S&P Downgrades USDT Rating, Warns of Peg Risk

S&P Global Ratings’ downgrade centers on what it identifies as fundamental weaknesses in Tether’s reserve management and transparency. The agency specifically highlighted the inclusion of Bitcoin and other “high-risk assets” in the reserves backing USDT, warning that a significant drop in their value could render the stablecoin undercollateralized. This means there might not be enough valuable assets to cover the value of all USDT tokens in circulation, directly threatening the dollar peg that is central to its function.

Beyond asset risk, S&P pointed to a persistent lack of clarity regarding Tether’s operational framework. The report criticized the “limited transparency on reserve management and risk appetite,” the “lack of a robust regulatory framework,” and the failure to provide clear information on the creditworthiness of its custodians, counterparties, and bank account providers. Crucially, S&P noted the absence of asset segregation, which would protect USDT holders in the event of Tether’s insolvency, and limitations on the token’s primary redeemability.

Tether responded to the downgrade with a statement of strong disagreement, defending its operational history and resilience. The company emphasized that USDT “has operated for more than a decade and has consistently maintained full resilience through banking crises, exchange failures, liquidity shocks, and extreme market volatility.” A key pillar of its defense is the claim that it has “never refused a redemption request from a verified user” throughout its history, positioning itself as a reliable pillar in the often-volatile crypto market.

Tether’s CEO, Paolo Ardoino, took a more confrontational stance on social media, framing the downgrade as a badge of honor. “We wear your loathing with pride,” he wrote, directly challenging the credibility of traditional rating models. Ardoino argued that these legacy models have historically failed, having assigned investment-grade ratings to companies that subsequently collapsed, a point that resonates in a post-2008 financial crisis world. A Tether spokesperson further argued that the rating was disconnected from reality, pointing to increasing USDT adoption as evidence of its utility and trust among users.

The scrutiny of USDT carries significant weight due to its dominant position in the cryptocurrency ecosystem. With a daily trading volume of $76.9 billion, USDT is the most-traded digital coin and the third-largest by market capitalization. As a stablecoin, it serves as the primary on-ramp and off-ramp for traders moving in and out of crypto positions without relying on traditional banks, effectively acting as the backbone of the digital asset economy. Any instability in its peg could therefore trigger widespread contagion across crypto markets.

This is not a hypothetical risk. The provided text recalls the 2023 de-pegging of USDC, the stablecoin issued by Circle, which fell to 87 cents after it was revealed that $3.3 billion of its reserves were held at the failing Silicon Valley Bank. More catastrophically, the 2022 collapse of the Terra ecosystem, which included its algorithmic stablecoin UST, erased $40 billion from the market and triggered a cascade of bankruptcies. These events underscore the systemic importance of stablecoin stability and the real-world consequences when that stability fails, putting S&P’s warning and Tether’s defense into a high-stakes context.