1Q22 Fitch Ratings Scale for Stablecoins Market Research

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The prices of other algorithmic stablecoins also decreased, with FRAX and DAI similarly falling by 47% and 32%, respectively, between end-1Q22 and end-May.

Fitch Ratings started tracking stablecoin markets in March and May 2022. This was primarily due to the collapse TerraUSD (UST). UST’s market capitalisation fell to USD300million at the end of May from USD16 billion at the end-1Q22. At end-May, the aggregate market capitalisation fell by 14% to USD162 billion from USD188 billion at the end of 1Q22. The failure to peg UST’s value to the US dollars by an algorithmic mechanism was the catalyst for UST’s collapse. FRAX, DAI, and other algorithmic stablecoins saw their prices drop by 32% and 47%, respectively, between the end of May and end-1Q22. The UST development team has launched Terra 2.0 (LUNA), a new blockchain, but it does not have an algorithmic stablecoin. New algorithmic stablecoins, however, have been quickly launched and have gained significant market share partly because of aggressive staking promotions. USDD, for example, was launched in May 2022. It is currently the eighth largest stablecoin (USD576 millions) and has a time-limited staking reward of 30%-60% (annual yield). Tether’s price fell to 0.9958 due to volatility caused by UST’s depegging. Between end-1Q22 & end-May, Tether’s market capital fell 11%. There are calls for greater regulatory oversight after the failure of UST. The UK is currently consulting on proposals to place failed systemic stablecoin issuesrs under special administration by the Bank of England. Tether and USDC account for 63% of total assets as of May. Tether’s portfolio has decreased its credit risk and duration and increased liquidity. End-1Q22 saw less than 0.5% of CPs and CDs from the reserve portfolio rated ‘F3 or below’. It has 48% of its portfolio as US Treasury bills.

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