S&P Global Ratings, the storied ratings agency known for assessing the stability of banks, credit facilities and other financial institutions and products, has turned its eyes to stablecoins, giving its first wide-ranging synopsis of the state of these supposedly moored blockchain-based assets. In an overview of the relative ability for eight stablecoins to be redeemed for one dollar, the currency to which they are all pegged, S&P has also \u2014 arguably and indirectly \u2014 affirmed that stablecoins are likely not going anywhere.Unmute\u201cWe always say our role is assessing if there are ways that we think that we can reduce the asymmetry of information in the market \u2014 that is really the way I see our role in the market,\u201d Lapo Guadagnuolo, a senior analyst at S&P Global Ratings, said in an interview with Crypto. He added that crypto \u201cis something we’re putting strong resources towards, because we know it’s a growing area both in traditional and new financial areas.\u201dThat said, of the eight stablecoins S&P reviewed, several received lackluster scores. Most notably Tether\u2019s USDT, the largest stablecoin by market cap and most used crypto asset in terms of trading volume, was given the fourth-lowest score in range from 1 to 5. Meanwhile MakerDAO\u2019s dai (DAI), popular across decentralized finance (DeFi), and the Justin Sun-backed TrueUSD, the fourth and fifth largest stablecoins, respectively, were also given low scores.At the end of 2023, crypto is not yet past the age where receiving any attention \u2014 positive or negative \u2014 from an institution like S&P is seen as a form of affirmation. A similar phenomenon happened two years ago, when the U.S. Treasury Department under Janet Yellen convened a study group to determine the risks that Tether\u2019s stablecoin posed to the U.S. economy, which can be validating for industry actors with anti-establishment roots.Similarly, S&P\u2019s report is a signal that these tools are important \u2014 whether or not they actually represent technical advancements.\u201cThe ratings are a very positive development in the normalization of stablecoins,\u201d Nic Carter, a co-founder of VC firm Castle Island Ventures, who began his career as Fidelity\u2019s first dedicated bitcoin (BTC) analyst. \u201cI have quibbles with some of the methodology used, but the fact that the major ratings agencies are paying attention to stablecoins and developing bespoke methodologies is quite validating for the sector,\u201d he said in a private message.See also: Paolo Ardoino: The Hardest Working Man in Crypto | Most Influential 2023Indeed, S&P\u2019s mixed report might just be the analysis that the stablecoin sector needed, an independent review of one of the crypto industry\u2019s only tools that could be said to have product-market fit. Stablecoins are big and growing bigger because they offer a way for people across the world to access the dominant U.S. dollar-denominated financial system, and are useful in the U.S. because they\u2019re essentially wire transfers without the hangups.While the review will likely be cited by many firms on Wall Street looking to test the waters of stablecoins (and many are), not everyone in crypto is taken with S&P\u2019s work. Perhaps for good reason.\u201cI haven’t been impressed with the efforts of S&P or Moody’s in this space,\u201d Austen Campbell, a Columbia Business School professor and former Paxos fund manager, said in a direct message. \u201cThey seem really out of their depth and not able to iterate on new products. Quite frankly, outside of regular debt, they haven’t added a ton of value in new things.\u201dIt was a point echoed by Carter: \u201cUltimately I don’t think crypto native clients of stablecoins will care much for the ratings \u2014 end of the day, traders like tether because it’s convenient, lindy and is perceived to be remote from U.S. regulators.\u201dHe added: \u201cBut the ratings are positive in terms of institutional entities getting comfortable with the sector.\u201dNo stablecoin S&P assessed received the highest possible rating, though Circle\u2019s USD Coin (USDC), Gemini\u2019s gemini dollar and Paxos\u2019s flagship pax dollar were rated as 2s on the list, for \u201cstrong.\u201d Earlier this year, the Binance branded BUSD token issued by Paxos, which was the third-largest stablecoin at time, was targeted by U.S. authorities \u2014 it was not rated by S&P.Guadagnuolo explained that S&P\u2019s ratings were not endorsements of any particular products, or even condemnations. Even \u201cweak\u201d assessments of stablecoins like TrueUSD (TUSD) or Frax (FRAX), which received the lowest possible score, should not be treated as \u201cfinancial advice,\u201d Guadagnuolo said. Both TUSD and FRAX are \u201calgorithmic stablecoins,\u201d which use cryptographic mechanisms rather than assets held in a treasury to support their peg to the greenback.\u201cThat’s what sometimes people forget to focus on; the ratings are a relative ranking,\u201d Guadagnuolo said. \u201cWe don’t endorse and we don’t condemn things when we give our opinion.\u201d He clarified the rankings are \u201cforward looking,\u201d an attempt to determine \u201cthe likelihood\u201d of the stablecoin maintaining its peg. (This is an important quality for a financial tool that promises to return every dollar deposited, and unlike banks gets to keep the accrued interest earned on those dollars rather than paying yield to users. It\u2019s a lucrative business: Tether made profits of more than $1billion in Q3.)Notably, S&P did not use its traditional rating system commonly applied to government and corporate debt or assets like credit default swaps (CDOs), where products can be rated from AAA to D. Guadagnuolo said this isn\u2019t unusual, and that the specific terms used \u201care not new for us.\u201d\u201cWe believe that there is enough differentiation by using five scores,\u201d he said. \u201cUsing more scores, we’ve felt at least at this stage would be probably alluding to a level of precision or specificity which is not there as of now.\u201dGuadagnuolo, who was project lead on the \u201cStablecoin Stability Assessment,\u201d also said that the ratings were made using only publicly-available data. He was not, for instance, in dialogue with Tether or Circle, and did not receive a snapshot of the stablecoin issuers\u2019 assets held in a bank, in the way that an auditor might have privileged access to this information. He said he was one of the earliest employees at S&P to focus on the emerging world of crypto. The New York-based company hosts a number of crash courses on market sub-sectors including DeFi.For competitive reasons an S&P\u2019s spokesperson could not disclose how many people contributed to the assessment, or how many employees focus on crypto full or part time at S&P.See also: The Niche Application of Stablecoins Is Not a Bad Thing | OpinionStablecoins, in a sense, are a type of privately issued currency. For instance, the U.S. Comptroller of the Currency Michael Hsu, the top federal banking regulator, recently compared stablecoins to the \u201cWildcat\u201d era of banking, when individual savings institutions printed their own unique dollars. There are theoretical risks to this form of currency expansion (the late-19th century saw a number of boom and bust credit cycles), as well as certain benefits like the transparency and settlement guarantees of blockchains.When asked if it is easier to look at on-chain assets than traditional credit ratings, Guadagnuolo said \u201cyes,\u201d with caveats. \u201cThere is surely much more information more easily available\u201d for stablecoins than other \u201cexotic\u201d products, which might have \u201cminimal documentation,\u201d he said. \u201cIf you know where to go and look,\u201d he added, there is a level of \u201ctransparency\u201d in knowing \u201cexactly how the workings of the smart contract work\u201d or \u201cwhat the volumes are \u2014 you can see that in a second.\u201dHowever blockchains often obscure as much as they reveal. Investors and users frequently do not know who built a protocol, if it was properly audited or other information that they might have access to \u201cin a regulated space,\u201d Guadagnuolo said. Ironically, crypto, which was created to reduce trust and the need for intermediaries in online transactions often requires users to act more on blind faith and place their trust in strangers than when using a credit card or opening a bank account.There were many other questions Guadagnuolo could not answer or that an S&P communications rep interjected to say he could not answer, including whether he would use any particular stablecoin, if he was personally interested in any DeFi mechanisms or whether he felt the weight of responsibility publishing information that \u2014 intended or not \u2014 will likely be taken as financial advice. Guadagnuolo was also not able to directly address why it is S&P, of all institutions, has legitimacy to comment on the credibility of stablecoins (see the Great Financial Crisis that birthed Bitcoin).\u201cWe have a strong, strong history. I don’t think we need to \u2026 It’s kind of for you guys,\u201d Guadagnuolo said.Whether or not intended, S&P has validated crypto to the extent that the stablecoin industry is now big, lucrative and fascinating enough that companies like S&P cannot look away. And however much it wants to say that its assessments are \u201copinions,\u201d they are undoubtedly read as informed statements of fact that will go on to influence trading and investment decisions.That may not exactly be the case at the level of a \u201cDeFi degen,\u201d who at this point is likely inured to criticisms of Tether or who has reasons of convenience to choose USDT or FRAX or TUSD, but S&P\u2019s comments are influential when it comes to publicly-traded companies or esteemed institutions that must be accountable for its decisions and actions. Say Tether collapses, Cantor Fitzgerald, a Wall Street broker that recently gave the offshore company a massive public vote of confidence, will take much more than just a financial hit.See also: Tether Freezes 41 Crypto Wallets Tied to SanctionsLikewise, crypto as a whole is dependent on its relationships with traditional power brokers and crown makers \u2014 even as it nominally sets out to dethrone the king. (How much of bitcoin\u2019s price action this year resulted from BlackRock\u2019s unexpected spot bitcoin ETF application? There\u2019s no definitive answer, but it\u2019s not zero.) It\u2019d be a mistake to read too much into S&P\u2019s report; afterall, blockchains are open systems and S&P did not need anyone\u2019s approval to do its research into stablecoin trustworthiness.The one thing Guadagnuolo might say S&P truly confirmed is that there is a mix of stablecoins, each with their relative risks and benefits. And so long that holds true, they\u2019ll always have a mix of users \u2014 including people today who need to be convinced of their importance.<\/p>\n","protected":false},"excerpt":{"rendered":"
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