The world's largest stablecoin faces skepticism; S&P downgrades its rating to the "worst tier"

On November 27, Financial Associated Press reported (Editor: Shi Zhengcheng) that the rating agency S&P Global released a report on Wednesday stating that based on the increasing allocation of high-risk assets by Tether, the issuer of the world’s largest stablecoin USDT, the rating of this stablecoin’s ability to maintain its peg to the dollar has been downgraded to “weak,” which is the lowest tier in a five-level rating system.

S&P stated that as of the end of September this year, the circulating value of USDT was $174.4 billion, while the corresponding reserve report showed a value of $181.2 billion, with the collateralization ratio dropping from 106.1% a year ago to 103.9%.

Compared to the collateralization ratio, S&P is more concerned about the composition of the reserve assets. Analysis indicated that only 64% of Tether’s reserves are in short-term U.S. Treasury bills, while another 10% is in low-risk overnight reverse repos. Meanwhile, “other assets,” which include Bitcoin, corporate bonds, gold, mortgages, and other unspecified assets, now account for 24% of USDT’s reserves, up from 17% a year ago.

S&P analysts Rebecca Mun and Mohamed Damak cited in the report: “Bitcoin currently accounts for about 5.6% of USDT’s reserve assets, exceeding the 3.9% excess collateralization ratio, meaning its reserves can no longer fully absorb the impact of a decline in asset value. Therefore, if the value of Bitcoin falls, along with devaluation of other high-risk assets, it could weaken the reserve coverage and lead to USDT being under-collateralized.”

For reference, Bitcoin has dropped over 20% since entering the fourth quarter.

S&P also raised several concerns, such as:

Tether does not publish audit reports but instead hires BDO Italia to prepare quarterly reserve snapshots, including data on assets and liabilities, which have not been audited;

After restructuring last year, the company was able to make speculative investments in South American agricultural company Adecoagro and video platform Rumble. There has been no public disclosure on how these investment activities will be separated from the core stablecoin business;

This year, Tether moved its company to El Salvador and applied for a digital asset license in that country. However, El Salvador’s regulatory requirements are lower than those in Europe and the U.S., only requiring Tether to maintain at least a 1:1 reserve backing, with at least 70% of the reserves being liquid within 30 days, and no requirement for asset segregation and custody.

In response to S&P’s report, Tether issued a statement strongly denying the descriptions in the report.

The world’s largest stablecoin issuer stated: “This report employs an outdated analytical framework that fails to reflect the characteristics, scale, and macroeconomic significance of digital-native currencies, and overlooks data that clearly demonstrates the resilience, transparency, and global utility of USDT.”

Tether also emphasized that the company has continuously published quarterly independent audit certification reports since 2021 and has never rejected any verified users’ redemption requests.

(Edited by: Wen Jing)

Keywords:
Stablecoin