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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 — 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.
When asked if it is easier to look at on-chain assets than traditional credit ratings, Guadagnuolo said “yes,” with caveats. “There is surely much more information more easily available” for stablecoins than other “exotic” products, which might have “minimal documentation,” he said. “If you know where to go and look,” he added, there is a level of “transparency” in knowing “exactly how the workings of the smart contract work” or “what the volumes are — you can see that in a second.”
However 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 “in a regulated space,” 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 — intended or not — 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).
“We have a strong, strong history. I don’t think we need to … It’s kind of for you guys,” 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 “opinions,” 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 “DeFi degen,” 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’s 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.
Likewise, crypto as a whole is dependent on its relationships with traditional power brokers and crown makers — even as it nominally sets out to dethrone the king. (How much of bitcoin’s price action this year resulted from BlackRock’s unexpected spot bitcoin ETF application? There’s no definitive answer, but it’s not zero.) It’d be a mistake to read too much into S&P’s report; afterall, blockchains are open systems and S&P did not need anyone’s 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’ll always have a mix of users — including people today who need to be convinced of their importance.
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