other markets.
Fitch Ratings: ‘Stablecoins Could Be Disruptive for CP Markets’
On Monday, the ‘Big Three’ credit agency Fitch Ratings published a report on stablecoins and the growth of these new assets. The report follows a study from Fitch that discusses El Salvador adopting bitcoin (BTC) as legal tender in the country. The latest report explains that stablecoins have grown exponentially and the Fitch report’s authors highlight the growth of the popular stablecoin tether (USDT). The study also mentions Facebook’s reported plans to launch a stablecoin crypto asset called “Diem.”
“The rapid growth in stablecoins means these securities holdings are already relatively large,” Fitch noted. “Although Tether’s annualised market value growth slowed to 45% in 2Q21, it has risen by 230% since the start of 2021 to 15 October to reach USD68.6 billion,” the rating agency added. This growth and “reserve allocations” could end up becoming a “significant investor group” in the U.S. commercial paper market, the study from Fitch Ratings suggests. The paper adds:
Stablecoins could be disruptive for CP markets; for example, owing to run risks. Stablecoin-related turbulence could both affect the CP market itself and transmit shocks to other market participants. Risks could be aggravated if the infrastructure and partners used by stablecoin operators to engage with traditional markets lack a record in the smooth handling of transactions during periods of market stress or volatility.
Fitch Ratings Report: ‘The Regulatory Approach Towards Stablecoins Will Affect How the Sector Develops’
In the article, the term “disruptive” is highlighted with a hyperlink that leads to another article published by Fitch Ratings on July 1, 2021. That specific report says stablecoins could “pose new short-term credit market risks.”
Fitch researchers say in the latest stablecoin report published on Monday, that regulations will define how the stablecoin sector develops. At present, the Fitch authors say regulatory approaches in the EU and U.S. are currently “unclear.” The report alludes to the belief that government entities may be able to keep stablecoins defined under the promise that reserves like cash and low-risk government securities are maintained. Overcollateralization, something that algorithmic and decentralized finance (defi) stablecoins like DAI leverage, could reduce overall damage, the Fitch report concludes.
“A requirement for stablecoin operators to hold more reserves in safe and highly liquid assets could reduce allocations to CP, but raise the influence of stablecoins on the short-dated government market,” the Fitch Ratings report explains. “Other initiatives, including the potential launch of central-bank digital currencies, could also significantly affect demand for stablecoins.”
What do you think about the recently published Fitch Ratings report that explains stablecoin growth could affect securities markets and other areas of finance? Let us know what you think about this subject in the comments section below.
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Author: Jamie Redman