Moody’s Ratings says it aims to establish a method for rating stablecoins.
Moody’s states that it is providing “a transparent and independent framework to assess credit risk for stablecoins.”
This follows a Request for Comment published in December. Moody’s received 15 comments on its proposal.
Moody’s said the stablecoin methodology will include an analysis of the credit quality of the pool of reserves backing the digital asset.
Moody’s shared that it plans to expand coverage across other digital finance networks, lines of business, and instrument types as adoption grows.
The key risks for stablecoin issuers, as outlined by Moody’s, are shared below:
- Credit quality of reserve assets: Credit risk arises when reserve assets default, and the reserve pool’s notional value is insufficient to redeem stablecoins upon demand. We assess the credit risk by evaluating the ratings of the reserve assets themselves or of the relevant counterparties.
- Market value of reserve assets: Market value risk occurs when the market value of the reserve assets decreases to a level where the liquidation proceeds of the collateral pool are at a level that is insufficient to redeem the stablecoins in full upon demand or upon a liquidation scenario.
- Liquidity: Liquidity risk arises because stablecoins typically promise redemption on demand. This risk occurs when the assets backing the stablecoin are not immediately convertible to cash, unlike cash deposits or overnight securities. If the portfolio contains assets with maturities longer than the redemption obligation or securities that lack a deep and liquid market, the issuer may encounter delays or incur losses when liquidating these holdings. Such circumstances can compromise the ability to meet redemption requests promptly and in full.
- Operations: Operational risk in stablecoin transactions arises when a party fails to carry out its responsibilities as specified in the transaction documentation, which can result in delayed payments or losses for holders. In our analysis, we consider key counterparties, whose performance affects the timely fulfillment of stablecoin obligations. We evaluate their financial disruption risk, operational robustness, track record, and the alignment of their interests to effectively assess and manage risk.
- Cash flow: Stablecoin issuers have ongoing operational expenses and, in certain cases, make regular payments of interest to the stablecoin holders, which can reduce the buffer between reserve assets and stablecoin obligations. Our analysis focuses on the funding sources for such payments and the ability of the issuer to provide reserves for such payments.
- Technology: Technology risk arises from the stablecoin issuer’s reliance on blockchain infrastructure and smart contracts to record ownership and facilitate transfers. Disruptions in these systems can impair the issuer’s ability to redeem stablecoins at par in a timely manner. Our analysis focuses on the issuer’s ability to identify, manage and fully mitigate these risks.