Tether stablecoin stability rating reduced to ‘weak’ at S&P

[LONDON] The ability of Tether’s USDT stablecoin to maintain its peg to the US dollar has been downgraded to the lowest rating by S&P Global Ratings, which warned that a drop in Bitcoin’s value could leave the stablecoin undercollateralised.

The token was awarded a stability rating of “weak” by analysts at the ratings firm on Wednesday (Nov 26), down from “constrained” previously. S&P said its assessment “reflects the rise in exposure to high-risk assets in USDT’s reserves over the past year”, including Bitcoin, gold, secured loans and corporate bonds, as well as limited disclosure.

“Bitcoin now represents about 5.6 per cent of USDT in circulation, exceeding the 3.9 per cent overcollateralisation margin, indicating the reserve can no longer fully absorb a decline in its value,” Rebecca Mun and Mohamed Damak wrote in the report. “A drop in Bitcoin’s value combined with a decline in value of other high-risk assets could therefore reduce coverage by reserves and lead to USDT being undercollateralised.”

Stablecoins are cryptocurrencies that aim to track the price of another asset, typically the US dollar. Issuers maintain reserves of assets such as cash and short-term government debt to help support that peg.  

A crash in Bitcoin’s price this month has left the asset on track for its worst monthly performance since a string of bankruptcies rocked the crypto sector in 2022. Circulation of Tether’s USDT, meanwhile, increased by around US$1 billion in November to US$184.4 billion, data from CoinGecko show.

Tether also provides limited information on the creditworthiness of its custodians, counterparties or bank account providers, Mun and Damak said. Other weaknesses include limited transparency on reserve management, no asset segregation to protect against the issuer’s insolvency and limitations to redeeming USDT with Tether directly.

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“Tether strongly disagrees with the characterisation presented in the report, which applies a legacy framework that fails to capture the nature, scale, and macroeconomic importance of digitally native money and overlooks data that clearly demonstrate USDT’s resilience, transparency, and global utility,” Tether said in a statement.

It added that it has published quarterly independent attestations on its reserves since 2021 and has never refused a redemption request from a verified user. BLOOMBERG