The rapid growth in emissions of so-called stablecoins could over time impair the functionality of the market for short-term loans, fears the rating agency Fitch.

Stablecoins are cryptocurrencies whose value is tied to conventional currencies and which seek to achieve this stability by holding reserves.

Fitch is particularly concerned about stablecoins that are either only partially secured or secured by investments that are themselves dependent on the credit markets.

Martin Hock

Editor in business.

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    The USD Coin, for example, the second largest dollar-linked stablecoin, which is covered 1: 1 by dollar deposits at the central bank, is comparatively less problematic.

    In contrast, half of the largest stablecoin, Tether, is covered by short-term corporate bonds (commercial paper).

    These holdings could be higher than most top quality money market funds.

    A sudden mass surrender of tether could affect the stability of short-term credit markets if it occurs during a market downturn, especially if other stablecoins were being sold with a similar reserve structure at the same time.

    The risk of a run was already shown with the collapse of the stablecoin, Iron in June.

    Diem is also mainly covered by bonds

    These risks of contagion could increase pressure for tighter regulation of the area. The dollar stablecoin Diem planned by Facebook is also supposed to hold at least 80 percent of the reserves in low-risk short-term government bonds and only 20 percent in cash or daily money market funds that also invest in such short-term government bonds. Fitch points out that American regulators have determined that stablecoins like Tether could prove unstable if short-term credit spreads widen significantly, as happened in 2020 or 2007/08. This is in contrast to the way stablecoins are marketed in public.

    Stricter regulation is currently being discussed in both the US and Europe, but the schedule and details are unclear or subject to change. Stricter regulation could improve transparency and force a gradual migration of stablecoin collateral reserves to less risky assets. Fitch believes that it is unlikely that authorities would intervene to save stablecoins, also to prevent them from being constructed in a correspondingly risky manner. The authorities could intervene, however, to support traders and money market funds, should the return of stablecoins lead to a wider sale of commercial paper or increase this in order to maintain the functionality of the market.