In its latest report, Moody’s Investors Service warned that recent instability in the traditional banking sector could negatively impact stablecoin adoption. The credit rating agency has highlighted the risks faced by fiat-backed stablecoins like USDC, stating that stablecoin issuers’ reliance on a small set of off-chain financial institutions limits their stability. The de-pegging of the USDC on March 10, which was caused by the sudden collapse of Silicon Valley Bank, has highlighted this risk.
Circle Internet Financial, the USDC issuer, had $3.3 billion in assets tied up at the bank, and in the span of three days, the company liquidated approximately $3 billion in USDC redemptions as the value of its stablecoin soared. it plunged to a low of around $0.87. However, USDC quickly regained its parity after the Federal Deposit Insurance Corporation announced that it would support all deposits held at Silicon Valley Bank.
Moody’s analysts believe that regulators are likely to seek stricter supervision of the stablecoin sector in the future, given recent market volatility and the potential risks associated with stablecoins. The credit rating agency also warned that if the USDC had not regained its peg, it could have suffered a run and been forced to liquidate its assets. Such a scenario could have caused more runs on the banks that own Circle’s assets, which could have led to the unpegging of other stablecoins.
Despite the Terra collapse, which prompted calls for stablecoin regulation, Moody’s believes that fiat-backed stablecoins like USDC work differently than algorithmic tokens and are less likely to fail. However, the credit rating agency warns that stablecoin issuers need to take steps to reduce their reliance on a small set of off-chain financial institutions to improve their stability.
In conclusion, the recent instability in the traditional banking sector and the decoupling of the USDC have highlighted the potential risks associated with stablecoins. While Moody’s believes that fiat-backed stablecoins are less likely to fail than algorithmic tokens, the credit rating agency advises that stablecoin issuers should take steps to reduce their reliance on a small set of financial institutions outside of the chain. As regulators are likely to seek stricter supervision of the stablecoin sector in the future, stablecoin adoption could be negatively affected.