Exponential Rise In Stablecoins Could Cause Market Instability...Fitch.

Exponential Rise In Stablecoins Could Cause Market Instability…Fitch.

Fitch, an American based rating agency said that stablecoins used without collaterization may cause market destabilization. The agency stated that stablecoins that are collaterized are more risk mitigating than those without backing. To exemplify collaterization, Fitch cited the USDC which is the USD stablecoin collaterized with the United States dollar on a 1:1 ratio.

Worthy of mention is March this year’s reserve information on Tether. The stablecoin has 26.2% of its reserve in cash, fiduciary deposits (that is deposits made by an agent bank to another bank on behalf of Tether) and securities. According to Fitch analysis, Tether’s commercial paper is equivalent to $20.3 billion which is approximately half of its entire reserve. However, in a situation where massive demand is placed by investors to redeem their USDT, the credit market may temporarily experience destabilization.

Diem, a stablecoin collaterized by Facebook was also cited by Fitch in its attempt to buttress the need for financial supervisory bodies to look into stablecoins. According to the agency, 80% of Diem’s reserve was initially proposed to be in the form of government securities while 20% was to be in the form of cash. However, in a swift move, it was diverted into Money Market Fund, an open-ended mutual fund that engages in government securities investment on a temporary basis.

Fitch also made mention of the earlier cautionary announcement issued by the U.S financial supervisors where the financial authorities explicitly stated that other assets backed in the similitude of Tether in the long run may be unstable as pressure on the financial market increases. In the previous month, the Boston’s Federal Reserve president asserted that the notable increase recorded with stablecoins is worrisome. In his view, stablecoins could lead to a negative tilt as regards stability of credit markets.


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