S&P warns Bitcoin slide could leave USDT undercollateralized

On Wednesday, S&P Global Ratings downgraded Tether’s USDT stability assessment to “weak” from “constrained,” citing rising exposure to higher-risk assets and limited transparency. The agency cautioned that a drop in Bitcoin’s price could leave USDT undercollateralized.

The revised view reflects an increase over the past year in reserve holdings such as Bitcoin, gold, secured loans, and corporate bonds, along with limited clarity on reserve composition and counterparties, according to the report.

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

Stablecoins are designed to hold near $1 by maintaining reserves such as cash and short-term government debt. The assessment focused on the mix and transparency of those reserves and on market risks if volatile assets in the portfolio fall in value.

Bitcoin is heading for its worst monthly performance since 2022 amid a wider crypto selloff. Despite the decline, USDT’s circulating supply grew by about $1 billion in November to $184.4 billion, data show.

The report highlighted limited information on the credit quality of custodians, counterparties, and banking providers. Other weaknesses include limited transparency on reserve management, the absence of asset segregation to protect reserves if the issuer becomes insolvent, and restrictions on redeeming USDT directly with Tether.

As we reported earlier, Tether CEO Paolo Ardoino told the Future Investment Initiative in Riyadh that 500 million people use USDT. He added that Tether is expanding beyond stablecoins, noting that the company invested in gold mining and launched an open-source wallet kit for AI developers.