The decentralized finance (DeFi) world is increasingly crossing over to the financial mainstream, which is more, well, centralized.
One of the biggest trappings of traditional finance is the credit rating, from one of the “big three”: S&P, Moody’s, or Fitch.
Compound Prime LLC’s product, Compound Treasury, which converts U.S. Dollar deposits into stablecoins, just became the first DeFi offering to get a credit rating, meaning that it has issued debt, and it’s considered significant enough for a rating that Wall Street can digest.
It got slapped with a B- grade from S&P Global Ratings. That’s what the street considers “junk” status, firmly in the world of distressed and high-yield debt.
S&P said Compound had a less-than-investment-grade rating owing to “weaknesses” including operational and convertibility risks between fiat money and stablecoins, which are cryptocurrencies typically pegged to reserve assets like gold or the U.S. Dollar.
Compound Prime’s Compound Treasury converts investors’ dollar deposits into the stablecoin USDC to use for its lending project. In return, Compound promises investors a 4% interest rate.
S&P also cited potential government regulation, Compound’s “low capital base,” and “the potential hurdles to generate a 4% return” as risks contributing to its low rating, according to its report.
Still, S&P said the “outlook is stable,” which indicates it expects “limited loan losses on the platform,” along with “very low profitability and an expected fast expansion of the balance sheet.”
Though the rating is technically junk status, it shows how far blockchain-based, DeFi platforms have come in the eyes of the mainstream—and how risky they remain. And junk status isn’t a death knell for a company, by any stretch. Just four years ago, Tesla was assigned junk status, and Elon Musk poked fun at the rating by tweeting an April Fools’ Day joke that the company had gone bankrupt.
Compound noted that its Treasury product was “the first institutional decentralized finance offering to be rated by a major credit rating agency,” in a blog post written by Compound Treasury’s general manager Reid Cuming.
Cuming added that it “signals tremendous progress in the crypto industry’s maturity, as traditional institutions begin to judge the risks of digital asset powered financial offerings.”
In the words of S&P, “the company’s decentralized finance infrastructure generates critical dependence on numerous external counterparties that increase operational, cyber, and other risks.”
S&P declined Coins2Day’s request for comment.