S&P Global Ratings has downgraded Tether's USDT stablecoin's ability to maintain its peg to the U.S. dollar to the lowest possible rating, citing increased exposure to riskier assets in its reserves and persistent transparency gaps. The agency lowered USDT's stability rating from "constrained" to "weak," the lowest level on its scale, issuing a warning that a decline in Bitcoin's value could lead to undercollateralization risks for the stablecoin.

The downgrade reflects S&P's concerns about the composition of USDT's reserves. The rating agency pointed out that Tether's reserves increasingly include assets beyond traditional U.S. dollar cash equivalents, such as Bitcoin, gold, secured loans, and corporate bonds. S&P noted that these assets, while potentially offering higher returns, come with "limited disclosures" and are "subject to credit, market, interest-rate, and foreign-exchange risks".

A key concern highlighted by S&P is the growing proportion of Bitcoin within USDT's reserves. The agency stated that Bitcoin now represents approximately 5.6% of USDT in circulation, exceeding the 3.9% overcollateralization margin. This implies that the reserves may no longer be sufficient to fully absorb a decline in Bitcoin's value. S&P cautioned that a drop in Bitcoin's value, combined with losses in other higher-risk holdings, could reduce reserve coverage and potentially lead to USDT becoming undercollateralized.

Beyond the asset composition, S&P also raised concerns about the limited transparency surrounding Tether's reserve management, risk appetite, custodians, counterparties, and bank account providers. The agency also cited the lack of a robust regulatory framework, the absence of asset segregation to protect against Tether's insolvency, and limitations to USDT's primary redeemability as additional weaknesses posing risks to USDT's dollar peg.

Tether, the company behind USDT, has disputed S&P's assessment. A Tether spokesperson stated that S&P applied "a legacy framework that fails to capture the nature, scale, and macroeconomic importance of digitally native money" and that the rating agency "overlooks data that clearly demonstrate USDT's resilience, transparency, and global utility". Tether has emphasized that it holds sufficient reserves in U.S. Treasuries and other assets to allow token-holders to swap their tokens back for dollars.

Despite the downgrade, USDT remains the dominant stablecoin in the cryptocurrency market, with a circulating supply of nearly $185 billion. Its closest competitor, Circle's USDC, has a market capitalization of under $75 billion. Tether reported substantial profits in the first nine months of the year, exceeding $10 billion, with significant holdings in gold and Bitcoin.

S&P's stablecoin stability assessment scale, introduced in 2023, ranges from 1 to 5, with 5 being the weakest. This rating places Tether in the same category as TrueUSD. S&P's assessment could improve if Tether reduces its exposure to high-risk assets and provides fuller disclosures about its reserve composition and the creditworthiness of its banking and custody partners.