Fragile nature of stable coins accelerates calls for regulation: Fitch

Investors likely to pay more scrutiny to risks as UST’s problems spark wider crypto volatility, rating agency says

2022-05-13 15:55:28

ANKARA

The fragile nature of stable coins, most evident in the recent price decline of TerraUSD, will accelerate calls for regulation in the cryptocurrency market, according to Fitch Ratings.

The rating agency said Thursday that algorithmic stable coins, such as TerraUSD, or known as UST, have struggled to win regulatory acceptance, while they face particular risks in maintaining a stable value.

The price of UST, a popular stable coin, plummeted to $0.1534 on Friday, also bringing down its sibling coin Luna to a junk price of $0.00002827, as UST uses an algorithm of burning and minting Luna to adjust its own supply for price stability.

"We expect recent developments to lead to increased calls for regulation of stable coins," Fitch said in a statement.

"Stable coins backed by reserve assets with clear fiat currency value face a fundamentally different set of credit issues to algorithmic stable coins, in our view. In such cases, the stable coin's stability risks can be more manageable, depending on various factors, notably the safety and liquidity of the reserve assets," it explained.

While UST uses an algorithm, other popular stable coins use reserve cash and other assets to manage a 1-on-1 ratio against the US dollar.

"Investors will likely pay more scrutiny to the risks surrounding stable coins and their reserve attestations given that UST's problems have sparked wider crypto market volatility," Fitch said.

US Treasury Secretary Janet Yellen on Thursday urged lawmakers about oversight over stable coins after President Joe Biden on Monday signed an executive order for a comprehensive approach to digital asset policy.

The Biden administration is currently drafting a report to identify financial stability risks and regulatory gaps in digital assets.