The regulation of stablecoins would affect the way the stock market develops. Those cryptocurrencies can gain great prominence in the US commercial paper market.
Fitch Ratings recently warned of stablecoins, the growth of which may negatively impact the traditional securities market. The credit rating agency highlights that those tokens can reach a scale of systemic importance, involving new risks to the commercial paper market.
Public limited companies are in charge of issuing commercial paper, which they use for public offering. Those securities are a short-term capital raising instrument, which can fill the gap in the capital market.
It all depends on how the regulations that directly affect stablecoins evolve, according to Fitch Ratings. However, they highlight that the reserves that currency traders use to back their stablecoin can affect the markets in the short term.
Holdings of commercial paper with maturities of 91 days to 13 months fell from 10% in June to 2% in August. Actual holdings are unclear, even in the most transparent cases, and there is no detailed breakdown of assets.
According to Circle, the company that issues USD Coin (USDC), the US dollar does not fully support that stablecoin. Certificates of deposit, securities, debt obligations of companies and financial institutions, and bonds of companies and state agencies accompany the fiat currency.
Stablecoin Regulations Will Affect the Traditional Market
The regulatory approach towards stablecoins will directly affect how the stock market develops, according to Fitch Ratings. However, that will not happen in the short term, as the details and timeline for the regulation of the emerging market are not yet well-defined.
In the case of the European Union, they mentioned that there are new negotiations over stablecoins in Brussels. They said they should have cash reserves and low-risk, predominantly governmental, securities.
In the United States, the administration task force of President Joe Biden urges regulating the use of stablecoins. The Federal Reserve and Congress collaborated to publish a document for that purpose.
Fitch Ratings detailed regulations that force stablecoin issuers to hold more reserves in safe and highly liquid assets. They explained that these could reduce the allocations to commercial paper in that region. Likewise, they said that this would increase the demand for those crypto assets in the government market in the short term.
Stablecoins Could Become a Key Investor Group
In addition to the risks that stablecoins pose, Fitch Ratings discussed growth rates and reserve allocations of stablecoins. The benefits suggest that the tokens could become a key investor group in the US commercial paper market.
Tether (USDT) is a crucial example of a stablecoin since it had 49% of its reserves in certificates of deposit and commercial paper in late June. The credit rating agency highlighted that the market capitalization of that cryptocurrency has increased by 230% this year to reach USD 70,009 million.
Fitch Ratings mentioned the global stablecoin Diem, backed by Facebook, whose launch has not happened yet. The firm believes that this token could further stimulate the growth of the market value of the sector.
By Alexander Salazar
