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Stablecoins such as tether (USDT), now a significant investor in the $1.1 trillion commercial paper market, could introduce new risks into short-term securities markets, warned global ratings agency Fitch Ratings.

At the current rate of growth, stablecoin issuers’ holdings of short-term debt instruments such as commercial paper – a commonly used type of unsecured debt issued by corporations, typically used for the financing of payroll, accounts payable and inventories – will grow to exceed that of money market funds over the next two to three years, according to Fitch.

The scale of run risks and stablecoin-related turbulence posed to commercial paper markets will depend on the evolution of regulations affecting the crypto asset class, Fitch said in a press release.

“Stablecoin-related turbulence could both affect the CP [commercial paper] market itself and transmit shocks to other market participants. Risks could be aggravated if the infrastructure and partners used by stablecoin operators to engage with traditional markets lack a record in the smooth handling of transactions during periods of market stress or volatility,” said Fitch, mentioning both USDT and also the potential impact of the Facebook-launched Diem project (formerly known as Libra).

Tether, which was fined $42 million last week by the Commodity Futures Trading Commission (CFTC) over misleading claims about the stablecoin’s backing, holds about half of its $62.8 billion of reserves in commercial paper, according to a disclosure made by the company in June 2021.

Carpe diem

The prospective launch of Diem’s dollar-backed stablecoin could further spur the sector’s market value growth, according to Fitch.

Diem had previously proposed to hold at least 80% of its reserves in short-term high-quality government securities and the remaining 20% in cash, noted Fitch, with overnight sweeps into daily liquid government money market funds.

“We believe it will not directly affect the CP market due to the government-securities focus of Diem’s declared reserve allocation plan, but alternative allocation strategies remain possible and, depending on its scale, the operator may become an important participant in other short-term markets,” Fitch said.

Fitch did not respond to interview requests by publication time.