Stablecoins Like Tether Could Pose New Risks to Securities Markets, Fitch Warns

·2-min read

Stablecoins such as tether (USDT), now a significant investor in the $1.1 trillion commercial paper market, could introduce new risks into short-term securities markets, global ratings agency Fitch Ratings warned.

At the current rate of growth, stablecoin issuers‚Äô holdings of short-term debt instruments such as commercial paper ‚Äď a commonly used type of unsecured debt issued by corporations, typically used for the financing of payroll, accounts payable and inventories ‚Äď will grow to exceed that of money market funds over the next two to three years, according to Fitch.

The scale of run risks and stablecoin-related turbulence posed to commercial paper markets will depend on the evolution of regulations affecting the crypto asset class, Fitch said in a press release.

‚ÄúStablecoin-related turbulence could both affect the CP [commercial paper] market itself and transmit shocks to other market participants. 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,‚ÄĚ said Fitch, mentioning both USDT and also the potential impact of the Facebook-launched Diem project (formerly known as Libra).

Tether, which was fined $42 million last week by the Commodity Futures Trading Commission (CFTC) over misleading claims about the stablecoin’s backing, holds about half of its $62.8 billion of reserves in commercial paper, according to a disclosure made by the company in June.

Carpe diem

The prospective launch of Diem’s dollar-backed stablecoin could further spur the sector’s market value growth, according to Fitch.

Diem had previously proposed to hold at least 80% of its reserves in short-term high-quality government securities and the remaining 20% in cash, noted Fitch, with overnight sweeps into daily liquid government money market funds.

‚ÄúWe believe it will not directly affect the CP market due to the government-securities focus of Diem‚Äôs declared reserve allocation plan, but alternative allocation strategies remain possible and, depending on its scale, the operator may become an important participant in other short-term markets,‚ÄĚ Fitch said.

Fitch did not respond to interview requests by publication time.

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