Although digital assets present financial institutions with the chance to cultivate novel revenue streams, a caution is issued by Fitch that associated hazards may materialize, potentially necessitating adjustments to credit ratings.
An admonition was issued by the global credit assessment entity, Fitch Ratings, indicating that financial institutions in the United States demonstrating “material” involvement with digital assets could face adverse re-evaluation of their credit standing.
In an official document disseminated on Sunday, it was contended by Fitch Ratings that while the integration of digital assets may augment commission earnings, returns, and functionality, it simultaneously introduces “institutional standing, solvency, operational, and regulatory” liabilities for financial institutions.
“Stablecoin issuance, deposit tokenization and blockchain technology use give banks opportunities to improve customer service. They also let banks leverage blockchain speed and efficiency in areas such as payments and smart contracts,”
Fitch said,
“However, we may negatively re-assess the business models or risk profiles of US banks with concentrated digital asset exposures.”
adding:
A declaration was made by Fitch that, despite legislative progress within the United States establishing prerequisites for a more secure digital asset sector, financial institutions continue to encounter numerous impediments when engaging with virtual currencies.
“However, banks would need to adequately address challenges around the volatility of cryptocurrency values, the pseudonymity of digital asset owners, and the protection of digital assets from loss or theft to adequately realize the earnings and franchise benefits,”
said Fitch.
Fitch Ratings is recognized as one of the “Big Three” credit assessment entities in the United States, alongside both Moody’s and S&P Global Ratings.
The evaluations originating from these organizations—which, at times, are subjected to contention—possess substantial gravity within the global finance sector and influence how corporate entities are appraised or capitalized upon from an angle of fiscal sustainability.
Consequently, a reduction in the assessment of a financial institution exhibiting material involvement with digital assets by Fitch could lead to diminished investor conviction, escalated capital acquisition expenditures, and obstacles to expansion.
The official document underscored that numerous preeminent financial institutions, notably JPMorgan Chase, Bank of America, Citigroup, and Wells Fargo, are presently engaged within the digital asset sphere.
Fitch warns of systemic risks from stablecoins
It was further asserted by Fitch that an additional peril could emanate from the rapid expansion of the pegged digital currency sector, particularly should its scale sufficiently increase to exert influence upon auxiliary domains and financial entities.
“Financial system risks could also increase if adoption of stablecoins expands, particularly if it reaches a level sufficient to influence the Treasury market.”
Concerns regarding the inherent systemic hazards of pegged digital currencies were similarly emphasized by Moody’s in a formal assessment published in late September, asserting that extensive assimilation of stablecoins within the United States could, in the long term, jeopardize the credibility of the US dollar.
“High penetration of USD-linked stablecoins in particular can weaken monetary transmission, especially where pricing and settlement increasingly occur outside the domestic currency,”
Moody’s said.
“This creates cryptoization pressures analogous to unofficial dollarization, but with greater opacity and less regulatory visibility,”
it added.
