S&P rates USDC and Gemini’s GUSD as ‘strong’ assets in stablecoin stability assessment

American credit rating agency S&P Global Ratings has revealed its first stablecoin stability assessment report, recognizing USDC and GUSD as ‘strong’ assets.

In eight separate reports, S&P Global Ratings evaluated each stablecoin based on its ability to maintain its peg to a fiat currency. According to the New York-headquartered rating giant, USDC is placed among top performers as the stablecoin “benefits from full backing by low-risk assets, primarily short-dated securities and deposits with banks.”

Yet, USDC wasn’t granted the highest mark — as neither any stablecoin from the list — due to “insufficient precedent on whether assets would be protected in the event of bankruptcy of Circle.” As noted by the credit agency, USDC demonstrated “weakness,” when in March 2023 its peg to the U.S. dollar dropped by 13% amid the Silicon Valley Bank crisis.

However, S&P Global Ratings noted that USDC’s stability assessment could improve “if there is increased certainty regarding the segregation and bankruptcy remoteness of the reserve assets and assets remain very strong.”

Low liquidity

S&P Global Ratings also ranked Gemini’s stablecoin GUSD as another top performer in the list, noting, however, that the scarcity of GUSD’s liquidity on the secondary market and its current market capitalization is “relatively modest compared with the overall stablecoin market.”

The rating agency noted that despite GUSD’s presence in the crypto market for several years, the stablecoin failed to gain widespread adoption. While it can be traded on certain centralized exchanges, including Coinbase, its liquidity remains relatively low, S&P Global Ratings said, adding that a “substantial portion” of GUSD (approximately $110 million) is currently allocated to the DAI peg stability module, indicating “limited involvement in other decentralized finance applications.”

Lack of information

S&P Global Ratings labeled Tether’s USDT stablecoin as “constrained” asset in its stability assessment, saying the assessment reflects a “lack of information on entities that are custodians, counterparties, or bank account providers of USDT’s reserves.”

“There is also significant exposure to higher-risk assets with limited disclosure. Such assets could be subject to credit, market, interest rate, or foreign currency risks.”

S&P Global Ratings

While USDT is registered with the Financial Crimes Enforcement Network, a bureau of the U.S.
Department of the Treasury, the stablecoin still suffers from a lack of a regulatory framework in addition to the absence of asset segregation to protect against the issuer’s insolvency, the report says.

Only one out of eight stablecoins received the lowest rating. As per the rating agency, the FRAX decentralized stablecoin is undercollateralized and “incorporates uncertainty about the future composition of assets when collateralization exceeds 100%.” S&P Global Ratings noted that FRAX is primarily backed by collateral on the blockchain using smart contract protocols, noting that some of these protocols have yet to be “substantially tested.”