S&P Global Ratings launches risk framework for crypto lending vaults
In brief
- S&P Global Ratings announced a risk assessment framework for digital asset lending vaults on Monday.
- Vaults are scored across six risk areas, including curator, protocol and blockchain risk.
- S&P says the assessments aren't credit ratings and won't evaluate yields.
- Vault deposits reached about $10 billion in September, according to S&P.
- S&P hasn't said which vaults it'll assess first.
Six categories, no single weak link
According to Monday's announcement, S&P's framework looks at portfolio credit quality, liquidity mismatch, curator, blockchain, protocol, and vault security and governance risk. S&P said the assessments will evaluate the risk of losses to investors in lending vaults.
They aren't credit ratings, and they won't evaluate yields.
S&P Global Ratings analyst Lisa Schroeer told Cointelegraph the framework wasn't designed to treat any one of the six categories as riskier than the others. She said a material weakness in any factor can constrain the overall Vault Risk Assessment (VRA), and that a strong score in one factor won't offset a weakness in another.
"The assessment aims to provide more transparency on the risks so that any entity can make more informed decisions when deciding how to allocate capital to DeFi vaults."
A $10 billion market, by S&P's count
Lending vaults pool investor deposits and deploy them through predefined strategies run by smart contracts or human curators (depositors get tokens representing their share). According to S&P, deposits hit about $10 billion in September.
Big platforms have moved in, according to Cointelegraph's reporting. Wallet in Telegram introduced self-custodial BTC, ETH and USDT vaults in February using infrastructure from Morpho, TAC and Re7. In May, Kraken launched a Bitcoin yield vault powered by Veda and curated by Sentora that drew $30 million from 4,000 wallets in its first 10 hours. Kraken added vaults for tokenized Nvidia, SPDR S&P 500 and Invesco QQQ ETFs in September.
The risks aren't theoretical. Cointelegraph reported that Term Finance lost an estimated $8.5 million in August after an attacker exploited governance control of its Meta Vaults.
Regulators are watching
In July, SEC Commissioner Hester Peirce said, according to Cointelegraph, that some vaults and onchain lending products could fall under federal securities laws depending on how they're structured and operated. Per the same report, she said vaults involving discretionary decisions over asset allocation, yield strategies, lending terms or liquidation thresholds could trigger securities, investment company or investment adviser requirements.
For now, Cointelegraph reported, crypto vaults remain in a regulatory gray area in the US.
S&P said it plans to publish its first Vault Risk Assessments in future announcements. It didn't say which vaults would go first.
Frequently asked questions
What does S&P's Vault Risk Assessment measure?
According to S&P, the assessments measure the risk of losses to investors in digital asset lending vaults. They look at six areas: portfolio credit quality, liquidity mismatch, curator, blockchain, protocol, and vault security and governance risk. They aren't credit ratings, and they don't evaluate yields.
How does a crypto lending vault work?
A digital asset lending vault pools investor deposits and deploys them through predefined strategies run by smart contracts or human curators. Depositors receive tokens that represent their share of the vault.
Can a strong score in one area offset a weak one?
No. S&P Global Ratings analyst Lisa Schroeer told Cointelegraph that a material weakness in any factor can constrain the overall Vault Risk Assessment, and a strong score in one factor won't offset a weakness in another.
