S&P casts doubt on Tether’s stability, USDT reserves

In its newly introduced Stablecoin Stability Assessment, Tether, the world’s largest stablecoin by market capitalization, received a score of 4 out of 5, indicating a “constrained” capability. A score of 1 represents the strongest ability to maintain value relative to a fiat currency.

S&P’s evaluation system, designed to assess the stability of stablecoins in the cryptocurrency market, aims to gauge their ability to maintain a stable value against traditional currencies. This assessment is particularly noteworthy as stablecoins like Tether are crucial in bridging the crypto and traditional financial systems, acting both as digital payment methods and as alternatives to fiat currencies in crypto transactions.

“The quality of the assets backing the stablecoin is a critical driver of the final assessment. Weaknesses in other areas, including regulation and supervision, governance, transparency, liquidity and redeemability, and track record, contributed to those stablecoins with lower assessments,” S&P wrote.

The assessment highlighted concerns regarding Tether’s reserve transparency and risk appetite. Tether’s USDT, despite being the most widely used stablecoin with a market cap of $90 billion, scored lower than its competitors. In contrast, Circle’s USDC, the second-largest stablecoin with a $24 billion market cap, along with Gemini dollar (GUSD) and Pax Dollar (USDP), received a score of 2, denoting a “strong” rating.

“The riskier assets making up 15% of the collateralization ratio comprise corporate bonds, precious metals, bitcoin, secured loans, and other investments. Our asset assessment of 4 (constrained) reflects a lack of information on entities that are custodians, counterparties, or bank account providers of USDT’s reserves,” adds the report.

S&P notes that a big portion of Tether’s reserves consists of “low-risk assets,” primarily short-term U.S. treasuries. However, Tether doesn’t disclose details about the custodians, counterparties, or banks associated with these assets, which raises concerns about transparency.

The report also identifies shortcomings in Tether’s operations, including the absence of a clear regulatory framework governing its operations, limitations on primary redeemability, and a lack of asset segregation.

The implications of S&P’s assessment on investment decisions, particularly among highly regulated traditional finance (TradFi) firms, remains to be seen. TradFi firms often rely on the transparency of stablecoin operators, and USDC has been viewed as a more transparent option compared to USDT, given its more frequent reporting on reserve holdings and composition.