Saturday, December 4

Stablecoins would bring new risks to the stock market, warns Fitch Ratings

The global credit rating agency, Fitch Ratings, issued a warning on stablecoins on Monday: their growth may negatively impact the traditional stock market.

In a release published on its blog today, the company highlights that stablecoins that reach a “scale of systemic importance” can bring “new risks” to the stock market, especially when it comes to commercial paper market (PC).

By definition, a commercial paper is a security issued by public limited companies, intended for public offering. It is a short-term capital raising instrument that can fill the void in a country’s capital market.

According to Fitch, it all depends on the evolution of regulations that directly affect stablecoins. However, they highlight that the reserves of several currency operators to partially support their stablecoin, “may affect the markets in the short term”, and more if the scale of importance increases.

Fitch Ratings indicates that risk management is a risk factor for the markets, since the turbulence around stablecoins it could affect commercial papers and, furthermore, “transmit disturbances to other market participants”.

“The risks could be compounded if the infrastructure and partners used by stablecoin traders with traditional markets lack a track record of smoothly handling transactions during periods of market stress or volatility.”

Fitch Ratings, global credit rating agency.

They specify that the Market value growth in stablecoins has been volatileIn addition, your reserve asset allocations may change. “Which makes the forecasts challenging,” they add.

“The latest certification of USD Coin (USDC) indicates that its holdings of commercial paper with maturities of 91 days to 13 months fell to 2% of reserve assets in August, from 10% in June. Actual holdings remain opaque, even in the most transparent cases, and a detailed breakdown of assets is not available, ”the firm highlights.

In fact, it became known in August that USDC is not backed entirely in dollars. The information was provided by Circle, the currency’s issuing company, in its most recent reserve report, after an audit by a tax firm external to the company.

Stablecoin regulations will also affect the traditional market

Something that Fitch highlights is that the regulatory approach towards stable currencies will directly affect the how the stock market develops. But this will not be seen in the short term because the details and timeline of emerging market regulation remain unclear.especially in the United States (US) and the European Union (EU).

In the case of the EU, they mentioned, in Brussels new regulations on stable coins. These should have cash reserves and low-risk, predominantly government securities

In the United States the situation is not very remote. In the news recently, the task force of President Joe Biden’s administration, made up of the Federal Reserve and Congress, released a document that urges to regulate the use of stablecoins in that country.

In any case, Fitch Ratings details that a regulation that forces stablecoin issuers to maintain more reserves in safe and highly liquid assets could reduce the allocations to commercial paper in that region. That, at the same time, increasewas going the demand of these crypto assets in the government market “short term”.

“Other initiatives, including the potential launch of central bank digital currencies (CBDC), could also significantly affect the demand for stablecoins,” they note from Fitch Ratings.

Illustrative Scenarios for Stablecoins Outperforming Money Market Bottom and US Commercial Paper Holdings / Source: Fitch Ratings.

Stablecoins could become a “major investor group”

Beyond the risks, at Fitch Ratings they talked about the benefits. In that sense, they highlighted that current growth rates, in addition to reserve allocations, suggest that stablecoins could become a “important investor group ” in the US commercial paper market.

“For example, in a hypothetical scenario in which the market value of stablecoins continues to grow at rates close to current rates, and reserve holding allocations remain stable, their holdings of commercial paper could exceed those of bank funds. money market in two or three years ”.

Fitch Ratings, global credit rating agency.

A key example of stablecoin for the company is the case of Tether, which had 49% of its reserves in certificates of deposit and commercial papers, this at the end of June 2021. In fact, they pointed out that the annualized market value of that cryptocurrency has increased by 230% since the beginning of 2021, being, until October 15, at USD 68.6 billion.

Fitch Ratings, which is one of the three largest credit rating companies, also discussed Diem, a global stablecoin backed by the social network Facebook, which has not been released yet.

They recall that at one point they proposed to keep at least 80% of their reserves in high-quality government securities in the short term and the remaining 20% ​​in cash. For the firm, the launch of Diem “could further stimulate the growth of the market value of the sector.”

“We believe that it will not directly affect the commercial paper market due to the focus on government securities in Diem’s ​​declared reserve allocation plan, but alternative allocation strategies are still possible and depending on their scale, the operator may become a participant. important in other markets in the short term ”.

Fitch Ratings, global credit rating agency.

Fitch Ratings, one of the three most important rating agencies in the world, believes that the characteristic turbulence around stablecoins could affect commercial papers. Source:

Stablecoins are gaining more and more spaces

The growth of stablecoins is a fact. So much so that large financial services companies, such as Visa, have developed tools that, in the future, will allow multiple blockchains to be interconnected, which will allow the transfer of stablecoins and central bank digital currencies, among other assets.

In the case of the multinational, it is the “universal payment channel”, which should be seen, according to the company, as a “universal adapter between blockchains” because it will allow central banks, companies and consumers “to exchange value without problems, regardless of the form factor of the coin. ”