A recap of the QualitaX webinar featuring Garett Jones, Chief Economist at Bluechip.
The Terra/Luna collapse of May 2022 wiped out approximately $40 billion in market value in a matter of days. It was not, in retrospect, an unforeseeable failure — it was a project whose fundamental structure made catastrophic collapse not just possible but, in adverse conditions, almost inevitable. The problem was that most participants in the market lacked the framework to recognise the warning signs. Bluechip was founded to change that. In a recent QualitaX webinar, Garett Jones — Chief Economist at Bluechip and Professor of Economics at George Mason University — joined us to walk through the SMIDGE rating framework, explain how stablecoins are assessed, and discuss what the emergence of regulated stablecoins and CBDCs means for the future of digital money.
What Is Bluechip and Why Does It Exist?
Bluechip was assembled in the summer of 2022 by Nevin Freeman, himself the founder of a stablecoin project, who concluded that the market urgently needed an independent stablecoin rating agency. The team of three — Garett as Chief Economist and a formally trained accountant as Ratings Director — set out to build a framework that combined economic and accounting rigour into a transparent, publicly available rating system.
The immediate motivation was obvious: Terra/Luna had demonstrated that a stablecoin could accumulate tens of billions in market capitalisation while being structurally unsound in ways that anyone applying a disciplined assessment framework would have flagged. But the broader motivation is more durable. Stablecoins are money — or they aspire to be — and the history of money is a history of people trusting institutions with their savings only to discover that the institution was not as sound as it appeared. Rating agencies exist in traditional finance precisely because individual savers and investors cannot independently assess the creditworthiness of every counterparty. Stablecoins need the same.
Garett’s informal mental model when building the framework: a middle-class person in Argentina or Colombia who has saved $1,000–2,000, is understandably sceptical of their local banking system, and wants to hold savings in something reasonably safe in the crypto ecosystem. What would they need to know? It turned out that the answer to that question is useful not just for that person, but for treasury managers, fintech companies, and Wall Street professionals too. Safety is a universal concern.
Today, Bluechip rates approximately 25 stablecoins on a letter grade scale from A+ through F, all freely available at bluechip.org. No coin has yet earned an A+, and there are several Fs. Both Moody’s and S&P have since entered the space with ratings products — Moody’s behind a paywall, S&P publicly — and when Garett compared Bluechip’s ratings to S&P’s, the rank correlation coefficient was 0.9. The frameworks converge because, as he put it, there are only so many sound ways to rate a stablecoin.
The SMIDGE Framework: A Structured Approach to Stablecoin Safety
The SMIDGE framework is the heart of Bluechip’s methodology. It is fully documented and publicly available on their website. The acronym covers four dimensions currently evaluated: Stability, Management, Decentralisation, and Governance.
S — Stability
Stability does not simply mean “has this coin held its peg for the past 90 days.” A coin can hold its peg right up until the moment it catastrophically fails — as Terra/Luna demonstrated. Stability means having the financial means to maintain the peg, not just the recent track record of having done so.
Garett’s framing draws on a long tradition in monetary economics: the only model that has consistently worked for stablecoin credibility is something analogous to 100% reserve banking — the model Milton Friedman advocated during part of his career. Every credible stablecoin, in Bluechip’s assessment, is essentially a 100% reserve bank: for every token in circulation, there should be a credibly held, equivalent reserve asset backing it.
The analogy Garett uses: it would be like Thailand deciding to hold $1 in US Treasuries or cash equivalents for every Thai Baht in existence, maintaining a 1:1 exchange rate. The question is not just whether the reserves exist, but whether they are held credibly and transparently for the benefit of token holders.
This is where bankruptcy remoteness becomes critical and where it has been one of Bluechip’s most contested but ultimately vindicated positions. If a stablecoin issuer goes bankrupt, are the reserve assets legally ring-fenced for token holders — or could they be seized by creditors, unpaid employees, or secured bondholders? Proving that reserves are held in a legally bankruptcy-remote structure is a requirement for a high stability rating. When Bluechip awarded USDC a B+ rather than an A, bankruptcy remoteness was a key reason. Six months later, S&P declined to give Circle its highest rating — citing the same concern.
M & G — Management and Governance
Management and Governance address what Garett calls “the stablecoin temptation”: any successful stablecoin project will be sitting on a large pile of reserve assets, and wherever there is a large pile of money, there will be people tempted to take it. The question management and governance assessment answers is: have the people running this project set it up in a way that makes that temptation hard to act on?
Key indicators include: whether team members have prior involvement in scams or public scandals; whether the project is domiciled in a jurisdiction with strong rule of law and relatively low corruption (choosing a strong rule-of-law jurisdiction is itself a credible commitment — it means voluntarily accepting that courts can hold you accountable); whether executive compensation structures reward long-term stability rather than short-term risk-taking; and, for decentralised coins, whether there are sufficient governance attack protections — time locks, long vote windows, minimum quorum requirements — to prevent a small group of insiders from executing a midnight vote that drains protocol funds.
Decentralisation itself is treated as neither required nor penalised. A coin can earn the highest possible rating while being fully centralised, and vice versa. Decentralisation is assessed because some users care about it — for ideological reasons, privacy reasons, or risk distribution reasons — and it is evaluated transparently. But a well-run, well-collateralised, bankruptcy-remote centralised stablecoin can outrank a poorly designed decentralised one.
The Red Flag List: When a Full Rating Is Unnecessary
One of Bluechip’s practical innovations is the Red Flag List. If a stablecoin fails any single critical criterion, it receives an F immediately — no further assessment required. The most common red flag is the Terra/Luna failure mode: backing a coin with the issuer’s own equity or a token of their own invention. Garett’s analogy is pointed: paying for dinner by doodling your signature on a napkin works if you are Picasso, but not if you are anyone else. Backing a stablecoin with a coin you invented is the equivalent — it is circular, self-referential, and structurally fragile.
This approach saves analytical effort on projects that do not warrant detailed assessment, and it provides users with immediate, unambiguous guidance: these projects are too dangerous to hold savings in, regardless of what else may be true about them.
Stablecoins as Eurodollars: The Monetary History Perspective
One of the most intellectually substantial contributions Garett brought to the conversation was an economic framing of why stablecoins exist and why they are overwhelmingly dollar-denominated. He draws on the work of Nick Carter, whose observation is that stablecoins are essentially following the path of Eurodollars — but at dramatically higher speed.
After the Bretton Woods system collapsed in the early 1970s, European financial institutions recognised that global demand for dollar-denominated savings and payments far outstripped what the US banking system could supply. Eurodollars — dollar-denominated deposits held outside the US banking system — emerged organically to fill that gap. The US government did not welcome them initially but ultimately learned to coexist with them, because the demand was real and the supply was disciplined enough to be credible.
Stablecoins are doing the same thing, faster. There is enormous global demand for the ability to save and transact in dollars — particularly in countries with unreliable local currencies or limited access to dollar banking. Not everyone has access to a dollar-denominated bank account. Stablecoins fill that gap. The early crypto narrative that stablecoins would displace dollars entirely has been comprehensively disproved — stablecoins are overwhelmingly dollar-denominated precisely because people want dollars, not alternatives to them.
This framing has a practical implication for thinking about supply as a metric. Garett made a counterintuitive but important point: as stablecoin payment infrastructure matures and transaction velocity increases, the total supply of stablecoins may actually decline even as usage grows. If settlements are faster and more reliable, users need to hold smaller balances to cover the same volume of transactions — just as you need less in your current account when you know transfers clear in seconds rather than days. Supply alone is therefore a poor proxy for stablecoin adoption or health.
Regulatory Oversight and Independent Ratings: Complementary, Not Redundant
A central question in the Q&A concerned whether regulatory approval from recognised authorities — the NYDFS in New York, the Monetary Authority of Singapore, the UK FCA — should automatically translate into higher ratings. Garett’s answer was carefully nuanced.
Regulatory approval does matter, but only indirectly. Bluechip does not defer to regulators — it maintains its own independent assessment. If a regulatory framework requires a stablecoin to meet conditions that are also conditions in the SMIDGE framework, then meeting those requirements helps the coin’s rating. But if a regulator defines bankruptcy remoteness differently from Bluechip, or approves a structure that Bluechip does not consider credible, the rating will reflect Bluechip’s assessment, not the regulator’s.
There is also a structural difference in what rating agencies and regulators do. Regulatory approval is binary: pass or fail, licensed or not. A rating is a continuum — a B+ is meaningfully different from an A-, and both are meaningfully different from a C+. That continuum provides information that binary approval cannot. In a market that moves as fast as stablecoins, graded, transparent, publicly-reasoned assessments are arguably more useful to market participants than regulatory approvals that may lag behind structural changes in a project by months or years.
Algorithmic Stablecoins: A Yellow Flag at Best
The term “algorithmic stablecoin” covers a wide range of designs, but Garett treats it as a yellow flag by default — not because mathematical backing is inherently invalid, but because in practice it has frequently been used as a euphemism for backing a coin with the issuer’s own invented assets. True algorithmic stability — maintaining a peg through programmatic mechanisms without adequate external collateral — has not yet produced a model that Bluechip finds credible for long-term reliability.
The closest thing to a credible model for volatile-asset-backed coins is extreme over-collateralisation. Liquity, a decentralised stablecoin backed by Ethereum, holds approximately 250% collateral against its circulating supply. Using a value-at-risk framework, Bluechip determined that even on very bad days for Ethereum prices, Liquity would be able to maintain its peg. That earned it an A rating — the highest currently awarded to any stablecoin in Bluechip’s coverage. But 250% collateralisation is demanding, and the bar for demonstrating that volatile-asset-backed coins are credible is correspondingly high.
CBDCs: How Would They Rate?
Garett offered a thought experiment that illuminates both the SMIDGE framework’s flexibility and the inherent limitations of central bank digital currencies: if Bluechip applied the SMIDGE framework to a retail CBDC from a well-governed country, what rating would it get?
The answer is instructive. On stability and management, a CBDC from a strong rule-of-law country would likely score well — the reserves are credible, the issuer is the central bank, and the rule of law is strong. But on decentralisation and governance, the score would be very poor. There are no privacy protections, no distributed governance, no meaningful checks on the issuer’s ability to change parameters. The aggregate rating would probably be somewhere in the B+–A range overall, but with a clear caveat about the centralisation and privacy trade-offs.
This is not necessarily disqualifying for users who prioritise stability over privacy. But it illustrates that CBDCs and private stablecoins are solving different problems and will coexist, serving different user needs. In jurisdictions with strong currencies and financial systems, CBDCs will likely dominate retail digital payments. In jurisdictions with weaker currencies — where the demand for dollar-denominated savings and payments is strongest — private stablecoins will remain the preferred option for the foreseeable future.
API Integration and Expanding Coverage
Bluechip’s framework and ratings are already being integrated by third parties through API agreements. At least one trading network has built their settlement layer to only permit coins rated B+ or above to be used, effectively outsourcing their stablecoin vetting to Bluechip’s framework. The framework is sufficiently transparent that any organisation could apply it independently, but the API integration route means Bluechip’s live ratings can be embedded directly into platform logic.
Looking ahead, Bluechip is extending its methodology beyond stablecoins to exchanges and other tokens. The FTX collapse demonstrated that exchanges carry many of the same structural risks as stablecoins — large pools of customer assets, misaligned incentives, inadequate disclosure — and that the SMIDGE framework’s economic and accounting rigour is applicable to those assessments as well. A world where exchanges are rated by the same transparent, publicly-reasoned framework as stablecoins would be considerably safer than the one we have today.
Key Takeaways
- Bluechip is the only crypto-native stablecoin rating agency with freely available, publicly-reasoned ratings — S&P and Moody’s have since entered the space, but with less transparency and higher access costs
- The SMIDGE framework evaluates Stability, Management, Decentralisation, and Governance — with 100% reserve backing and bankruptcy remoteness of assets as the two most foundational requirements for a high rating
- Bankruptcy remoteness — the legal ring-fencing of reserve assets for token holders in the event of issuer insolvency — is a non-negotiable requirement that even major coins like USDC have not fully satisfied
- The Red Flag List provides immediate F ratings for projects that fail any single critical criterion, most commonly backing a coin with the issuer’s own invented assets (the Terra/Luna model)
- Stablecoins are dollar-denominated Eurodollars: the dominant use case is providing global access to dollar-denominated savings and payments in markets where that access is otherwise limited or unreliable
- Supply is a poor metric for stablecoin health: as infrastructure matures and transaction velocity increases, users may need to hold less stablecoin to achieve the same economic outcomes
- Regulatory approval and independent ratings are complementary, not redundant: regulation is binary, ratings are continuous — and rating agencies can move faster and provide more granular information than regulatory processes
- Algorithmic stablecoins require extreme caution: only very high over-collateralisation (on the order of 250%) has produced a model Bluechip finds credible for volatile-asset backing
- CBDCs would rate well on stability but poorly on decentralisation and privacy — reinforcing that they serve different use cases from private stablecoins rather than replacing them.
Bluechip’s ratings and the full SMIDGE framework documentation are freely available at bluechip.org. Organisations interested in API integration should contact the Bluechip team directly via the website.