FILE PHOTO: Tether logo is seen in this illustration taken March 31, 2023. REUTERS/Dado Ruvic/Illustration/File Photo
LONDON (Reuters) -Credit rating firm S&P Global has started providing risk assessments of eight of the world's top stablecoins, with the two of the mostly widely used, Tether and Dai, given near bottom marks.
Stablecoins are a form of cryptocurrency backed by an asset or fiat currency. They have surged in popularity but their weaknesses were exposed last year by the spectacular collapse of TerraUSD and its sister coin Luna.
S&P's new risk scale will go from 1 to 5 rather than the triple-A to default range it uses for governments and companies, but the focus on the qualities and drawbacks is much the same, and the scores will go up and down like its credit ratings too.
Tether, the most widely used and Dai the fourth most widely used stablecoins, have been given "constrained" 4 scores in the new ranking system, while the fifth most popular TrueUSD is graded a "weak" 5.
"The assets (backing the stablecoins), for us, are the most fundamental starting point" S&P analyst Lapo Guadagnuolo said, explaining one of the key reasons for calculating the scores was their growing use as a means of payment.
Tether's lowly score reflects a lack of information about who or what holds its reserve assets. A large chunk of those are U.S. government bonds and cash-like equivalents, but there is also "significant exposure" to riskier assets, S&P added.
For TrueUSD it said there was "no information on the nature of the assets in the reserve or the creditworthiness of institutions holding these assets."
Another coin, Frax, was also assessed as a 5. First Digital USD was rated a 4, while number two stablecoin USD Coin was classed as a "strong" 2, alongside Gemini Dollar and Pax Dollar.
Some stablecoins promise to maintain their "pegs" via pools of fixed-income assets of varying liquidity. Other stablecoins promise to do so via crypto assets. Some are based on a mix of both.
Some also seek to reduce the risks related to their underlying assets by requiring overcollateralization and establishing mechanisms for early liquidation or support against "adverse movement in the value of the assets".
Weaknesses in other areas, however, such as regulation and supervision, governance, transparency, volatility or "liquidity and redeemability" contribute to lower scores, S&P said.
"Stablecoin is just a name," Guadagnuolo added. "Last year Terra-luna was called a stablecoin but it was anything but."
(Reporting by Marc Jones; editing by David Evans and Jonathan Oatis)
