S&P's Tether Downgrade: Risky Reserves vs. CEO's Innovation Defense

S&P Global Ratings has downgraded Tether's USDT stablecoin to the lowest tier on its stability scale, citing increased exposure to high-risk assets and transparency concerns. The agency assigned USDT a "weak" rating of 5, down from "constrained" (4), in a report published Wednesday. According to S&P Global, the downgrade reflects a shift in Tether's reserve composition, with Bitcoin now accounting for 5.6% of circulating USDT-exceeding the company's stated 3.9% overcollateralization buffer-and gold, secured loans, and corporate bonds comprising additional volatile holdings. S&P warned that a decline in the value of these assets could leave USDT undercollateralized, undermining its 1:1 peg to the U.S. dollar.

Tether CEO Paolo Ardoino responded defiantly, dismissing the downgrade as a reflection of "loathing" from traditional finance toward digital assets. In a statement on X, he framed the criticism as part of a broader resistance to innovation, asserting that Tether's model-described as the "first overcapitalized firm in the financial industry"-operates independently of conventional banking structures. Ardoino highlighted the company's profitability and resilience through past market crises, arguing that S&P's assessment relies on outdated frameworks unsuited for digitally native money.

The ratings agency emphasized persistent gaps in Tether's disclosure practices, including limited transparency around custodians, counterparties, and reserve management. While USDT's reserves include $113 billion in short-term U.S. Treasury bills, the lack of asset segregation and robust regulatory oversight raises red flags for S&P. The firm noted that Tether's reserves could improve if the company reduces exposure to high-risk assets and provides clearer disclosures.

The downgrade has sparked reactions across global markets, particularly in China, where USDT is a cornerstone of the underground crypto ecosystem. Over 20 million participants rely on the stablecoin for trading, despite the 2021 ban on crypto transactions. Chinese traders expressed skepticism and anxiety on social media platforms, with some dismissing the downgrade as routine noise and others fearing systemic risks in the absence of official safeguards according to market analysts.

Tether's market capitalization remains robust at $184 billion, according to CoinGecko, underscoring its dominance despite regulatory scrutiny. The company has previously faced lawsuits over reserve transparency and is currently seeking an independent audit by one of the Big Four accounting firms.