S&P Global: US Stablecoin Adoption Could Surge Under New Regulatory Framework

Regulatory Clarity to Encourage Bank Participation

The Lummis-Gillibrand Payment Stablecoin Act was introduced on April 17. O’Neill explained in his note that regulatory clarity is likely to encourage banks to enter the stablecoin market.

“Assuming the bill is approved, and that relevant banking regulation follows, the new rules may offer banks a competitive advantage by limiting institutions without a banking license to a maximum issuance of $10 billion. The bill is unlikely to significantly affect stablecoins already regulated by the New York Department of Financial Services (NYDFS), including PayPal USD, Gemini USD, and Paxos USD, as they are well-below the $10 billion threshold and because it is otherwise broadly consistent with NYDFS guidance,” said Andrew O’Neill, managing director and co-chair of S&P Global’s Digital Assets Research Lab.

Tether’s Market Dominance May Decline

Another key point from O’Neill is that Tether’s (USDT) dominance in the stablecoin market may wane. Tether is the largest stablecoin by outstanding volume but is issued by a non-US entity, meaning it would not qualify as a permitted payment stablecoin under the proposed bill, according to the S&P managing director.

“This means that US entities couldn’t hold or transact in Tether, which may reduce demand while boosting US-issued stablecoins. We note, however, that Tether transaction activity is predominantly outside the US, in emerging markets, and driven by retail users and remittances,” said O’Neill.

In December, S&P Global announced it had begun assessing Tether’s ability to maintain its peg to the US dollar, assigning it a ‘constrained’ rating of 4.

Stablecoins are cryptocurrencies whose value is typically pegged to a fiat currency or commodity. Tether has faced scrutiny for years; issued in 2014, it is the longest-standing stablecoin with the largest volume in circulation. Its price has remained relatively stable in recent years, particularly over the past 12 months, as noted by S&P in 2023.

The risk assessment scale ranges from 1 to 5, with 5 indicating a weak rating. Tether was previously scored as weak due to a lack of disclosed information.

Emergence of New Custody Services

O’Neill also highlighted that the removal of the Securities and Exchange Commission’s (SEC) requirement for custodians to report digital assets on their balance sheets could lead to the emergence of more custody services.

“That policy not only differs from the general treatment of financial assets held in custody, which are generally off-balance sheet, but creates a capital requirement that likely discourages financial institutions from providing digital asset custody in the US. The new rules would remove that barrier and could lead to greater competition,” said O’Neill.