Unveiling the Truth About Tether Reserves: Capital Adequacy Ratio Analysis and $450 Million Shortfall

Stablecoin or Risk Asset? The True Identity of Tether

Tether($USDT) has sparked countless controversies over the past two and a half years, with the core issue always pointing to the same dilemma: Does this institution have enough reserves to support the issuance of $17.45 billion in tokens?

On the surface, Tether International holds $18.12 billion in assets, resulting in a surplus of $680 million compared to its $17.45 billion in liabilities. But this simple arithmetic masks a more complex financial issue: The traditional standards for assessing a company’s solvency do not apply to financial institutions.

When evaluating a bank or bank-like institution, you cannot just look at whether assets exceed liabilities. The real key is whether the institution has enough risk buffer capital to absorb potential fluctuations and losses in its asset portfolio.

Understanding the Risk-Weighted Logic of Financial Institutions

Traditional financial regulatory frameworks (such as Basel accords) require financial institutions to risk-weight different types of assets. The significance of this risk weighting is that it reflects the actual risk of these assets under stress conditions.

For example:

• Cash and short-term money market instruments: Risk weight close to 0%, due to extremely low default risk
• Precious metals like gold: Risk weights typically range from 100% to 250%, due to market volatility risk
• Bitcoin: Under the strictest Basel standards, risk weight can be as high as 1,250%

Why calculate it this way? Because a financial institution needs to maintain sufficient capital to withstand potential declines in asset values during extreme scenarios.

Composition of Tether’s Assets and Risk Assessment

Tether’s asset distribution roughly includes:

• About 77% in USD cash and money market instruments (very low risk weight)
• About 13% in precious metals and digital assets (mainly gold and Bitcoin)
• The remaining portion in loans and other investments (transparency is limited)

The key issues lie in the second and third categories.

Gold holdings: According to banking practices, gold should be assigned a risk weight of 100%-250%. Since Tether holds a significant gold position, this part of the assets requires a higher capital buffer.

Bitcoin risk: Strictly following Basel standards, BTC would require a full 1:1 capital reserve—meaning an equal amount of capital to “cover” this part of the assets. However, this approach is overly conservative for institutions whose main clients are in the crypto market. A more realistic approach is to adjust the risk weight based on BTC’s volatility. Given BTC’s volatility (45%-70% annualized), which is 3-5 times that of gold, a reasonable risk weight should be between 300% and 500%, not 1,250%.

Loan portfolio: Completely lacks transparency. Without information on borrowers, maturities, or collateral, a conservative estimate would assign a 100% risk weight.

Calculating Tether’s True Capital Adequacy Ratio

Based on Basel standards, two key metrics need to be calculated:

1. The range of Risk-Weighted Assets (RWA)

Depending on how Bitcoin is treated:

• Conservative scenario (BTC fully reserved): RWA approximately $175.3 billion
• Moderate scenario (BTC risk weight 400%): RWA approximately $62.3 billion
• Optimistic scenario (BTC risk weight 200%): RWA approximately $62.0 billion

2. The assessment of the Total Capital Ratio (TCR)

Using Tether’s net assets of $680 million divided by RWA:

• Conservative scenario: TCR = 3.87%
• Moderate scenario: TCR = 10.89%
• Optimistic scenario: TCR = 10.96%

According to Basel’s minimum standards, TCR should be at least 8%. Globally systemically important banks typically maintain levels of 15%-18%.

Tether’s Capital Shortfall

Under the moderate conservative assumption (BTC risk weight 400%), Tether’s TCR is about 10.89%, just above Basel’s minimum requirement.

But compared to the actual standards of large global banks, Tether should maintain a 12%-15% level. This implies:

Tether needs to raise approximately $4.5 billion in additional capital to reach industry-average levels.

How is this figure derived? To reach a 12% TCR, with RWA of $62.3 billion, the required capital is about $7.48 billion. Currently, Tether has only $680 million, so the shortfall is about $6.8 billion. Even with more lenient assumptions, at least $4.5 billion additional capital is needed.

Is Tether’s Profit Buffer Sufficient?

Tether’s response points to the group’s profits. According to the latest data:

• Full-year 2024 net profit exceeds $13 billion
• Profits in the first three quarters of 2025 exceed $10 billion
• The group’s overall equity exceeds $20 billion

These figures seem substantial. But the key question is: Do these profits legally constitute a risk buffer for USDT holders?

The answer is ambiguous. Tether employs an “asset segregation” structure: the reserves backing USDT are legally separated from the group’s other investments (renewable energy, Bitcoin mining, AI, real estate, gold mining, etc.). While Tether can transfer profits to the USDT entity during crises, this is not a legal obligation.

In other words, the $20 billion in group equity functions more like an “implicit buffer” rather than a “legal guarantee.”

Conclusion: Balancing Risks and Reality

From a strict Basel perspective, Tether just meets the minimum standards but falls well below industry norms. In practice, its massive group profits provide an additional safety margin.

The core issue is not “Will Tether default,” but “Under what conditions is Tether’s capital buffer sufficient to withstand extreme scenarios?”

If you require Tether to meet the capital standards of large global financial institutions, then the $4.5 billion shortfall is real. But considering its unique market position and profit-generating capacity, this gap may not be fatal—at least in the near term.

Ultimately, the assessment depends on investors’ confidence in Tether’s management risk commitments, which is precisely why Tether, as a “controversial stablecoin,” has always been unable to escape doubt.