In Industry First, S&P Gives Compound Prime Junk Credit Rating

Crypto industry participants expect credit raters to increase their scrutiny of DeFi firms as institutional interest in the space continues to grow


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key takeaways

  • The DeFi protocol is the first to receive a credit rating from S&P Global Ratings
  • Low capital base, increasing regulatory scrutiny and return obligations were areas of concern for credit raters

The first institutional DeFi company rated by S&P Global received a B-, or junk, grade.

S&P Global Ratings has assigned Compound Prime a B- long-term credit rating. It is the first time an institutional DeFi (decentralized finance) offering has been rated by the agency, 

Compound Prime, a Compound Labs subsidiary, has a stable outlook, but ratings issuers cited uncertain regulatory conditions around stablecoins and Compound Treasury’s currently “very low” capital base — as well as its 4% return obligation — as concerns.

Compound Prime oversees Compound Treasury, the company’s security offering that converts US dollars to stablecoin USDC and secures accredited investors a 4% return, according to Reid Cuming, Compound Treasury’s general manager. 

The Treasury offering was first announced in June 2021. 

A B- rating, a junk rating six levels below investment grade, means the business is more vulnerable to adverse financial conditions, although it “currently has capacity to meet financial obligations,” S&P Global Ratings said in its explanation.

“As part of ongoing discussions with S&P, Compound Treasury’s ratings could be upgraded in upside scenarios such as greater regulatory clarity for the digital asset industry, or a longer track record of stable performance,” Cuming said in a statement.

S&P choosing to assign a DeFi protocol a rating, which Compound said is a first, shows that greater adoption is coming, Cuming said. 

“Over time, traditional financial markets and DeFi will converge,” Robert Leshner, Compound’s founder, tweeted. “Compound Treasury is one of the products accelerating this transition, by offering institutions a cash-management product powered by the Compound protocol.”

Ratings will become more common, Lesher added, which will help to foster institutional demand.

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