Photo: photodaria / Shutterstock.com
Credit rating agency S&P Global Ratings has downgraded the stability of Tether’s stablecoin, USDT, to level 5—the lowest on its scale. According to S&P, the buffer is insufficient to absorb a sharp drop in Bitcoin’s price, making USDT vulnerable.
Why is this a problem? #
The report reveals that Bitcoin constitutes approximately 5.6% of the collateral for all outstanding USDT. This is more than the roughly 3.9% ‘reserve buffer’ that Tether recently reported. A significant decline in the Bitcoin price, especially if other risky assets also lose value, could lead to USDT having insufficient collateral to back all its circulating tokens.
Furthermore, the risky components within Tether’s reserve portfolio have grown. Assets like Bitcoin, gold, corporate bonds, and secured loans now account for about 24% of the total reserves, up from around 17% a year earlier. Besides these investments, Tether’s reserves consist mainly of cash, but that percentage now appears to be declining.
At the same time, Tether is not transparent about who manages these assets and where they are held. According to S&P, this lack of clarity is insufficient for serious investors who expect safety and certainty.
Liquidity is present, but without investor protection #
A large portion of the reserves is still invested in short-term U.S. Treasury bonds and other readily available investments. However, the structure of these reserves is not organized like in traditional financial markets; assets are not strictly segregated from Tether’s corporate funds. Additionally, investors do not have guaranteed access to redemption on demand, which is standard for regulated products.
S&P noted that the stability rating could improve, but only if Tether reduces its exposure to risky assets and provides full transparency. They would need to share data on the composition of their reserves and the creditworthiness of their financial partners.
Risks for the entire crypto market #
S&P’s warning is part of a broader trend, as companies heavily reliant on Bitcoin, such as some ’treasury’ firms, recently received speculative credit ratings. These organizations are at risk during sharp market price swings—the same risk now identified for USDT.
Despite this, USDT remains, by far, the largest dollar-pegged stablecoin, according to data from The Block. Its circulating supply is around €159.5 billion. Its largest competitor, USDC, lags far behind with a market capitalization of less than €65 billion.
Tether has weathered various storms in the past and has always maintained a solid reputation. As a result, there is currently no major panic, as long as the company takes S&P’s points seriously.