Stablecoins could become increasingly important within global securities markets as they seek to back their growing cryptocurrencies with short-term securities, says Fitch Ratings.
In a new report, the rating agency said that stablecoins — crypto-assets that are pegged to a fiat currency, such as the U.S. dollar — may bring new risks to short-term securities markets. That could include the commercial paper market, as the crypto-assets reach systemically important levels.
“The reserves that coin operators hold to at least partially back their currency can affect short-term markets, particularly as they increase in scale,” Fitch said.
Also, given their rapid growth in recent years, the securities holdings of stablecoins are “already relatively large,” Fitch said, noting that — at current growth rates — stablecoins could become a significant investor group in the U.S. commercial paper (CP) market.
“In a hypothetical scenario where stablecoin market value continues to grow at near current rates, and reserve holding allocations remain stable, their CP holdings could exceed those of money market funds within two or three years,” Fitch said.
The growing prominence for cryptos in the short-term securities markets also could create added risks, the report warned.
“Stablecoin-related turbulence could both affect the CP market itself and transmit shocks to other market participants,” Fitch said. “Risks could be aggravated if the infrastructure and partners used by stablecoin operators to engage with traditional markets lack a record in the smooth handling of transactions during periods of market stress or volatility.”
Ultimately, regulation will likely play a big role in how the crypto sector develops, and how it impacts traditional securities markets. At this point though, the regulatory trajectory is still unclear, Fitch said.
“The EU, for example, is negotiating new regulations on crypto assets that would require stablecoins that are intended to be used as a means of payment to invest their reserves in cash and very low-risk predominantly government securities. A requirement for stablecoin operators to hold more reserves in safe and highly liquid assets could reduce allocations to CP, but raise the influence of stablecoins on the short-dated government market,” the report said.
The potential launch of central bank digital currencies could also significantly affect demand for stablecoins, the report noted, so is a trend to watch.