LONDON (S&P Global Ratings) May 13, 2022—S&P Global Ratings said today that the recent downturn for crypto-assets, including stablecoins, will not have a material impact on traditional financial markets or the macroeconomy, given that these assets are not yet systemically important. Accordingly, the recent price volatility is unlikely to materially pressure our ratings or our macro forecast, which is driven mainly by the uneven recovery from the pandemic and monetary policy tightening. But next time around, things could be different as the crypto sector continues to grow.
This limited impact is primarily due to the relatively small size of this emerging crypto ecosystem, and its limited interconnectedness with traditional finance, in our view (see "Digitalization Of Markets: Framing The Emerging Ecosystem," published Sept. 16, 2021, on RatingsDirect). We concur with the view that the Financial Stability Board expressed in its February 2022 report that crypto assets remain a "small portion of overall global financial system assets." The shock waves from the crypto assets downturn in recent days has remained primarily within crypto markets, and affected retail investors the most. The total value of crypto assets, including the instruments known as stablecoins, reached a peak of close to $2.8 trillion in November 2021--about 5% of the U.S. equity market capitalization for instance. And the recent drop in the value of bitcoin, the largest crypto asset, is not dissimilar from the one that occurred about a year ago.
Chart 1
A more novel development in the current crypto downturn is the spotlight that instruments referred to as stablecoins have attracted. TerraUSD (UST), in particular, which relies on an algorithm to adjust supply and maintain a one-to-one peg with the U.S. dollar, has seen its value plummet well below the peg. At the time of writing, UST traded at around 20 cents. At the same time, we note that stablecoins backed by fiat assets with high credit quality, shorter duration, and third-party auditing , such as USD coin (USDC), have maintained their pegged value, highlighting the very different nature of assets backing various stablecoin offerings. The value of the largest stablecoin, Tether (USDT), had temporarily fallen toward $0.95 during the recent market stress, but it gradually recovered to its pegged value. These events point to the need to ensure that proper levels of transparency and investor education are in place. As we noted in our recent report, "Economic Research: Stablecoin Regimes Are Digital Currency Boards," stablecoins are only as credible as their issuer and we need to be clear in distinguishing between assets that are more likely to be stable stores of value and those that are more risky and better classified as investment products.
In addition to the modest relative size of crypto asset markets, small direct exposures by financial institutions further contain contagion risks. This is despite the recent growth in crypto asset adoption by institutional investors. Generally cautious regulatory messages around crypto assets, and the lack of visibility on future regulatory regimes have likely helped stem the exposure by traditional finance to this emerging ecosystem. In our rating approach for issuers exposed to crypto assets, we do not treat crypto assets as cash or cash-like instruments due to the volatility of many of them and the uncertainty around regulatory treatment. We also consider the volatility of these still novel assets and activities in our assessment of business risk.
The potential risks inherent in this ecosystem--only partly illustrated by the current crypto downturn--underpin the material regulatory push that we are witnessing. Like any innovation, crypto assets can bring benefits, but also risks. The regulatory mission is a balancing act between both (see "Regulation Of Digital Assets: How Far, How Fast? ," published Sept. 16, 2021).
In our view, certain crypto assets will continue to grow in both size and scope, reflecting the benefits stemming from the underlying blockchain technology. Their interlinkages with the traditional financial system will continue to grow and deepen as well, particularly for products like stablecoins that provide a bridge between the fiat and crypto worlds. As a result, financial stability concerns will rise in parallel. This downturn will undoubtedly be considered in the regulatory debate that is taking place, including around stablecoins. Decision points will include to what extent crypto assets will be allowed to become systemic, the inherent vulnerabilities that can be tolerated (for example, liquidity, leverage), and the level of exposure allowed for traditional finance. Customer protection and anti-money laundering will also remain key considerations. These regulatory decisions will determine how much greater--and damaging--the repercussions of the next crypto downturn could be.
Related Research
- Compound Prime Assigned 'B-' Ratings On Weak Capital Base, Regulatory Risk, And Profitability Challenges; Outlook Stable, May 9, 2022
- Coinbase Global Inc., Dec. 22, 2021
- MicroStrategy Inc. Assigned 'CCC+' ICR On Leveraged Bitcoin Purchase, Outlook Stable; Debt Rated 'B-' (Recovery: 2), June 9, 2021
- Digitalization Of Markets: Framing The Emerging Ecosystem, Sept. 16, 2021
- Regulation Of Digital Assets: How Far, How Fast? Sept. 16, 2021
This report does not constitute a rating action.
S&P Global Ratings, part of S&P Global Inc. (NYSE: SPGI), is the world's leading provider of independent credit risk research. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 26 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information that helps to support the growth of transparent, liquid debt markets worldwide.
| Primary Credit Analyst: | Alexandre Birry, London + 44 20 7176 7108; alexandre.birry@spglobal.com |
| Secondary Contact: | Paul F Gruenwald, New York + 1 (212) 437 1710; paul.gruenwald@spglobal.com |
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