Stablecoins like Tether (USDT), which is already a major participant in the $1.1 trillion commercial paper market, may bring new risks into short-term securities markets, according to Fitch Ratings, a worldwide ratings firm. The rating agency had already issued a warning in July that stablecoins had the potential to destabilize credit markets in the short term.
Tether has recently agreed to pay $41 million in a settlement with the US Commodity Futures Trading Commission for “misleading” investors about the number of its reserves. adding the latest consequence of the Biden administration’s wider assault on cryptocurrency markets.
“On Friday, the Commodity Futures Trading Commission issued an order resolving charges against Tether… for making false or misleading representations and omissions in connection with the US dollar tether token stablecoin,” the CFTC stated.
Tether was charged by the Commodity Futures Trading Commission of fraudulently stating that each of its crypto tokens was backed by an equal amount of US cash.
Separately, the CFTC imposed a $1.5 million punishment for allegations resolved against Tether’s connected exchange Bitfinex.
According to a study released by Fitch Ratings, stablecoins represent a danger to the securities markets.
According to Fitch, stablecoin issuers’ holdings of short-term debt instruments such as commercial paper – a commonly used type of unsecured debt issued by corporations, typically used for the financing of payroll, accounts payable, and inventories – will surpass those of money market funds in the next two to three years if growth continues at its current rate.
The ratings agency is concerned about stablecoins on a day when the cryptocurrency sector has plenty to celebrate, with the bitcoin price hovering over $64,000 and an ETF on the horizon. The company, which has previously warned about stablecoins, cautions that when stablecoins grow “systemically significant,” they may offer additional dangers to “short-term securities markets,” such as commercial paper (CP).
“Risks could be exacerbated if stablecoin operators’ infrastructure and partners used to engage with traditional markets lack a track record in the smooth handling of transactions during periods of market stress or volatility,” said Fitch, mentioning both USDT and the potential impact of the Facebook-launched Diem project (formerly known as Libra).
Diem, Facebook’s yet-to-be-released digital currency, will be backed by a mix of government assets and cash.
Fitch observed that Diem has earlier recommended holding at least 80% of its reserves in short-term high-quality government securities and the remaining 20% in cash, with overnight sweeps into daily liquid government money market funds.
We believe it will not have a direct impact on the CP market due to Diem’s declared reserve allocation plan’s focus on government securities, but alternative allocation strategies remain possible and, depending on its scale, the operator may become an important participant in other short-term markets,” Fitch said.