Fitch Ratings: Stablecoins are ... stable again

Quick Take

  • The stablecoin market has stabilized as confidence returns to larger coins, Fitch Ratings said.
  • Excess risk remains for larger stablecoins, despite efforts to improve reserves. 

The stablecoin market has stabilized since the collapse of TerraUSD as confidence is returning to larger coins, Fitch Ratings said. 

Tether and Circle, the issuers of USDT and USDC stablecoins, have made concerted efforts to increase investor confidence and improve price stability, the firm said in a report. Both issuers have increased the proportion of liquid assets backing the stablecoins, though excess risk remains. 

While Tether reduced USDT's commercial paper holdings — now at zero according to the firm — its portfolio still holds more volatile and potentially less liquid assets, such as precious metals, the report said.

"USDT's consolidated assets exceed its liabilities by 0.3%, which may not cover volatile swings in values of some underlying assets if USDT has to liquidate assets," Fitch wrote. 

Meanwhile, USDC holds a high level of cash through U.S. deposits (20%) and short-duration U.S. treasuries (80%). 

USDT and USDC have the largest share of stablecoin volume, with $205 billion and $195 billion, respectively, this month, according to The Block's data. The adjusted on-chain volume of stablecoins so far in November is $473 billion, meaning USDT and USDC make up over 60% of the total volume. 

While stablecoins have been showing signs of stability, USDT briefly traded below its peg to the U.S. dollar last Thursday. The Tron DAO Reserve said it would purchase 1 billion USDT to fight short sellers as a result. 

New coins on the block

The rating agency said the number of new stablecoins increased to 132 by the end of August — a 76% increase from the first quarter of 2022.

"Fitch Ratings believes that the entry of many new coins is likely to lead to additional issues and failures of smaller stablecoins," the report said.

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