Fitch: ‘Regulation could hit stablecoin market expansion’

By Raffaele Redi

Stablecoins are used more and more by cryptocurrency investors to hold realised profits

Fitch Ratings logo in Lower Manhattan                                 
Fitch estimated a fourfold growth for stablecoins - Photo: Shutterstock.
                                

Stablecoins, such as Tether and USDCoin, are increasingly relevant participants in the short-term credit markets, but “regulation could significantly impact their growth,” said Alastair Sewell, head of Fund and Asset Manager Ratings at Fitch to Currency.com.

Due to their ownership of short-term securities backing outstanding coins and low volatility, stablecoins are used more and more by cryptocurrency investors to hold realised profits, for conversions between cryptocurrencies, or as a means of payment. However, authorities all over the world fear them as they are “unregulated”.

In a recent digital debate, the former president and CEO of the Federal Reserve Bank of Boston, Eric S Rosengren, considered them “as high risk transaction accounts”.

In a recent letter to the US Secretary of the Treasury, Jenet Yellen, the US Senator for Pennsylvania, Pat Toomey, claimed stablecoins must be regulated by Congress first, as US financial authorities are gearing up to tighten rules on this kind of “unregulated assets”, as Rosengren defined them.

European Central Bank (ECB) president Christine Lagarde also expressed concerns. “They have to back up coins with dollars, so they can be guaranteed. They must be regulated and supervised to guarantee users,” she warned.

Can stablecoins overcome cryptos in the future?

Fitch recently estimated the total stablecoin market capitalisation growth was around fourfold (420%) as of 30 September 2021 at 131.1bn with more than $1tr in stablecoin transactions volumes per quarter recorded in 2021.

Recent figures prompted the former Federal Reserve CEO to affirm that: “bitcoins, stablecoins, and central bank digital currencies will coexist in the future.” This opens possibility that stablecoins could overcome other cryptos over time, as they are also qualified as cryptocurrencies.

Fitch's Sewell said to Currency.com: “As per 12 of September 2021, the market capitalisation of Bitcoin was USD 1.08tr. As a comparison, according to CoinMarketCap, the total stablecoin market identified as of the same date was USD131.2bn or just 12% of the market capitalisation of the Bitcoin”.

“There is clearly a significant difference at present. For stablecoin market cap to exceed that of major cryptocurrencies such as Bitcoin, there would need to be a material change in the market capitalisation of one or the other,” he said.

“We are still waiting to see how regulation evolves, in particular affecting stablecoins, as this could significantly impact the growth of the stablecoin market,” Sewell added.

Further reading: Fitch Ratings: “Stablecoins may expand over time”

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