S&P Global Ratings released its assessment of stablecoins relative to a fiat currency. The results were not very good for Tether. In its report, S&P Global Ratings applied its analytical approach to evaluate the stability of a stablecoin on a scale from 1 (very strong) to 5 (weak). S&P Global Ratings evaluated Tether (USDT) with a score of 4 (limited).
S&P Global Ratings has announced the beginning of its stablecoin stability evaluation, which aims to assess the ability of a stablecoin to maintain a constant value compared to a fiat currency, famous companies such as Tether were included in the process. .
This would represent one of the first financial ratings oriented to the crypto ecosystem, and more specifically to the stablecoin ecosystem. For S&P, this advance is significant in the firm’s commitment to leverage its robust analytical and risk assessment capabilities to support not only traditional finance (TradFi) but also the growing universe of clients of blockchain technology, native decentralized finance and cryptocurrencies.
Tether: How Does the S&P Stablecoin Assessment Work?
In its report, S&P Global Ratings applied its analytical approach to evaluate the stability of a stablecoin on a scale from 1 (very strong) to 5 (weak). Eight of the major stablecoins have ratings ranging from strong to weak:
- Asset quality risks were noted. Including credit, market value and custody risks.
- The extent to which overcollateralization needs and settlement policies can mitigate these risks was analyzed.
- S&P then considered five additional areas: governance, legal and regulatory framework, redeemability and liquidity, technology and third-party dependencies, and track record.
S&P Does Not Rate Most Stablecoins Like USDT Very Highly
According to S&P’s analytical approach, for the eight stablecoins evaluated -including Tether-; Stability assessments range from 2 (strong) to 5 (weak) in terms of the ability to maintain its peg with a fiat currency.
The quality of the assets backing the stablecoin is a critical factor in the final evaluation. Weaknesses in other areas, including regulation and supervision, governance, transparency, liquidity and redeemability, and track record, contributed to stablecoins with lower evaluations.
Lapo Guadagnuolo, senior analyst at S&P Global Ratings, highlighted the following:
“As we look to the future, we see stablecoins becoming further integrated into the fabric of financial markets, acting as an important bridge between digital and real-world assets. However, it is important to recognize that stablecoins are not immune to factors such as asset quality, governance, and liquidity. Our evaluations consider elements that can cause them to detach themselves from their objective value.”
The stablecoin stability assessment comes from insights gathered through in-depth interviews with key participants in the TradFi and DeFi sectors. The launch includes public evaluations of eight leading stablecoins: DAI, FDUSD, FRAX, GUSD, USDP, USDT, TUSD and USDC.
What Would S&P’s Assessment Mean for Tether?
S&P Global Ratings evaluated Tether (USDT) with a score of 4, indicating limitations. USDT, launched in 2014, is the oldest stablecoin with the largest amount in circulation. The asset score of 4 indicates the lack of information on custodian entities. This highlights exposure to risky assets with limited information, which could have credit, market, interest rate or foreign currency risks.
Weaknesses in reserve management could indicate a lack of regulation and limited redeemability of USDT. The score could improve with more information and by moving towards less risky assets. Institutionalism is key, since the support of a government or regulatory entity could improve the rating, and the opposite would also be true.
By Leonardo Perez
