Fitch Ratings published, "Stablecoin Risks Extend Beyond Reserving Practices," which tells us, "Reserve practices for major stablecoins have become more conservative, but stablecoin holders continue to face other sources of risk, some of which have been spotlighted in the failure of major cryptocurrency entities, says Fitch Ratings. These include incomplete attestations, weaknesses in the legal rights of stablecoin holders, and contagion risks linked to the cryptocurrency ecosystem. The overall capitalisation of the stablecoin sector has shrunk significantly since the collapse of Terra in May 2022, falling from around USD189 billion at end-April to around USD144 billion at end-December. The bankruptcy of the second-largest crypto exchange, FTX, amid a fraud scandal in November, followed by Binance's pause in withdrawals in December, led to heightened stablecoin redemption activity and episodic unmooring of Tether's USDT and Binance's BUSD stablecoins from par. Both tokens were only unmoored by slight amounts and stablecoin trading velocity has recovered somewhat, but these events have negatively affected sentiment towards stablecoins." They continue, "We believe market concerns and pressure from regulators have driven a trend towards more conservative reserving and some improvement in transparency, although significant variation between stablecoins remains. Reserves for the dominant stablecoins increasingly comprise short-term US Treasuries and cash. For example, Tether has said it reduced its commercial paper exposure by USD24 billion in 2022. Nonetheless, the price volatility of USDT and BUSD is still high compared with money market funds. This reflects lingering risks around reserving practices and transparency, as well as other factors such as contagion risk, counterparty risk, the legal rights of stablecoin holders (notably around redemption rights) and operational risks, including cyber risks." Fitch adds, "We expect the close linkages between major stablecoins and the broader crypto sector to remain a focus for regulators." See also, an earlier piece, "BlackRock's Stablecoin Money Fund Draws Bank Lobby Warning," by ignites, which tells us, "The Bank Policy Institute, whose board members include the chief executives of JPMorgan Chase and Bank of America, has sounded the alarm on BlackRock's $28 billion Circle Reserve Fund. The government money fund, which launched in November, stores a portion of the reserves for Circle Internet Financial's USDC stablecoin. Circle is the only entity allowed to purchase shares of the money fund, and the financial technology firm has said it expects those reserve assets to be 'fully transitioned' to the fund by the end of March 2023. The root of the ... institute's concerns is that BlackRock plans to apply for the money fund to access the Federal Reserve's overnight reverse repurchase agreement facility.... If the Fed grants such access to the money fund, it would render the stablecoin a 'back-door' central bank digital currency, the Bank Policy Institute wrote in a Jan. 4 post on its website."

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