S&P Global Ratings has significantly lowered its stability assessment of Tether, the issuer of the leading stablecoin USDT. This marks a stark warning regarding Tether’s financial health, indicating that the company is struggling to maintain the necessary collateral to back its dollar-pegged token. As of the end of September, USDT was valued at approximately $174.4 billion, while reported reserves stood at $181.2 billion. This has resulted in a collateralization ratio drop to 103.9%, down from 106.1% the previous year.
A major concern highlighted by S&P is the composition of Tether’s reserves. Merely 64% are held in short-term U.S. Treasury bills, with an additional 10% in low-risk overnight reverse repos. The lingering uncertainty about Tether’s financial practices has led to fears surrounding the company’s transparency. Cantor Fitzgerald is reportedly the custodian for Tether’s Treasury bills, but without official confirmation, skepticism remains regarding the trustworthiness and disclosure of counterparties and bank accounts involved in these reserves.
A troubling aspect of Tether’s financial strategy is its growing reliance on higher-risk assets. Investments categorized as “other stuff,” such as corporate bonds, cryptocurrencies, gold, and loans, now account for 24% of USDT reserves, a significant increase from 17% a year ago. This trend raises alarms not only for its potential risks but also due to Tether’s move away from a previously more conservative investment policy.
Furthermore, Bitcoin now makes up about 5.6% of USDT reserves, surpassing the previous over-collateralization margin of 3.9%. This suggests that the reserves may struggle to absorb potential losses from a downturn in Bitcoin or other high-risk asset values. After witnessing a 24% drop in Bitcoin’s price, S&P underscores the vulnerability of Tether’s collateral position.
The lack of public disclosures regarding asset types that qualify for USDT reserves, as well as the absence of a contingency plan for significant asset value declines, adds to the uncertainty surrounding Tether’s stability. S&P’s concerns are crystallized in various points, highlighting weaknesses in Tether’s operational transparency. Instead of providing an independent auditor’s report, Tether relies on BDO Italia for quarterly snapshots of reserves, which have not been subjected to external audits.
Last year, Tether underwent a corporate restructuring that divided its operations into four divisions, allowing it to invest in diverse ventures, including a video hosting service and an agricultural company. However, the mechanisms for keeping these investments separate from the core stablecoin business remain obscure, further confounding investor trust.
This year, Tether relocated to El Salvador, where it is licensed by a regulatory body with minimal requirements compared to standards in Europe and the U.S. The local commission only mandates a 1:1 reserve ratio and stipulates that 70% of the reserves be liquid in 30 days, without any obligation for asset segregation.
Additionally, Tether imposes a $100,000 minimum redemption threshold, accompanied by a tax on redemptions, making it more challenging for retail clients to access their funds. For those who don’t meet the requirements for direct redemption, secondary markets become the only option, although their reliability is inconsistent.
While S&P raises valid questions about Tether’s complex structure and opaque practices, it still leaves unaddressed why a company holding over $188 billion would maintain such convoluted operations. The apparent preference for pursuing higher returns over simplicity, with a focus on maximizing profits despite skepticism from rating agencies, raises eyebrows among financial analysts. In a recent social media post, Tether’s CEO dismissed these concerns as misinformation, asserting confidence in the company’s standing amid growing scrutiny.
As Tether navigates its tumultuous landscape, its future will rely heavily on its ability to address these significant concerns and restore confidence among its stakeholders.
