(Bloomberg) -- Decentralized finance platform Compound Prime LLC received a junk credit rating from S&P Global Ratings, underscoring how crypto lending is making inroads among institutional investors -- as well as the risks involved.
S&P on Monday issued a B- long-term rating for Compound Prime, six levels below investment grade, with a stable outlook. It cited uncertainty around the regulation of cryptocurrencies as one of the risks to Compound Treasury’s rating. Stablecoins are tokens which are pegged to the value of an asset, typically the U.S. dollar.
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Compound Prime, a subsidiary of Compound Labs Inc., oversees the company’s Treasury product which takes deposits in U.S. dollars and converts them into the USDC stablecoin. The tokens are then supplied to the broader DeFi lending project Compound to generate a promised 4% interest rate for accredited investors.
Compound Labs announced the Treasury offering in June last year. It has about $5.2 billion in total value locked to the Compound protocol, according to data from tracker DeFi Llama.
Among other risks S&P cited in its rating of Compound Prime was the convertibility of private stablecoins back into fiat currency, as well as the platform’s “very low” capital base, operational complexity and “the potential hurdles” to generate its 4% return.
“The stable outlook reflects our expectation of limited loan losses on the platform but also of very low profitability and a fast-expanding balance sheet, which we believe will weigh on an already weak capital position,” the ratings agency said in its report.
Reid Cuming, general manager of Compound Treasury, said separately in a blog post that the rating from S&P signals “tremendous progress in the crypto industry’s maturity.” It is the first credit rating for an institutional DeFi offering from a major ratings firm, according to Compound Treasury. A spokesperson for S&P declined to comment.
DeFi projects let investors trade, borrow and lend digital tokens without involving intermediaries like banks. Some also offer a strategy known as yield farming, where platforms advertise high interest rates for investors staking tokens on the underlying protocol. The industry has $133.5 billion in total value locked, DeFi Llama data show.
Highlighting DeFi’s tentative steps into the financial mainstream, firms like Jane Street have recently started making use of such offerings. Fairfax County, Virginia, is considering putting pension fund money in two crypto funds that use yield farming to generate returns, an official said last week.
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