S&P Global Ratings has downgraded its assessment of Tether’s reserve assets to its lowest rating, raising fresh questions about the world’s largest stablecoin operator’s ability to maintain its dollar peg amid increasing exposure to volatile investments.
Reserve Quality Downgraded to Lowest Level
The credit rating agency announced on Wednesday it had lowered Tether’s asset assessment to “weak” from “constrained”, citing a significant increase in high-risk holdings backing the $184 billion USDT stablecoin.
According to S&P’s analysis, corporate bonds, precious metals, bitcoin and secured loans now account for 24% of Tether’s total reserves as of September, up from 17% a year earlier. This shift represents a substantial move away from the low-risk government securities that traditionally form the backbone of stablecoin reserves.
USDT operates as a form of digital cash pegged to the US dollar, theoretically allowing users to exchange one USDT token for one dollar at any time. The stablecoin is primarily backed by US Treasury securities and other assets held in reserve by Tether Holdings.
Transparency Concerns Remain Central Issue
S&P highlighted persistent transparency issues in its downgrade rationale, warning that Tether maintains “limited transparency on reserve management and risk appetite, lack of a robust regulatory framework [and] no asset segregation to protect against the issuer’s insolvency.”
The rating agency specifically noted Tether’s failure to disclose key operational details, including the identity of its custodians, bank account providers and counterparties. S&P also flagged the absence of clear policies on how the company selects risky assets or manages potential losses if asset values decline sharply.
“A decline in the price of bitcoin or the value of other higher-risk assets could therefore reduce collateral coverage and result in USDT becoming under-collateralised,” S&P analysts wrote. The rising allocation to volatile assets exposes the reserves “to greater market fluctuations,” they added.
While US Commerce Secretary Howard Lutnick has previously stated that Cantor Fitzgerald, where he formerly served as chief executive, custodies Tether’s Treasury holdings, S&P noted that official reserve reports still omit custodian, counterparty and banking information.
Tether Disputes S&P Assessment
Tether responded forcefully to the downgrade, stating it “strongly disagrees with the characterisation presented in the report.” The company emphasised that USDT “has consistently maintained full resilience through banking crises, exchange failures, liquidity shocks and extreme market volatility.”
The stablecoin issuer also defended its disclosure practices, claiming it “leads the industry in transparent reserve reporting, publishing real-time data and quarterly independent attestations since 2021 — standards that exceed those of many regulated financial institutions.”
However, Tether continues to publish attestations reviewed by BDO Italia rather than full audits of its reserves, despite CEO Paolo Ardoino previously identifying hiring an auditor as a top priority.
Financial Performance and Future Plans
Tether ranks among the world’s largest holders of US Treasury securities, which comprise 75% of its collateral, down from 81% in S&P’s previous review. The company generated $10.1 billion in net profits through September this year, primarily by earning interest on its Treasury holdings.
In September, the El Salvador-based company entered discussions to raise up to $20 billion in a private funding round that would value the business at $500 billion.
Since its founding eleven years ago, Tether has faced persistent questions regarding disclosure quality and operational transparency. The company operates in a regulatory grey area, lacking the comprehensive oversight that applies to traditional financial institutions offering similar services.
The S&P downgrade adds to mounting pressure on stablecoin issuers to improve transparency and adopt more conservative reserve management practices as regulators worldwide consider formal frameworks for this rapidly growing sector of digital finance.
