Compound Treasury received a B- credit rating from S&P Global Ratings earlier today, making the decentralized lending protocol the first-ever DeFi institutional offering to be rated by a major credit rating agency.
Compound allows borrowers to take out crypto loans, and lenders to lock crypto assets into protocols, for a return of interest that fluctuates depending on demand for a given crypto asset.
While Compound as a whole currently boasts over $5 billion in total value locked (TVL) across all protocols, according to DeFi Pulse, Standard & Poor’s today only rated Compound Treasury, a lower-risk protocol that exclusively accepts deposits of cash and USDC, a stablecoin tied to the U.S. dollar. Only accredited institutional customers can deposit cash into Compound Treasury, which then converts the cash to USDC and supplies it to the Compound Protocol, for a guaranteed return of 4% APR.
Because all of Compound Treasury’s assets are tied to the dollar, S&P determined its outlook to be “stable.” However, the agency cited in a report that it also had “major rating weaknesses,” including “the company’s very low capital base, regulatory risk associated with cryptocurrencies, considerable operational risk and complexity, convertibility risk between private stable coins and fiat currency, and the potential hurdles to generate a 4% return.” As of April, S&P noted, Compound Treasury had only 20 customers, and $180 million invested.
For these reasons, S&P conferred a rating of B-, six levels below BBB-, the lowest “investment grade” rating awarded by the agency, and well within the category of “speculative grade,” often colloquially referred to as “junk.”
And yet, the rating still constitutes a major acknowledgement by a pillar of traditional finance of DeFi's potential staying power. According to a blog post this morning by Compound Treasury General Manager, Reid Cuming, the Treasury is in ongoing conversations with S&P that could lead to a ratings upgrade.
“Over time, traditional financial markets and DeFi will converge,” Compound founder Robert Leshner wrote in a Tweet this morning. “This is a major milestone in the convergence.”
The rating comes on the heels of a weekend that saw major cryptocurrencies including Ethereum and Bitcoin fall to 50% of their all-time highs. It remains to be seen when the major ratings agencies will open their doors to cryptocurrencies untethered from more traditional assets.