S&P Downgrades Tether to 'Weak': Bitcoin Exposure Risks USDT Peg
- S&P Global Ratings downgraded Tether’s stability rating to "weak" due to concerns that its exposure to volatile assets like Bitcoin exceeds its safety buffer, risking undercollateralization.
- The report highlights significant transparency issues, including a lack of information on banking partners and insufficient asset segregation to protect users in case of insolvency.
The stability of the world's largest stablecoin, Tether (USDT), has come under renewed fire following a significant downgrade by S&P Global Ratings. The prominent credit rating agency lowered its assessment of Tether’s ability to maintain its peg to the US dollar from "constrained" to "weak," the lowest possible tier in its evaluation system. This move highlights growing institutional concerns regarding the composition of the reserves backing the digital asset, particularly as the cryptocurrency market navigates a period of intense volatility and declining asset prices.
At the heart of S&P’s concern is Tether's increasing exposure to high-risk assets. While a stablecoin is designed to mirror the value of a fiat currency like the dollar, its stability relies entirely on the issuer holding sufficient liquid assets—such as cash or short-term government debt—to back every token in circulation. However, analysts Rebecca Mun and Mohamed Damak noted in their report that Tether has diversified its reserves into more volatile instruments, including Bitcoin, gold, corporate bonds, and secured loans. This shift in strategy has introduced a layer of risk that traditional credit assessors find alarming for an asset meant to be a safe haven.
The specific mathematical worry cited by S&P revolves around the concept of the "overcollateralization margin"—essentially a financial buffer designed to absorb shocks. According to the report, Bitcoin now constitutes approximately 5.6% of the total USDT reserves. This figure exceeds Tether’s own safety cushion of 3.9%. The implication is stark: if the value of Bitcoin drops significantly, the buffer would evaporate, potentially leaving the stablecoin undercollateralized. In such a scenario, the liabilities (the tokens held by users) would exceed the value of the assets backing them.
This warning comes at a precarious time for the crypto market. Bitcoin is currently on track for its worst monthly performance since the industry-wide collapse of 2022. If the price of the lead cryptocurrency continues to plummet, combined with a downturn in other risky assets like corporate bonds, S&P argues that Tether’s ability to honor redemptions could be compromised. Despite these market headwinds, the demand for the token remains robust, with the circulation of USDT actually increasing by roughly $1 billion in November to reach a total of $184.4 billion.
Beyond asset allocation, the rating agency criticized Tether for a lack of transparency regarding its operational infrastructure. The analysts pointed out that there is limited public information available regarding the creditworthiness of the custodians, counterparties, and bank account providers that Tether utilizes. For a financial instrument of this scale, the opacity surrounding who actually holds the money creates "counterparty risk"—the danger that a partner institution could fail, taking Tether’s funds with them.
Furthermore, the report highlighted structural weaknesses in how Tether is organized. Specifically, S&P noted the absence of clear asset segregation that would protect token holders in the event of the issuer’s insolvency. Additionally, there are practical limitations on who can redeem USDT directly with Tether for cash, which complicates the liquidity picture for average users who rely on secondary markets. These governance issues contribute to the agency's view that the stablecoin carries higher risks than its competitors who adhere to stricter regulatory standards.
Tether has responded aggressively to the downgrade, rejecting the assessment as outdated and irrelevant. In an official statement, the company argued that S&P is applying a "legacy framework" that fails to understand the mechanics and macroeconomic utility of "digitally native money." Tether insists that the rating overlooks data proving the token's resilience, citing its history of publishing quarterly independent attestations since 2021. The issuer also emphasized its track record, stating that it has never refused a redemption request from a verified customer, even during periods of extreme market stress.