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As mentioned in a commentary note by the rating agency Fitch Ratings, the growth of those stablecoins that lacks backing by safe assets could trigger a destabilization in the short-term credit market. In an explanation of the warning, the firm said that the coins that are backed by safe assets can pose a lesser risk for the financial markets.
Fitch Releases Warning Regarding Stablecoins and Credit Market
Talking about the stablecoins that are fully backed, the company gave the name of USDC, as it is fully backed by the US Dollar on a 1:1 basis held in custody accounts.
However, the company released a warning about the footprint and said that:
The authorities may still be concerned if the footprint is potentially global or systemic.”
In addition to this, the rating company shed some light on the commercial paper holdings of Tether and said that:
“Nearly 50% of its reserve — may be larger than those of most prime money market funds (MMF) in the United States and EMEA. A sudden mass redemption of USDT could affect the stability of short-term credit markets if it occurred during a period of wider selling pressure in the CP market, particularly if associated with wider redemptions of other stablecoins that hold reserves in similar assets.”
United States Regulators Warns Entities Regarding Allocations to Tether
Apart from this, Fitch noted the warning that has been issued by the regulators in the United States that the bodies with alike asset allocations to Tether might not be considered stable in case the short-term credit spreads broaden notably and added:
“This contrasts with the way stablecoins are marketed to the public.”
Eric Rosengren, the President of the Boston Federal Reserve, expressed his concerns last month regarding the rapid growth witnessed in stablecoins and said:
“I do think we need to think more broadly about what could disrupt short-term credit markets over time, and certainly stablecoins are one element.”