Crypto, financial sector stress a two-way street

Global policy-makers have been concerned that turmoil in the fledgling crypto sector could spread to the traditional financial industry; however, stress in the U.S. banking industry this spring spread to the stablecoin market, Fitch Ratings says.

In a new report, the rating agency said tighter financial conditions, which ultimately led to several high-profile bank failures headlined by the collapse of the tech-focused Silicon Valley Bank, echoed among stablecoins.

“Significant volatility, shaken investor confidence and temporary but sharp de-pegging occurred in the stablecoin market in March as shockwaves spread from traditional finance,” Fitch said.

The market cap for the USD Coin (USDC), which is pegged to the U.S. dollar on a 1:1 basis, fell by over 25% in the first quarter “and remains depressed,” Fitch said, noting that the coin soon recovered its peg.

The Tether coin’s market cap rose by 12% over the same period, it noted, as Tether captured about 72% of USDC’s redemption volume.

In the wake of the turmoil in the U.S. banking sector, USDC decreased the maturity of its U.S. T-bill exposure, Fitch noted, whereas Tether increased its allocation to U.S. T-bills and recently introduced Bitcoins to its reserve portfolio.

Efforts to regulate stablecoins have progressed at different paces in the U.S. and Europe, the report noted, adding that “stablecoin reporting and transparency differ between stablecoins, as a direct consequence.”

James Langton

James is a senior reporter for Advisor.ca and its sister publication, Investment Executive. He has been reporting on regulation, securities law, industry news and more since 1994.