Improved Regulation Could Moderate Stablecoin Credit Risks


Monday, December 27, 2021 / 08:40 AM / by Fitch Ratings / Header Image Credit: Asia Blockchain

Greater regulatory certainty over the status of stablecoins and their issuers could create market opportunities, as regulatory risk has deterred many financial institutions from engaging with stablecoin operators, says Fitch Ratings. Clearer and tighter regulation could clarify how far the credit profiles of stablecoin issuers diverge from traditional developed-market participants in the deposit-taking space, but short records will weigh on their creditworthiness.

The EU is the first major economy to publish specific draft regulations for the stablecoin sector, calling for issuers to be regulated as banks or electronic money institutions. A key US regulatory report has similarly recommended stablecoin issuers be treated as insured banks. Nonetheless, it remains unclear when – or even if – legislation will be enacted to implement these recommendations.

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We regard the US regulatory approach as particularly important to the sector's medium-term development, as the vast majority of major stablecoins traded today are linked to the US dollar and we expect this to remain so over the medium term.

Should issuers secure charters to operate as deposit-taking institutions, they could eventually challenge incumbent banks and potentially non-bank payment providers. Notably, newly chartered stablecoin-issuing entities might sap deposits from other banks. Hurdles to this level of system penetration nonetheless remain high for would-be stablecoin bank conversions.

Uncertainty remains over the fundamental aspects of stablecoin arrangements, including the legal rights of users. Transparency over these issues and reserve asset holdings will be important in assessing the credit profiles of stablecoin issuers. Governance and operational risks, which are usually high for new sectors, may be further exacerbated for stablecoin issuers due to the untested and unique structural challenges of the crypto space.

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