Key Takeaways
- S&P has downgraded its stability rating for USDT.
- The company cited increased exposure to higher-risk assets in USDT reserves.
- Tether has increased gold and Bitcoin purchases in recent months
S&P Global Ratings has downgraded its Stablecoin Stability Assessment for USDT, citing increased exposure to high-risk assets, such as Bitcoin and Gold, in its reserves.
The world’s most popular stablecoin now has the worst possible rating on S&P’s scale after it was adjusted from four (constrained) to five (weak).
Tether Pivots Away From Cash Reserves
Ever since the stablecoin’s inception, the majority of USDT reserves have consisted of cash-equivalent instruments such as Treasury bills and repos.
A smaller portion of Tether’s reserve funds is allocated to riskier, but more lucrative investments, including Bitcoin and gold.
The makeup of USDT reserves has evolved over the years. Initially, the trend was toward reducing risk exposure.
In early 2023, Tether celebrated the elimination of commercial paper exposure, proudly declaring that USDT was 81% backed by cash and cash-equivalent assets. However, in hindsight, that may have been the high watermark of Tether’s efforts to de-risk its reserves.
As of Sept. 30, cash-equivalent investments had shrunk to 77.23% of Tether’s overall reserves. The largest alternative asset class was secured loans (8.06%), followed by precious metals (7.13%) and Bitcoin (5.44%).
In recent months, Tether has significantly picked up its gold investments, acquiring 26 tonnes of bullion in the third quarter alone. The firm has also increased its Bitcoin holdings, purchasing nearly 9,849 coins in September and October.
USDT Stability Rating Downgraded
S&P’s Stablecoin Stability Assessment is designed to reflect each given coin’s risk profile and ability to maintain parity with the currency it references
“Our asset assessment of 5 (weak) reflects the rise in exposure to high-risk assets in USDT’s reserves over the past year,” S&P said in a press release shared with CCN.
The ratings agency pointed out that the amount of BTC in Tether’s reserves now exceeds its overcollateralization margin.
“A drop in the Bitcoin’s value combined with a decline in value of other high-risk assets could therefore reduce coverage by reserves and lead to USDT being undercollateralized,” S&P warned.
Only stablecoins that are 100% collateralized by low-risk, cash-like assets denominated in their peg currency receive S&P’s highest rating. But even those that meet the higher standard don’t necessarily make the cut.
For instance, although coins issued by Circle received the best possible rating for its reserve assets, S&P withheld a “strong” overall rating because there is insufficient precedent on whether assets would be protected in the event of a bankruptcy.
Currently, none of the stablecoins rated by S&P has received the highest overall rating.
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James Morales is CCN’s blockchain and crypto policy reporter. He has been working in the news media since 2020, writing about topics such as payments, banking and financial technology. These days, he likes to explore the latest blockchain innovations and the evolving landscape of global crypto regulation.
With an educational background in social anthropology and media studies, James uses his platform as a journalist to explore how new technologies work, why they matter and how they might shape our future.
