Credit rating agency Moody's is set to introduce a new stablecoin rating system that could redefine how investors evaluate this $300 billion market. The 116-year-old firm has proposed a framework to assign deposit ratings to stablecoins based on the quality of reserve assets, market capitalization risks, and operational safeguards for each token.
Moody's released the proposal last Friday and plans to finalize it after considering public feedback, with the comment period closing on January 29. This initiative comes as stablecoin usage grows globally and new regulatory frameworks emerge. In July, the U.S. passed the Genius Act, establishing regulatory guidelines for stablecoins. These cryptocurrencies serve as crucial liquidity providers in digital asset markets by maintaining stable value through their typical 1:1 peg to the U.S. dollar.
"Stablecoins are becoming increasingly interconnected with banks, corporate treasuries, and payment systems," Moody's stated, adding that its goal is to provide independent assessments for this "still evolving and often opaque" market. Robert Franklin III, managing partner at RFS Consulting, described the current proposal as a "transitional framework" requiring ongoing refinement. "On-chain liquidity really, really matters," he noted, emphasizing blockchain liquidity's critical importance during market stress.
Under the proposed methodology, Moody's will evaluate the credit quality of each asset in a stablecoin's reserve pool to calculate a weighted average, while also considering market values. The final rating will be based on the lower result between the credit quality analysis and market value assessment, with necessary adjustments applied.
Most stablecoins are backed by cash and cash equivalents like short-term Treasury bills, with issuers publishing periodic reserve reports. However, not all undergo full audits - an ongoing industry controversy that includes Tether, issuer of the world's most widely used stablecoin USDT.
Similar to credit ratings, stablecoin issuers must voluntarily apply and pay for assessments. While Moody's didn't specify whether it would rate Tether, the proposal includes consideration of whether "independent third parties" verify issuer data as part of evaluations.
The rating system will be constrained by the "weakest link" - the lowest-rated asset in a stablecoin's reserves. Moody's plans to apply an advance rate (effectively a discount) based on risk factors including liquidity. The proposal identifies five liquid asset categories, with same-currency cash deposits and central government securities receiving higher ratings.
Additional evaluation factors include governance structures, regulatory environments, and potential stress scenarios. Reserve portfolios with high-quality liquid assets may qualify for short-term P-1 deposit ratings. The framework also assesses technical risks like blockchain security vulnerabilities or forks that could complicate transaction verification.
Moody's explicitly excludes algorithmic stablecoins that use automated supply controls rather than collateral to maintain value, as such tokens have historically been more prone to losing their pegs. The agency emphasizes that its new ratings shouldn't be used to evaluate stablecoin stability or investment performance, as they solely reflect the likelihood of timely redemption.
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