Thursday, February 10, 2022 / 09:43 AM / by Fitch Ratings / Header Image Credit: Kaspersky

The recently launched USDF Consortium (USDF) of a group of U.S. banks and fintechs to issue and use stablecoin (SC) for payment transfers and other digital assets over blockchain is neutral to credit for member institutions over the near term, Fitch Ratings says. As financial institutions weigh the opportunities and risks of digital asset usage, the longer-term ratings effects will largely be driven by banks' exposure to SC and by the development and scope of regulation, the clarity of which will support demand for USDF and growth of the SC market more generally.

USDF highlights the potential for SC issuance by U.S. banks, with members including New York Community Bank, NBH Bank, FirstBank, Sterling National Bank and Synovus Bank, as well as fintechs Figure Technologies and JAM FINTOP. USDF is redeemable on a one-to-one basis between the wallets of customers of member banks operating exclusively within the Provenance ecosystem, an open-source blockchain. Other U.S. bank consortiums include Zelle, a consumer-focused, digital peer-to-peer payments network owned by BofA, Truist, Capital One, JPMorgan Chase, PNC Bank, U.S. Bank and Wells Fargo.

Other banks have formed closed ecosystems, including Silvergate Bank's proprietary Silvergate Exchange Network (SEN), a real-time payments infrastructure for its bank customers, along with its recent acquisition of the blockchain payment network assets from Diem Group, which was formed by Facebook. Signature Bank developed Signet, a blockchain-based payments platform for its commercial customers, with deposit balances of around $10 billion or nearly 10% of total deposits. SEN and Signet provide real-time settlement and around-the-clock payment capabilities for each bank's respective customers, particularly for wholesale payments. Conversely, USDF and Zelle are interbank systems for transactions of customers between member banks.

Lack of legislation or clear regulatory guidance has made U.S. banks cautious to enter the digital asset space. Policymakers have increasingly voiced concerns around money laundering/terrorism financing and know-your-customer (KYC) issues, as well as price volatility of cryptocurrencies. According to a joint statement from the Fed, FDIC and OCC in November, aside from the issuance and distribution of stablecoin, regulatory priorities for 2022 pertaining to crypto assets include increased clarity around crypto-asset safekeeping, traditional/ancillary custody services, facilitation of customer purchases/sales of crypto-assets, loans collateralized by crypto-assets and implications of crypto assets on balance sheets.

U.S. regulators have expressed concerns about risks associated with SC issuers (e.g. Tether and Circle), including a report by the U.S. President's Working Group on Financial Markets, published in November 2021, recommending SC issuers be categorized as insured depositories subject to commercial bank regulation and supervision. However, Fed Chairman Jerome Powell recently indicated that privately issued stablecoins could exist alongside a possible central bank digital currency.

Issuing, redeeming and/or exchanging SC may be a source of fee-based and FX-spread income for USDF member banks, which could be a near-term credit positive, especially should SC issuance be franchise enhancing for those with a first-mover advantage and deep customer relationships that are burdensome to transfer within the digital assets space.

However, inadequate technological or regulatory compliance frameworks could expose SC-issuing banks to greater operational, cybersecurity, and KYC risks, which could likely offset any potential franchise enhancement and expose a bank to negative rating repercussions. Involvement in SC issuance and growth of digital assets in general could present financial, operational, and compliance challenges for banks which would be key risk considerations for Fitch.