S&P Global Targets Cryptocurrency Fund Risks with New Framework

The new framework from S&P Global assesses digital asset lending funds across six risk categories as deposits in this sector reach approximately $10 billion.

S&P Global Ratings has launched a risk assessment framework for crypto lending vaults, considering the growing popularity of on-chain investment products.

According to a statement released on Monday, this framework evaluates these funds across six risk areas: credit quality of the investment portfolio, liquidity mismatch risk, curator risk, blockchain risk, protocol risk, and security and governance risk of the fund.

S&P stated that these assessments examine the risk of loss for investors in lending funds but will not serve as credit ratings or yield assessments. Additionally, Lisa Schroeer, an analyst at S&P Global Ratings, noted that the framework is not designed to indicate that one of these six areas poses a greater risk than the others.

Schroeer said:

A fundamental weakness in any of the factors can limit the overall risk assessment score (VRA). A strong score in one factor does not compensate for a fundamental weakness in another.

She emphasized that this approach reflects a part where "there are many points of risk and potential failure that could lead to collapse."

Digital asset lending funds collect investors' deposits and deploy them through predetermined strategies managed by smart contracts or human curators. Depositors receive tokens representing their share of the assets and the fund's returns.

According to S&P, the amount of deposits in digital asset lending funds reached approximately $10 billion in September, a significant increase from the $1.5 billion figure two years ago. S&P announced plans to release its first risk assessment reports (VRA) in future announcements, although it did not specify which funds would be assessed first.

Schroeer explained the potential role of this framework for investors:

The goal of this assessment is to create greater transparency regarding risks so that any entity can make more informed decisions when allocating capital to DeFi funds.

Growth of Cryptocurrency Funds Amid Increased Risk Scrutiny

Cryptocurrency funds have expanded significantly over the past year, as exchanges, wallets, and DeFi platforms have offered products that provide lending and other profitable strategies in a bundled format to users.

In February, the wallet sector in Telegram introduced self-custody funds for Bitcoin (BTC), Ethereum (ETH), and Tether (USDT) using the Morpho, TAC, and Re7 infrastructures. Following that, in May, the Kraken exchange launched a profitable Bitcoin fund backed by Veda and managed by Sentora, which attracted $30 million in capital from 4,000 wallets in just the first 10 hours.

Since then, this model has also expanded into the realm of tokenized securities. In September, Kraken launched profitable funds for tokenized shares of Nvidia and SPDR S&P 500 and Invesco QQQ ETFs, where the Sentora platform manages the lending strategies of these assets in DeFi markets.

However, the growing popularity of cryptocurrency funds has not been without risks. In August, the Term Finance lending protocol suffered a loss of approximately $8.5 million after an attacker exploited a governance vulnerability in its Meta Vaults system.

Currently, cryptocurrency funds in the United States remain in a gray and ambiguous regulatory area. In July, Hester Peirce, a commissioner of the U.S. Securities and Exchange Commission (SEC), stated that some funds and on-chain lending products may fall under federal securities laws depending on their structure and operation.

Peirce noted that funds involving discretionary and managerial decisions regarding asset allocation, yield strategies, lending terms, or liquidation thresholds may be subject to securities, investment company, or investment advisor regulations.