A stablecoin is a blockchain-based crypto-asset designed to minimize its price volatility by maintaining a stable value relative to a fiat currency, such as the U.S. dollar.

In November last year, S&P Global Ratings published its analytical approach for evaluating a stablecoin's ability to maintain its peg to a reference asset ranked on a scale of 1 (very strong) to 5 (weak). On Dec. 12, 2023, we released our Stablecoin Stability Assessment (SSA) on eight stablecoins that collectively account for more than 95% of the industry's market capitalization (see our "Stablecoin Stability Assessments" interactive dashboard for more information).

Following our webinar on Jan. 10, 2024 (click here for the replay "Understanding S&P Global Ratings Stablecoin Stability Assessment"), in which we discussed our analytical approach, here we answer further questions from investors on our stablecoin assessments.

Frequently Asked Questions

What is the difference between an SSA and a credit rating?

An S&P Global Ratings credit rating is a forward-looking opinion of the capacity and willingness of an obligor to repay its financial obligations on time and in full. Our SSA is not a rating but a relative ranking on the forward-looking ability of a stablecoin to maintain its peg to a fiat currency or basket of fiat currencies. We have designed our assessment to offer market participants transparency regarding the stability of assessed stablecoins and to provide insights into their strengths and weaknesses.

What types of stablecoin do you assess?

There are two categories in the scope of our analytical approach: centralized stablecoins, where there is a sponsor managing the coin and its underlying assets; and decentralized stablecoins, which are managed by a governance protocol and a series of smart contracts.

We do not assess stablecoins whose stability relies solely or primarily on the creditworthiness of the issuing entity. These are sometimes referred to as tokenized deposits or deposit tokens. We also do not assess algorithmic stablecoins that are either uncollateralized or collateralized primarily by endogenous collateral. Central bank digital currencies are also out of our scope because they are not usually backed by reserves or assets.

What is a "depeg" event?

A stablecoin's market price could deviate from its peg for a number of reasons. It was one of the key factors we considered during our design of the analytical approach for SSAs. To define a "depeg" event, we had two options:

• Use a specific threshold and design the approach so that the assessment changes when the stablecoin's value deviates from this threshold, for example, by plus or minus 3%; or
• Consider both quantitative and qualitative factors to determine to what extent such a deviation would influence our assessment in the event of a depeg.

We chose the second option, considering two quantitative factors: the magnitude of deviation from the fiat value (up or down) and its persistence over time. Additionally, we examine two qualitative factors: the reason for the deviation (for example, the impairment of one of the underlying assets), and the reaction of the sponsor or protocol governance mechanism (such as to inject additional assets).

How did you design the analytical approach?

We started by defining the promise: that is, the stablecoin maintaining its peg. We then identified the most important factors to achieve that, which is the asset assessment. This is because the quality of the assets will determine the capacity of the sponsor or protocol governance mechanism to liquidate them and repay stablecoin users. Subsequently, we identified other factors that could influence the capacity of the sponsor or the protocol to keep its promise.

There are five factors in our analytical approach: governance, legal and regulatory framework, redeemability and liquidity, technology and third-party dependencies, and track record. In calibrating the potential influence of these factors on the assessment, we decided to use a holistic neutral or negative adjustment. In our view, the strength of a stablecoin in any of these areas cannot offset the weaknesses of its assets. For example, a stablecoin can have the strongest governance framework but this is unlikely to improve the assessment if the creditworthiness of the assets is weak.

Have you tested your methodology against historical data?

An analysis of asset quality is a fundamental step in our SSA process. We have several decades of data that illustrate the behavior of financial assets at various levels of creditworthiness and their market value risk. We have factored this into our asset assessment.

Moreover, we took into consideration recent market events that allowed us to test the effects of general instability in our assessment. In 2023, for example, there were instabilities in the stablecoin industry, particularly around March, due to the failure of certain U.S. banks. Some of those banks were heavily involved in the crypto industry, either as payment rails or recipients of significant funding from stablecoins. It is important to note that the stablecoin industry is still in a relatively early stage of development and is yet to establish a strong track record.

How does addressing risk vary for different types of stablecoin, such as algorithmic?

Algorithmic stablecoins, which are not backed by assets but use algorithmic mechanisms and/or smart contracts to maintain their value, are out of scope for our SSA. For our evaluation of centralized or decentralized stablecoins, the most important aspect of the analysis is the assessment of assets.

For decentralized stablecoins, there is an additional layer of analysis that includes the extent of overcollateralization, liquidity mechanisms, and reserve funds. Such elements do not currently exist or are marginal for centralized stablecoins. A high level of overcollateralization and robust liquidation mechanisms can enhance the asset assessment. This could be the case, for example, if we start with an asset score of 5 (for a stablecoin backed by crypto assets) and determine that there is sufficient overcollateralization, tested liquidation mechanisms, and enough reserves to address any potential losses.

Does your analytical approach for SSAs favor a particular structure of stablecoin?

No. We look at the facts and assess the relative ability of the stablecoin to maintain its peg. The distribution of the eight SSAs we published in December 2023 may suggest that centralized stablecoins receive a higher assessment than decentralized stablecoins. For example, we assessed Dai and Frax at 4 (constrained) and 5 (weak) respectively, while some centralized stablecoins were assessed at 2 (strong). However, this is not the case.

TrueUSD (TUSD) and Tether (USDT)--both centralized stablecoins--are assessed at 5 (weak) for TUSD and 4 (constrained) for USDT. We assess the ability of TUSD to maintain the peg at 5 (weak) since we have no information on some of its assets or the creditworthiness of institutions holding these assets, and there is a lack of clear guidance on asset management. In addition, TUSD is not regulated. In January 2024, the TUSD's value on the secondary market started to fluctuate against the peg, but its primary redeemability has reportedly continued without any disruption. USDT is assessed at 4 despite being the longest-standing stablecoin with the largest volume in circulation. This is due to lack of information on the custodians, counterparties, and bank account providers, as well as significant exposure to high-risk assets with limited disclosures.

How do you factor in a sponsor and its creditworthiness?

We incorporate this aspect into various parts of our assessment. For example, in the event of a price deviation, among other factors, we look at the sponsor's reaction and assess to what extent it is committed to resolving the deviation promptly, as well as its capacity to do so. We also look at the sponsor's governance and whether its internal procedures and policies help to create or mitigate risk.

The sponsor is an important part of the analysis, but what is more important is the quality of assets and the assets' segregation from the sponsor to ensure their protection in case of the sponsor's bankruptcy. Ultimately, the liquidation of assets underpins the repayment to stablecoin holders and the stablecoin's capacity to maintain its peg.

How frequently do you review a stablecoin assessment?

We monitor assessments on an ongoing basis and conduct periodic reviews based on a stablecoin's performance and track record. This also means reviewing any new attestation reports and incorporating the latest public information into our analysis, which could result in a revision of our assessment. We also consider whether the new information is likely to reflect the stablecoin's characteristics in the future or at just one point in time.

How do you incorporate the transparency (or lack thereof) of stablecoin sponsors into your assessment?

This is as an important component of our asset assessment. Although secondary market pricing may fluctuate as a result of a sponsor's transparency, we believe that--in the long term--transparency is an important contributor to the overall stability of a stablecoin. If we see risks or uncertainties regarding asset quality, we may take a conservative view, either in our asset assessment or by making an adjustment after the asset assessment.

How do you account for smart contracts and technology risk?

One of the additional factors we assess is third-party dependencies and technology. Those can be either neutral or contribute to a negative adjustment. We review, for example, the complexity of the code behind smart contracts and reliance on oracles to connect to external market data. We also review smart contract audit reports to identify any major weaknesses and assess how these are addressed. Ultimately, we may make a negative adjustment if we believe material weaknesses have not been resolved.

How important is regulation to your assessment?

Regulation is another factor we consider to determine whether to make any adjustments to the asset assessment. Although there is no federal regulation on stablecoins in the U.S., some stablecoins are subject to the guidance of the New York State Department of Financial Services. In Europe, Markets in Cryptoassets Regulation sets specific requirements for stablecoins. Regulation can sometimes enhance the SSA since it could impose minimum requirements, in favor of stablecoin users. This could relate to the minimum creditworthiness of assets, standard minimum repayment time, or effective segregation of assets from sponsors.

Related Research

• TUSD Stablecoin Price Drop Highlights Underlying Challenges To Maintain Its Peg, Jan. 16, 2024
• Stablecoin Stability Assessment: First Digital USD (FDUSD) Dec. 12, 2023
• Stablecoin Stability Assessment: Dai, Dec. 12, 2023
• Stablecoin Stability Assessment: Tether (USDT), Dec. 12, 2023
• Stablecoin Stability Assessment: USDC, Dec. 12, 2023
• Stablecoin Stability Assessment: Paxos USD (USDP), Dec. 12, 2023
• Stablecoin Stability Assessment: FRAX, Dec. 12, 2023
• Stablecoin Stability Assessment: Gemini USD, Dec. 12, 2023
• Stablecoin Stability Assessment: TrueUSD, Dec. 12, 2023
• Analytical Approach: Stablecoin Stability Assessments, Nov. 28, 2023
• Stablecoins: A Deep Dive Into Valuation And Depegging, Sept 7, 2023
• Stablecoin Depegging Highlights DeFi's Exposure To TradFi Risks, March 15, 2023
• Stablecoins: Common Promises, Diverging Outcomes, June 15, 2022