Fitch ratings estimates stablecoin assets grew by around 450% to $156 billion in 2021 to 13 December. The relative market share of Tether has decreased, with a total of eight stablecoins now having market values of around $1 billion or more.
These other stablecoins allocate their reserve portfolios to cash and cash equivalents, whereas Tether’s reserve portfolio features a broader asset allocation. This suggests the market may be evolving towards more conservative reserve portfolio composition as regulatory scrutiny continues.
The eight largest stablecoins had an aggregated market capitalization of $152 billion as of 13 Dec. 2021 and accounted for around 98% of the total market according to MarketCoinCap. Tether remains the largest stablecoin with its market capitalization reaching $76.6 billion as of 13 Dec. 2021, followed by USDCoin at $41.6 billion.
Tether’s 3Q21 reserve portfolio report, published on 3 December 2021, shows a broadly stable asset allocation. Its investments in ‘F3’ or equivalent certificates of deposit (CDs) and commercial paper (CP) decreased from 7%, as of end-June to 4% as of end-September 2021. Tether has also started investing in ‘F1+’-rated CP and CDs, albeit at low volume. The bulk of CP and CD exposure matures within 91 to 180 days. Tether has also initiated some holdings in money market funds, again at low volume to date.
Stablecoins are digital currencies, primarily used, at present, for storing proceeds from cryptocurrency trades. The “use case” for stablecoins may expand over time, particularly as regulatory clarity emerges and portfolios become more liquid.
Regulatory uncertainty
The EU is the first major economy to publish specific draft regulations for the stablecoin sector, calling for issuers to be regulated as banks or electronic money institutions. A key US regulatory report has similarly recommended stablecoin issuers be treated as insured banks. Nonetheless, it remains unclear when – or even if – legislation will be enacted to implement these recommendations.
Fitch regards the US regulatory approach as particularly important to the sector’s medium-term development, as the vast majority of major stablecoins traded today are linked to the US dollar and this is expected to remain so over the medium term.
Should issuers secure charters to operate as deposit-taking institutions, they could eventually challenge incumbent banks and potentially non-bank payment providers. Notably, newly chartered stablecoin-issuing entities might sap deposits from other banks. Hurdles to this level of system penetration nonetheless remain high for would-be stablecoin bank conversions.
Uncertainty remains over the fundamental aspects of stablecoin arrangements, including the legal rights of users. Transparency over these issues and reserve asset holdings will be important in assessing the credit profiles of stablecoin issuers. Governance and operational risks, which are usually high for new sectors, may be further exacerbated for stablecoin issuers due to the untested and unique structural challenges of the crypto space.
Greater regulatory certainty over the status of stablecoins and their issuers could create market opportunities, as regulatory risk has deterred many financial institutions from engaging with stablecoin operators, Fitch Ratings said. Clearer and tighter regulation could clarify how far the credit profiles of stablecoin issuers diverge from traditional developed-market participants in the deposit-taking space, but short records will weigh on their creditworthiness.