S&P: Stablecoins' Role In Decentralized Finance Set For Further Disruption

Rhea-AI Summary

S&P Global Ratings published an article on June 17, 2022, discussing the role of stablecoins in decentralized finance (DeFi). The analysis highlights that stablecoins must connect traditional finance to gain mainstream acceptance, amidst recent market disruptions revealing varied risks among them. Regulatory scrutiny is on the rise, particularly in the U.S., China, and the U.K., each taking distinct approaches to stablecoin legislation. The report emphasizes that stablecoins will contend with central bank digital currencies as their usage continues to grow.

Positive

• Stablecoins identified as key in bridging DeFi and traditional finance.
• Increased regulatory focus may lead to clearer guidelines, fostering market confidence.

Negative

• Market volatility has shown that not all stablecoins maintain stability; algorithmic types at higher risk.
• Potential financial stability concerns if a stablecoin faces a run, risking asset firesales.

NEW YORK, June 17, 2022 /PRNewswire/ -- (S&P Global Ratings) -- Decentralized finance (DeFi) needs digital currencies that can dependably act as a bridge with the world of traditional finance to become mainstream, said an article published today by S&P Global. In "Stablecoins: Common Promises, Diverging Outcomes," the authors discuss how stablecoins--cryptocurrencies with a market value generally tied to a specific fiat currency--have emerged to fulfill that role.

The recent market rout has demonstrated that not all stablecoins are equal and contain idiosyncratic risks, where certain algorithmic types are less likely to maintain their promised stability. Stablecoins will ultimately compete with central bank digital currencies (CBDCs) or tokenized deposits of commercial banks from the traditional finance world.

Spurred by recent market turbulence, stablecoins are attracting increasing regulatory scrutiny and constitute arguably the hottest regulatory topic in the crypto world at the moment. This is no surprise. The implications will only grow with volumes issued. These are multifaceted--from traditional anti-money laundering issues to potential financial stability considerations, such as a run on a stablecoin leading to a fire sale of assets held as reserves.

The currency policy stance towards stablecoins varies across jurisdictions. In China, for instance, stablecoins and other cryptocurrencies are banned outright so that the focus is on the launch of a central bank-backed e-CNY. In the U.S., discussions are progressing on how to regulate stablecoins; so far, over 95% of outstanding coins are linked to the U.S. dollar. The U.K. government has also made it a priority to legislate in this area to foster the country's future role as a crypto-hub. Japan is allowing banks and other registered financial services entities to issue stablecoins from next year.

The report looks into many of the implications around stablecoins and potential competitors from the traditional finance world, how they work, the roles they play, and the risks they pose.

This report does not constitute a rating action.

Media Contact:

Jeff Sexton, New York  +1 (917) 596-3417
 jeff.sexton@spglobal.com

S&P Global Ratings is the world's leading provider of independent credit ratings. Our ratings are essential to driving growth, providing transparency and helping educate market participants so they can make decisions with confidence. We have more than 1 million credit ratings outstanding on government, corporate, financial sector and structured finance entities and securities. We offer an independent view of the market built on a unique combination of broad perspective and local insight. We provide our opinions and research about relative credit risk; market participants gain independent information to help support the growth of transparent, liquid debt markets worldwide.

S&P Global Ratings is a division of S&P Global (NYSE: SPGI), which provides essential intelligence for individuals, companies and governments to make decisions with confidence. For more information, visit www.spglobal.com/ratings.

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SOURCE S&P Global

FAQ

What is the significance of the S&P Global Ratings report on stablecoins?

The report highlights stablecoins' role in bridging decentralized finance with traditional finance, emphasizing regulatory scrutiny.

When was the S&P Global Ratings article on stablecoins published?

The article was published on June 17, 2022.

What risks do stablecoins face according to the S&P Global Ratings report?

Stablecoins face risks related to market volatility, particularly algorithmic types that may struggle to maintain stability.

How are stablecoins viewed in different countries according to S&P Global Ratings?

Countries like China ban stablecoins, while the U.S. and U.K. are developing regulations to manage them.