Stablecoins and Ratings Agency: S&P Reveals Critical Flaws

Last Updated 2 mins ago

By Giuseppe Ciccomascolo

S&P Global Ratings said the majority of stablecoins lack the necessary backing to maintain their peg to fiat currencies.

Key Takeaways

• Stablecoins are playing an increasingly important role in the cryptocurrency ecosystem.
• S&P found that many stablecoins are not backed by enough reserves to maintain their peg to fiat currencies.
• Tether, the largest stablecoin by market capitalization, received a rating of 4 from S&P, indicating that it is a “constrained” investment.
• The approval of a Bitcoin ETF may attract some investors away from stablecoins.

In the cryptocurrency universe, stablecoins are carving out an increasingly significant role. These tokens aim to reproduce and maintain in a digital key – and within a blockchain – the value of traditional currencies, such as the US dollar and euro or, in some cases, commodities like gold.

Anyway, a recent report from the rating agency Standard & Poor’s (S&P) highlighted that the majority of these tokens lack the necessary backing to maintain their peg to fiat currencies. The report, which scrutinizes the top 12 stablecoins, raises serious concerns about the transparency and integrity of the stablecoin market, potentially jeopardizing investor confidence and fueling fears of a potential meltdown.

Stablecoins’ Role

At this pivotal juncture, stablecoins primarily address two key use cases: firstly, they provide crypto-investors an avenue to mitigate the volatility inherent in Bitcoin and other cryptocurrencies, enabling them to stay within the realm of digital wallets. For instance, they facilitate the conversion of Bitcoin into digital dollars, allowing investors to navigate periods of heightened price fluctuations.

The second main application revolves around financial inclusion. Many countries grapple with the dual challenge of a lack of access to traditional banking services and existing in an economic landscape marred by high inflation.

In nations grappling with high inflation, the growing adoption of stablecoins stems from the capacity to convert volatile local currencies into stable alternatives like the dollar and euro. This trend is evident in countries such as Lebanon, Turkey, Argentina, and Venezuela. In these places, inflation reaches double, if not triple, digits.

However, a crucial question arises: are stablecoins genuinely “stable” and do they possess the attributes necessary t