Better regulation could reduce Stablecoin credit risk, says Fitch Ratings

Central banks in various parts of the world have shown concerns about stablecoins and discussed their potential negative impact on the economy. However, the stablecoin market continues to grow.

Stablecoin credit risk may be limited

Since the beginning of the year, stablecoins have gained massive popularity. A recent report by DappRadar revealed that stablecoin volume in the cryptocurrency space has increased by almost 400% since the beginning of 2021.

At the beginning of 2021, the stablecoin market was worth $29 billion. However, Tether, USDC, Binance USD (BUSD), and other stablecoins are worth over $140 billion. As a result, the two stablecoins are already part of the top ten cryptocurrencies by market capitalization.

The rising market capitalization of stablecoins is a cause for concern for central banks around the world. Apex banks warn about the risks stablecoins pose to the global economy. However, Fitch Ratings believes that the credit risk posed by stablecoins can be mitigated through appropriate regulation.

The report said, “The EU is the first major economy to publish detailed draft regulations for the stablecoin sector, calling for the regulation of issuers as banks or e-money institutions. A key U.S. regulatory report similarly recommends that stablecoin issuers be treated like insured banks.”

The US regulatory approach will impact the Stablecoin market

In the United States, stablecoins have not yet been properly regulated. The authorities recommend that stablecoin issuers be treated as insured banks. Fitch believes that the US regulatory approach is important for the medium-term development of the stablecoin sector. This is because the vast majority of the major stablecoins traded today are pegged to the US dollar. The rating agency expects the situation to continue in the medium term.

“Transparency regarding these issues and reserve asset holdings will be important when assessing the credit profiles of stablecoin issuers. Governance and operational risks, which are typically high for new sectors, may become even more acute for stablecoin issuers due to the untested and unique structural challenges of the crypto space.” the report has ended.

Tether remains the leading stablecoin, with a market capitalization of over $76 billion. In second place are USDC and Binance USD issued by Circle, whose market capitalization is $42 billion and $14 billion, respectively.

This article was originally published on FX Empire

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