The non-profit stablecoin rating agency Bluechip’s rankings have raised questions about their legitimacy, as top-ranked BUSD faces a regulatory crackdown while the largest stablecoin USDT ranks lowly.
Bluechip’s ratings are based on its proprietary SMIDGE criteria – Stability, Management, Implementation decentralization, Governance, and Externals. Regulatory actions are not a metric, as Bluechip chief economist Garett Jones stated their role is not carrying water for regulators, but evaluating stablecoins’ business plans and safety.
While surprising given recent events, Bluechip aims to independently rate stablecoins on their merits, not incorporate regulatory judgments. Their focus is assessing stablecoins’ inherent qualities rather than reflecting agencies’ targeting of them. The agency claims an objective methodology based on the crypto sector, not governments.
Despite Bluechip’s top “A” rating for BUSD, they included a disclaimer noting the NYDFS regulatory action against it.
USDT’s low “D” rating stems heavily from the lack of a credible audit. As Jones explained, audits are crucial for trustworthiness in game theory, and their rating director wants to follow accounting norms. The absence of an audit signals potential issues in their view. Proper audits are a key expectation for maximum stability and legitimacy per Bluechip’s criteria.
While not incorporating regulatory actions directly, Bluechip’s ratings still point to risks like regulation and auditing as undermining stability. Their criteria ultimately highlight similar deficiencies to agencies, despite claims of an independent methodology.
Bluechip provided recommendations for how Tether could improve its low ranking, like disclosing custodian names, providing transparent redemption timelines similar to regulated stablecoins, and lowering the redemption ceiling to $5k from $100k.
Decentralized stablecoins LUSD and DAI earned high “A” ratings largely due to over-collateralization. Unlike BUSD and USDT which rely on third parties holding equal asset value, LUSD and DAI users deposit more collateral than they borrow. This omission of a trusted third party is inefficient but enhances safety per Bluechip, despite requiring over-collateralization.
Bluechip’s framework favors attributes like transparency, auditing, and decentralized models using over-collateralization for stability. Their criteria explain higher rankings for DAI and LUSD versus centralized alternatives, as well as a path for Tether to potentially improve.
Bluechip’s modeling found decentralized LUSD could withstand high volatility and remain collateralized even in severe scenarios, owing to its high ETH collateralization currently. This makes it far more robust than uncollateralized stablecoins, which Jones sees as “literally impossible” to sustain long-term.
He argues only an eccentric billionaire could potentially backstop an uncollateralized stablecoin by staking their reputation and wealth. Jones claims he predicted issues with unbacked tokens like Terra USD since 2017, as faith would eventually vanish causing collapse.
While such models can appear to work briefly, Jones believes fully uncollateralized stablecoins are fundamentally flawed and set up for inevitable failure. Time proves unsustainable if no assets or over-collateralization back the peg.
Bluechip’s framework favors fundamentally robust designs using collateralization, reflecting lessons from past failed stablecoins. Their upcoming expanded ratings will likely draw further debate on assessing true stability.
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