S&P downgraded the USDT dollar peg rating to the lowest score! Tether: misleading.

S&P Global Ratings has downgraded Tether's USDT stablecoin rating to the lowest level, questioning the token's ability to maintain its peg to the US dollar. S&P Global noted that Bitcoin accounts for 5.6% of the total USDT circulation, exceeding the 3.9% over-collateralization rate, and a fall in Bitcoin prices could reduce collateral coverage. Tether has classified the report as misleading, stating that it fails to capture the nature, scale, and macroeconomic significance of digital native currencies.

S&P Questions: Bitcoin Reserves and Audit Deficiencies

(Source: S&P Global Ratings)

S&P Global Ratings downgraded the rating of USDT to the lowest score primarily due to issues with its reserve asset structure. S&P pointed out that Bitcoin accounts for 5.6% of the total circulation of USDT, which may not seem high, but the problem lies in Bitcoin's extreme volatility. The report states: “Bitcoin accounts for 5.6% of the total circulation of USDT, exceeding the 3.9% over-collateralization rate, while the 103.9% collateralization rate corresponds to it. Therefore, a fall in Bitcoin prices or a decline in the value of other high-risk assets could reduce the coverage rate of collateral.”

The key to this logic lies in the buffering effect of the over-collateralization rate. USDT claims that for every 1 USD token, there are 1.039 USD in assets backing it, with the excess being only 3.9%. If the price of Bitcoin drops by 50% (which is not uncommon in the crypto market), it would cause the total value of the collateral to decrease by about 2.8% (5.6% × 50%). This loss nearly depletes the 3.9% safety buffer, putting USDT at risk of under-collateralization.

Besides Bitcoin, S&P Global also pointed out that assets such as gold, loans, and corporate bonds have higher volatility. Tether holds 116 tons of gold reserves, and although gold is generally considered a stable asset, its price can still fluctuate. Loans and corporate bonds carry default risks, which are asset classes that traditional stablecoin issuers typically avoid.

The lack of sufficient audit or reserve proof reports is also considered one of the main reasons for the low stability rating. Tether has long been criticized for its lack of audit transparency. Although the company regularly releases reserve proof reports, these reports are often attested by accounting firms rather than being a full audit. An attestation only confirms the asset balance at a certain point in time, while an audit requires checking internal controls, accounting policies, and transaction records, which significantly increases reliability.

S&P stated that Tether is headquartered in El Salvador and is regulated by the National Digital Assets Commission (CNAD), which has relatively loose requirements for the reserves of stablecoins. The regulatory environment in El Salvador is far less strict than that of the United States or the European Union, allowing Tether to adopt a more aggressive asset allocation strategy, but it also raises questions about regulatory arbitrage.

Four Reasons for S&P's Downgrade of USDT Rating

High-risk asset proportion: Bitcoin accounts for 5.6%, while gold, loans, corporate bonds, and other volatile assets have a higher proportion.

Insufficient safety buffer: The over-collateralization rate is only 3.9%, which cannot withstand extreme market fluctuations.

Low audit transparency: Lack of complete audit reports, only proof reports available.

Regulatory Environment is Loose: El Salvador CNAD has relatively loose reserve requirements.

Tether Strikes Back: $112 Billion in US Debt Surpasses Most Countries

Tether classified the S&P report as “misleading” in a statement, stating that it “strongly disagrees with the characterizations made in the report,” and that the report “fails to capture the nature, scale, and macroeconomic significance of digital native currencies, and neglects to clearly present data demonstrating the resilience, transparency, and global utility of USDT.”

Tether CEO Paolo Ardoino also questioned the new ratings and the utility of financial rating agencies. “The classic rating models established by traditional financial institutions have historically led private and institutional investors to invest their wealth in companies that, despite being assigned investment-grade ratings, ultimately went bankrupt,” Ardoino said. This is a reference to the 2008 financial crisis, when rating agencies like S&P gave high ratings to subprime mortgage securities, but these products ultimately triggered a global financial tsunami.

Ardoino's most compelling evidence of a counterattack is the scale of U.S. Treasuries held by Tether. According to Ardoino, Tether is the 17th largest holder of U.S. Treasuries in the world, holding over $112 billion in short-term U.S. government bonds, surpassing most countries including South Korea, Saudi Arabia, and Germany. This figure is astonishing as it shows that Tether's position in the U.S. bond market is approaching that of sovereign nations.

Despite the low rating, S&P actually acknowledges that 75% of USDT's funding is supported by U.S. Treasuries and other “low-risk” short-term financial instruments. This means that the main reserves of USDT are safe, while the issue lies in the asset allocation of the remaining 25% and overall transparency. If Tether can provide a complete audit report and reduce the proportion of high-risk assets, the rating may improve.

The company has also accumulated 116 tons of gold reserves, comparable to those of national and central bank reserves. Tether's accumulation of gold, U.S. government bonds, and its ability to mint and redeem digital dollars has led some analysts to claim that Tether now operates like a central bank. Although this analogy may be exaggerated, it is not entirely without merit. The circulation of USDT issued by Tether exceeds 130 billion USD, equivalent to the money supply of some small to medium-sized countries.

Market Impact and Controversies of S&P Ratings

The timing of S&P's downgrade is noteworthy. This report comes at a significant milestone year for stablecoins. Previously, the United States passed relevant regulations, and the Trump administration regarded stablecoins as a means to maintain the hegemony of the US dollar, with the market value of stablecoins surpassing 300 billion USD. In this overall positive context, S&P's negative rating on USDT stands out.

From the market response, the price of USDT has not decoupled due to the downgrade in ratings. This shows that market confidence in Tether has not been shaken temporarily, possibly because: (1) Investors have become accustomed to questioning Tether, similar reports have emerged multiple times in the past few years, but USDT has never truly collapsed; (2) The network effect of USDT in the crypto market is extremely strong, most exchanges and DeFi protocols heavily rely on USDT, making it difficult to replace in the short term; (3) Tether's rapid rebuttal and data on US Treasury holdings provide a certain level of confidence support.

However, in the long run, S&P's skepticism may accelerate the loss of USDT's market share. Regulators may refer to the ratings of authoritative institutions like S&P when assessing the compliance of stablecoins. Institutional investors may also prefer products with higher ratings when choosing stablecoin allocations. If competitors like USDC and PYUSD can obtain higher ratings, they may encroach on USDT's market share.

From an investor's perspective, S&P ratings provide important risk warnings. Although USDT is currently operating normally, its reserve structure does have risks. Under extreme market conditions (such as Bitcoin falling 70% and gold dropping 30% simultaneously), USDT may face a collateral shortfall. For large holders, diversifying stablecoin allocations and not concentrating all funds in USDT is a more prudent strategy.

The Central Bankization Trend of Tether

(Source: Paolo Ardoino)

Tether's behavior is increasingly resembling that of a central bank. Holding 112 billion USD in U.S. Treasury bonds makes it a significant participant in the U.S. bond market, and its buying and selling activities may influence bond prices. Accumulating 116 tons of gold reserves has resulted in its gold holdings surpassing those of many central banks. This asset allocation strategy has transcended the role of traditional stablecoin issuers.

Traditional stablecoin issuers like Circle (USDC) primarily hold cash and short-term U.S. Treasury bonds, with a very conservative asset allocation. Furthermore, Circle has gone public in the U.S. stock market, entering the U.S. regulatory system, which promotes traditional capital into CRCL stocks. In contrast, Tether's investment portfolio includes diverse assets such as Bitcoin, gold, corporate loans, and corporate bonds. This strategy allows Tether to achieve higher investment returns (reportedly, Tether's profits exceed $5 billion in 2024), but it also entails higher risks.

This trend of central banking has raised regulatory concerns. If Tether truly operates like a central bank, should it be subject to the same regulations as banks? Should it be required to hold minimum capital buffers, undergo regular regulatory examinations, and implement deposit insurance? These questions have not been clearly addressed in stablecoin regulatory legislation.