S&P, 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 — arguably and indirectly — affirmed that stablecoins are likely not going anywhere.
“We always say our role is [assessing if] there are ways that we think that we can reduce the asymmetry of information in the market — that is really the way I see our role in the market,” Lapo Guadagnuolo, a senior analyst at S&P Global Ratings, said in an interview with CoinDesk. He added that crypto “is something we're putting strong resources towards, because we know it's a growing area both in traditional and new financial areas.”
That said, of the eight stablecoins S&P reviewed, several received lackluster scores. Most notably Tether’s 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’s 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 — positive or negative — 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’s stablecoin posed to the U.S. economy, which can be validating for industry actors with anti-establishment roots.
Similarly, S&P’s report is a signal that these tools are important — whether or not they actually represent technical advancements.
“The ratings are a very positive development in the normalization of stablecoins,” Nic Carter, a co-founder of VC firm Castle Island Ventures, who began his career as Fidelity’s first dedicated bitcoin [BTC] analyst. “I 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,” he said in a private message.
Indeed, S&P’s mixed report might just be the analysis that the stablecoin sector needed, an independent review of one of the crypto industry’s 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’re 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’s work. Perhaps for good reason.
“I haven't been impressed with the efforts of S&P or Moody's in this space,” Austen Campbell, a Columbia Business School professor and former Paxos fund manager, said in a direct message. “They 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.”
It was a point echoed by Carter: “Ultimately I don't think crypto native clients of stablecoins will care much for the ratings — end of the day, traders like tether because it's convenient, lindy and is perceived to be remote from U.S. regulators.”
He added: “But the ratings are positive in terms of institutional entities getting comfortable with the sector.”
No stablecoin S&P assessed received the highest possible rating, though Circle’s USD Coin [USDC], Gemini’s gemini dollar and Paxos’s flagship pax dollar were rated as 2s on the list, for “strong.” 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 — it was not rated by S&P.
Guadagnuolo explained that S&P’s ratings were not endorsements of any particular products, or even condemnations. Even “weak” assessments of stablecoins like TrueUSD (TUSD) or Frax (FRAX), which received the lowest possible score, should not be treated as “financial advice,” Guadagnuolo said. Both TUSD and FRAX are “algorithmic stablecoins,” which use cryptographic mechanisms rather than assets held in a treasury to support their peg to the greenback.
“That's what sometimes people forget to focus on; the ratings are a relative ranking,” Guadagnuolo said. “We don't endorse and we don't condemn things when we give our opinion.” He clarified the rankings are “forward looking,” an attempt to determine “the likelihood” 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’s 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’t unusual, and that the specific terms used “are not new for us.”
“We believe that there is enough differentiation by using five scores,” he said. “Using 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.”
Guadagnuolo, who was project lead on the “Stablecoin Stability Assessment,” 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’ 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’s 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.
Stablecoins, 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 “Wildcat” 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...
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– D.K.
@danielgkuhn
daniel@coindesk.com
