S&P Global Introduces Risk Grading for Crypto Lending Vaults
S&P Global Ratings has introduced a new Vault Risk Assessment (VRA) to evaluate crypto lending vaults, a market currently holding approximately $10 billion in deposits. The VRA is designed to provide a standardized risk evaluation, though S&P emphasizes that these scores are not credit ratings. Crypto lending vaults function similarly to blockchain-based bond funds, pooling deposits and lending them to borrowers. Despite rapid growth, deposits have surged from $1.5 billion to $10 billion in just two years, disclosure standards vary widely across the sector.
The assessment covers six key risk areas: portfolio credit quality, liquidity mismatches, the curator, the blockchain, the protocol, and vault security and governance. Curators, the firms that decide where vaults deploy capital, play a critical role in determining whether depositors recover their funds during market shocks. S&P’s ratings focus on the likelihood of investor losses but do not address the advertised yields of these vaults.
James Wiemken, head of global ratings services at S&P Global Ratings, highlighted the need for standardized risk assessments due to the complexities and inconsistent disclosure practices in the crypto lending market. This move is part of S&P’s broader expansion into digital assets, including the acquisition of auditor OpenZeppelin and an investment in data provider Kaiko. The firm has also issued credit ratings for DeFi protocols like Sky Protocol and structured finance deals backed by Bitcoin.
Recent incidents, such as an $8.5 million exploit in August that drained Term Labs’ vaults, underscore the real risks associated with crypto lending. Regulators, including the SEC, have begun scrutinizing these vaults, with Commissioner Hester Peirce suggesting they may fall under federal securities law. Independent risk assessments like S&P’s could facilitate broader adoption by banks and funds that require third-party risk evaluations, potentially shifting competition from yields to VRA scores.