Fitch Ratings report says stablecoins could impact securities markets

Credit rating agency Fitch has warned that stablecoins may affect the securities markets.

In its latest report, Fitch Ratings says it believes stablecoins that approach a systemically important scale could come to play an important role in short-term securities markets – such as commercial paper – while bringing new risks to markets.

The agency also said the extent to which stablecoins impact securities will depend on the “evolution of regulations affecting the asset class”.

Fitch Ratings went on to add the reserves that coin operators hold to at least partially back their currency can affect short-term markets, particularly as they increase in scale.

Tether, for example, held 49% of its reserves in certificates of deposit and CP as of end-June 2021,” the report said.

“Meanwhile, Diem, a global stablecoin backed by Facebook, but not yet released, has previously proposed to hold at least 80% of its reserves in short-term high-quality government securities and the remaining 20% in cash, with overnight sweeps into daily liquid government money market funds (MMF).”

Stablecoin-related instability is a risk

Fitch noted stablecoins could be disruptive for commercial paper markets, for example, owing to run risks.

“Stablecoin-related turbulence could both affect the CP market itself and transmit shocks to other market participants,” the agency wrote.

“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.”

The US Treasury Secretary Janet Yellen, who already brought in a strict crypto regulatory framework, has already met with multiple federal agencies with the express purpose of carving out a regulatory approach for stablecoins.

During the meeting, Yellen emphasised that there was a “need to act quickly” in order to ensure stablecoins are reined into the broader US regulatory framework.

Disclaimer: The views and opinions expressed by the author should not be considered as financial advice. We do not give advice on financial products.

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