Rating giant enters the game! Moody's plans to launch a stablecoin rating system, anchoring reserve assets and redemption risks.

Credit rating agency Moody's will adopt a new stablecoin rating system, which may redefine the way investors evaluate this $300 billion market. Moody's, a credit rating company with a 116-year history, has proposed a plan to grant deposit ratings to stablecoins based on the quality of the reserve assets, market risk, and operational safeguards of each token. Moody's released the proposal last Friday and plans to formally adopt it after considering public feedback, with the deadline for comments being January 29. The proposal comes at a time when the use of stablecoins is growing, and new regulatory regimes are emerging globally. In July of this year, the United States passed the "Genius Act," providing a regulatory framework for stablecoins. These cryptocurrencies are seen as a key source of liquidity in the digital asset market, as they are designed to maintain stable value by being pegged 1:1 to the US dollar. Moody's stated, "The correlation between stablecoins and banks, corporate treasurers, and payment systems is increasing." The company added that its goal is to provide independent assessments for this "evolving and often opaque" market. Robert Frankin III, Managing Partner at RFS Consulting, called the current proposal a "transition plan" that requires constant evolution. He said, "On-chain liquidity is really, really important," and added that in times of stress, blockchain liquidity becomes even more critical. "This is something you must consider in the evaluation framework." According to the proposed methodology, Moody's will assess the credit quality of each asset in the stablecoin reserve pool to calculate a weighted average. It will also consider the market value of the assets. Moody's will then adjust the credit quality analysis of the reserve pool value with the lower of the market value analysis results before granting a rating. Stablecoins are typically backed by a mix of cash and cash equivalents (such as short-term government bonds), and issuers regularly publish reserve reports. Not all issuers have undergone comprehensive audits, which has been a point of controversy in the industry, including Tether, the issuer of the most widely used stablecoin USDT. Similar to credit ratings, stablecoin issuers must actively apply and pay evaluation fees. Moody's did not specify whether it would rate Tether, but the proposal includes a consideration factor of whether a "fair third party" has reviewed the issuer's data as part of the evaluation. According to the proposal, stablecoin ratings will be constrained by the "weakest link," which is the lowest rated asset in the reserve. Moody's plans to apply a haircut, essentially a form of impairment, based on risk indicators including liquidity. The proposal identifies five categories of liquid assets, with same-currency cash deposits and central government securities receiving higher ratings. Other considerations include the governance of stablecoins, regulatory background, and potential stress scenarios. The company stated that portfolios with high-quality liquid assets may qualify for a short-term deposit rating of P-1. The proposal will also assess technical risks, such as blockchain security vulnerabilities or forks that may complicate transaction verification. Moody's will exclude algorithmic stablecoins, which use automated supply control methods rather than collateral to maintain value. In the past, these tokens have been more prone to becoming unanchored from their target assets. Moody's emphasized that the new ratings should not be used to assess the stability or investment performance of stablecoins, as they are only intended to reflect the likelihood of stablecoins being redeemed in a timely manner.