Financial Feasibility Analysis of Tether: How Much Reserves Are Needed to Ensure Stability?

Tether operates as an unregulated bank

Tether International is not merely a custodial organization but a financial institution operating like a bank. The issuing company provides digital deposit instruments on demand, allowing free circulation in the crypto market, while also investing these liabilities into a diversified asset portfolio.

Tether not only maintains reserves according to risk/maturity levels but actively allocates assets to profit from the yield spread between assets and liabilities. This is a typical banking activity characteristic, not just a simple remittance service.

Evaluation framework: Capital adequacy ratio based on Basel standards

To understand whether Tether has sufficient liquidity, we need to apply the widely used capital adequacy framework in the financial industry. Financial institutions are required to maintain a certain amount of capital to absorb the impact of asset fluctuations and other potential risks.

Three main types of risks to consider:

• Credit risk: The possibility that the borrower fails to fulfill obligations, accounting for 80%-90% in most large financial institutions
• Market risk: Asset value fluctuations affecting repayment ability, accounting for 2%-5%
• Operational risk: Risks from fraud, system failures, legal losses

Minimum capital requirements:

• Common Equity Tier 1 (CET1): 4.5% of risk-weighted assets (CET1)
• Tier 1 capital: 6.0% of risk-weighted assets
• Total capital: 8.0% of risk-weighted assets

Under normal conditions, large financial institutions must maintain 7%-12% CET1 and 10%-15% total capital. In practice, these requirements often exceed 15%.

Asset structure and risk profile of Tether

By the end of Q1 2025, Tether has issued approximately $174.5 billion in tokens, with held assets totaling $181.2 billion, creating a reserve surplus of about $6.8 billion.

Asset portfolio composition:

• Approximately 77% invested in money market instruments and USD equivalents, nearly without risk weight
• Approximately 13% in physical and digital commodities
• The remaining in loans and other investments

Handling risk weights:

For Bitcoin (BTC), according to international standards, the risk weight can be as high as 1,250%. However, this is an overly conservative assumption. Considering BTC’s nature as a digital commodity, a more reasonable approach is to apply risk weights aligned with actual price volatility.

Since the approval of Bitcoin ETFs, BTC’s annual volatility has been 45%-70%, higher than gold (12%-15%). Accordingly, BTC’s risk weight should be about three times higher than gold.

For the loan portfolio, due to lack of detailed borrower and collateral information, a reasonable approach is to assign a 100% risk weight.

Current capital status of Tether

Based on the above analysis, Tether’s risk-weighted assets (RWAs) range from approximately $62.3 billion to $175.3 billion, depending on how the commodity portfolio is handled.

Tether’s total capital ratio (TCR):

With a reserve surplus of $6.8 billion, the TCR would range from 3.87% to 10.89%, mainly depending on the risk calculation for BTC.

If a reasonable standard assumption is applied (assets must withstand BTC price fluctuations of 30%-50%, within historical ranges), Tether essentially meets the minimum regulatory requirements.

However, compared to the market standards of large financial institutions (capital ratio of 17.5%-18.5%), Tether still falls short. To maintain the current USDT issuance scale according to market standards, Tether may need an additional approximately $4.5 billion in capital.

Independence from the group

Tether often argues that at the group level, they have substantial retained earnings as a buffer. By the end of 2024, reported annual net profit exceeded $13 billion, with group equity surpassing $20 billion.

However, according to strict financial management principles, these profits and investments belong to the group level and are outside the segregated reserves of the token issuance division. Tether can transfer these funds when necessary, but are not legally obliged to do so.

Therefore, considering all retained earnings as available capital to absorb USDT losses is overly optimistic. A rigorous assessment should consider the performance and liquidity of the risky assets within the group’s portfolio, as well as the leadership’s willingness to sacrifice these assets during crises to protect token holders’ interests.

Final remarks

Tether meets the minimum capital requirements based on conservative standards. However, compared to higher standards applied to large financial institutions, the company still has a significant gap in its capital buffer. Whether Tether needs to raise additional capital ultimately depends on the criteria and standards you choose to apply.