Stablecoins Could Still Dominate Post-Terra, S&P Says

Not all stablecoins are alike, analysts note, but regulations may be needed to precipitate audits and investor fairness.

AccessTimeIconJun 23, 2022 at 4:32 p.m. UTC
Updated May 11, 2023 at 3:39 p.m. UTC

Stablecoins could become a systemic feature of the financial world in spite of the recent high-profile collapse of the Luna Foundation’s terraUSD, analysts at credit agency S&P Global Ratings said in a webinar Thursday.

Staffers at one of the world’s top-three rating agencies believe the technology, a supposedly stable source of value that offers a bridge to more volatile crypto assets, could still transform international finance and global trade – even if recent market turbulence has shown some coins are more stable than others.

For S&P Global Chief Economist Paul Gruenwald, the dramatic devaluation of terra – supposedly equal in value to the U.S. dollar at one time, but now essentially worthless – was proof that crypto issuers need to jump through the same hoops as conventional finance.

'The same sort of rules apply'

Traditional financiers will ruthlessly exploit any currency that makes spurious promises about its ability to maintain value, and crypto markets are no different, he said.

“The same sort of rules apply – the same centrality of credibility applies” in crypto as in traditional finance, Gruenwald noted, saying assets linked to the dollar “are going to need sort of high quality, liquid U.S. dollar assets in some sort of backing portfolios to make sure that regime is credible.”

That pretty much does it for terra-style algorithmic models – in which the asset is supposedly backed by an algorithm designed to ensure supply tracks demand, said Mohamed Damak, S&P's senior director for Middle East and African Financial Institutions.

“I think people have realized to some extent that this type of stablecoin cannot really be called stable,” Damak said. Even for those coins that seek to assure value through actual assets, “they are not all equal because the question mark is on the quality of the assets backing them, whether it's audited frequently or not, and by whom.”

Stablecoins still have a future, however, not least because international payments using the conventional banking system are so slow and expensive, said Harry Hu, a senior director responsible for S&P’s ratings of Chinese financial institutions.

“Stablecoins have the potential to become systemic, primarily because traditional finance has not really kept up with innovation,” Hu said.

Damak also reckons that countries issuing their own central bank digital currencies (CBDCs) could change how they trade.

“For example: A country helps another country to develop its financial infrastructure as long as the second country would use the CBDC of the first country in order to transact internationally,” Damak said. “That could definitely change some of the ways international trade is conducted today.”

What else is needed

These remarks imply a future generation of digital coins becoming vital to the financial system – a success that would likely come at a cost as regulators seek to stamp out any risks that could cause a 2008-style crash.

“The credibility of this stablecoin industry going forward is going to have to involve some sort of external, credible, regular audit of the asset side of the balance sheet,” Gruenwald said, so investors know that any pegged currency has a portfolio of assets to back it.

While some stablecoin issuers already hold those audits voluntarily, Gruenwald also pointed to a recent bill from Sen. Pat Toomey (R–Penn.) that would have mandated them.

Regulation could also seek to protect consumers, given that, if there is a crash, crypto whales with large holdings might end up getting a better deal, leaving smaller investors to carry the cost.

“Not every holder of stablecoin is white-listed for fiat conversion… this creates an un-level playing field and opens the system up for potential manipulation,” Hu said.

Under the current system, those with inside access could still trade at the advertised price even as it crashes for the rest of the market – creating an arbitrage opportunity that regulators might need to put a stop to, Hu said.


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Jack Schickler

Jack Schickler was a CoinDesk reporter focused on crypto regulations, based in Brussels, Belgium. He doesn’t own any crypto.