Why Stablecoins Should Be Rated:
Stablecoins have become a central topic in the digital asset ecosystem—especially with recent legislative developments like the GENIUS Act drawing attention to the space. But what exactly are stablecoins, and how do they function?
There are four primary categories of stablecoins:
1 Algorithmic Stablecoins: These use smart contracts to dynamically adjust token supply in response to market demand.
2 Crypto-Backed Stablecoins: Backed by other digital assets, these are typically overcollateralized to help manage price volatility.
3 Commodity-Backed Stablecoins: These are pegged to commodities such as gold or other tangible assets.
4 Fiat-Backed Stablecoins: Backed on a 1:1 basis with fiat currencies such as the U.S. Dollar, often held in cash or short-term government securities.
This article focuses on fiat-backed stablecoins, which structurally resemble money market funds. Money market funds accept investor capital and invest it in short-term, highly liquid, and creditworthy instruments, generating a yield (or “spread”) between what the fund earns and what it pays out to investors. These funds maintain a constant $1 Net Asset Value (NAV), allowing investors to redeem shares at face value at any time.
While not identical, fiat-backed stablecoins function similarly. They accept fiat deposits and invest in liquid, low-risk assets to preserve their peg to the dollar. However, unlike money market funds, stablecoin issuers are not currently subject to uniform regulatory standards, nor are they rated by credit agencies.
Money market funds are governed by rules such as SEC Rule 2a-7, which imposes requirements on portfolio quality, maturity, and liquidity. Importantly, credit rating agencies evaluate these funds based on the quality of their underlying assets. If a money market fund takes on more credit or interest rate risk, it receives a lower credit rating and must offer a higher yield to attract investors.
The same principle should apply to fiat-backed stablecoins. Not all stablecoins are equal in terms of collateral quality, transparency, and liquidity. Some issuers may invest in lower-quality or longer-duration assets, introducing potential risk to the $1 peg. Others may lack sufficient disclosure altogether.
So why aren’t fiat-backed stablecoin issuers rated like money market funds?
Assigning credit ratings to stablecoins would provide a clear, independent assessment of an issuer’s ability to maintain its peg. This would:
– Enhance investor confidence and trust.
– Encourage greater transparency and disclosure.
– Create competitive pressure among issuers to maintain high-quality reserves.
– Help regulators, institutions, and consumers make more informed decisions.
Ratings would reward stablecoins backed by transparent, high-quality, and liquid reserves—and penalize those that fall short. Over time, this could improve the overall safety and credibility of the stablecoin market.
Implementing such a framework could be relatively straightforward, leveraging existing credit rating methodologies already used in the traditional financial sector. Ultimately, this would benefit the broader digital asset ecosystem by aligning stablecoin practices with time-tested financial principles.
Informed decision-making, not speculation or blind faith, should be the foundation of stablecoin adoption—and credit ratings are a logical next step.
This blog post is for informational purposes only and, in no way, should be construed as investment advice.
By George Kushner
