Rating Agency Breaks with Financial Community Over Cryptos Being an Asset Class

Standard & Poor’s weighs in on cryptos with some comments that don’t jive with other financial players.

As the popularity of cryptocurrencies continues to grow, traditionalists in the finance industry are trying to figure out if these digital currencies should be viewed as an asset class.

One financial player says no, which is a break from many others, including government regulators.

This player is Standard & Poor’s. It’s one of the three main rating agencies on Wall Street; the others are Moody’s Investors Service and Fitch. On Monday, its S&P Global Ratings division released a report in which it discussed cryptos’ impact on the financial industry as a whole.

Let’s discuss.

Not an asset class

We’ve told you about well-respected financial players viewing Bitcoin, for example, as a new asset class. This includes Leo Melamed, Chairman Emeritus of CME Group, who believes Bitcoin is “a new asset class”, soon to become as legitimate as gold or stocks and to be traded by major investors.

However, S&P Global Ratings credit analyst Mohamed Damak begs to differ. In a report he authored titled “The Future Of Banking: Cryptocurrencies Will Need Some Rules To Change The Game,” he said cryptocurrencies do not meet the basic two requisites of a currency. (Note: a subscription is required to access the report)

  1. Cryptocurrencies are still not widely accepted as payment instruments, although the list of companies accepting them has increased over the past few years.
  2. The volatility that we have observed over the past 12 months in the valuation of some cryptocurrencies and their market cap is the most meaningful evidence that they fail the test of value storage. For example, in the first 10 days of February 2018, the market cap of cryptocurrencies dropped by around $185 billion from Jan. 28, 2018.

He added that the total amount of cryptos outstanding isn’t “big enough yet.” At Feb. 10, 2018, there were 1,523 outstanding cryptocurrencies with a market cap of around $394 billion, he pointed out.

“Bitcoin was originally used as a means of payment for transactions but its credibility dipped when it was allegedly associated with illegal transactions. Bitcoin and other cryptocurrencies reemerged in 2017 when their market cap increased exponentially. However, we believe that their usage changed from a payment instrument to a speculative instrument when buyers began to largely bet on their future value instead of using them for transactions.”

Moms and Pops will be first to feel the burn

If the value of cryptocurrencies dropped substantially, the so-called mom and pop investors, or retail, would endure most of the impact, while rated banks wouldn’t feel the hit since they are largely insulated thanks to their limited direct and indirect exposures and cautious approach so far, Damak said.

He added:

“We think that retail investors would be the first to bear the brunt in the event of a collapse in their market value. We expect banks rated by S&P Global Ratings to be largely insulated, given that their direct or indirect exposure to cryptocurrencies appears to remain limited.”

Get over the rhetoric

The crypto space has been rife with all kinds of talk about how the extreme volatility it’s known for could affect the stability of the financial services industry. To that, Damak basically says calm down.

Calling it much ado about nothing, he wrote in the report:

“Financial markets are abuzz with questions regarding the nature and viability of digital currencies. In our opinion, in its current version, a cryptocurrency is a speculative instrument, and a collapse in its market value would be just a ripple across the financial services industry, still too small to disturb stability or affect the creditworthiness of banks we rate.”

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