Stablecoins Could Reshape Short-Term Debt Markets, Fitch Says
The rapid growth of stablecoins like Tether is exerting an ever-greater impact on short-term securities markets such as commercial paper, according to Fitch Ratings.
In the next few years, the stablecoin industry could potentially rival traditional money market funds for influence in the commercial paper sector, the ratings company said in a note. Stablecoins may also be disruptive for commercial paper markets if investors lost confidence in the tokens, Fitch warned.
“Current growth rates and reserve allocations suggest that stablecoins could become a significant investor group in the U.S. CP market,” Fitch analysts including Alastair Sewell, senior director of fund and asset manager ratings, wrote in the note dated Oct. 18.
Tether claims a 1-to-1 exchange rate to the dollar. It is widely used to trade Bitcoin and other tokens, making it key to the crypto market, as it allows for quick transactions and is supposed to be immune to volatile price swings. Tether’s market value more than tripled this year to almost $70 billion, CoinGecko data shows.
Many questions remain about the inner workings of Tether and how it manages reserves backing the token. That’s spurred expectations that regulatory oversight of the cryptocurrency industry is going to intensify.
In a hypothetical scenario of rapid stablecoin expansion and 20% of marginal stablecoin reserve growth going into commercial paper, stablecoin holdings of the latter could overtake those of money market funds by mid-2023, according to Fitch modeling. Fitch stressed the scenario is illustrative only and not meant as a forecast or prediction.
Stablecoin-related turbulence “could both affect the CP market itself and transmit shocks to other market participants,” the Fitch analysts wrote.
Market risks could be further aggravated as the infrastructure and partners used by stablecoin operators lack a record of smooth operations during periods of market volatility, they added.
The volatile nature of stablecoin growth and the opaque nature of actual holdings makes forecasts challenging, the report said.
Regulatory requirements to hold more reserves in safer assets could ultimately reduce commercial paper allocations, but raise stablecoin influence on short-dated government debt instead, Fitch said.
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