S&P Downgrades Tether to Lowest Stability Rating Amid Bitcoin Risk Concerns

S&P Global Ratings delivered its harshest assessment yet of USDT on Wednesday, downgrading the world's largest stablecoin to "weak"—the lowest possible rating on its five-point scale. The downgrade stems from Tether's growing exposure to volatile assets like Bitcoin and persistent transparency gaps that the rating agency says could threaten the stablecoin's ability to maintain its dollar peg.

The assessment represents a significant escalation in scrutiny for Tether, which maintains over $184 billion in circulation and dominates roughly 71% of the global stablecoin market. S&P's Stablecoin Stability Assessment dropped USDT from "4 (constrained)" to "5 (weak)," placing it in the same category as TrueUSD, which has lost access to nearly all its reserves.

Bitcoin Exposure Exceeds Safety Buffer

The core concern driving the downgrade centers on Tether's Bitcoin holdings, which now represent 5.6% of USDT in circulation, exceeding the company's 3.9% overcollateralization margin. This marks the first time Bitcoin exposure has surpassed Tether's safety buffer, creating a scenario where a material decline in Bitcoin's value could leave USDT undercollateralized.

According to S&P's analysis, Tether's high-risk assets now comprise 24% of total reserves, up from 17% a year earlier. These assets include Bitcoin, gold, secured loans, corporate bonds, and other investments that carry credit, market, interest-rate, and foreign-exchange risks.

The Financial Times recently reported that Tether has become the world's largest independent holder of gold, further highlighting the company's shift toward non-traditional reserve assets.

Transparency Concerns Persist

Beyond asset composition risks, S&P flagged ongoing gaps in disclosure around reserve management. The rating agency noted that Tether provides limited information about the creditworthiness of its custodians, counterparties, or banking providers, despite its massive scale of operations.

Unlike competing stablecoins, Tether publishes quarterly rather than monthly reports, and the available documentation lacks detailed breakdowns of asset types and risk exposure. S&P also highlighted the absence of public information ensuring that reserve assets are legally protected in case of issuer insolvency.

Tether's Defiant Response

Tether CEO Paolo Ardoino responded forcefully to the downgrade, posting on X: We wear your loathing with pride. The classical rating models built for legacy financial institutions historically led private and institutional investors to invest their wealth into companies that despite being attributed investment grade… collapsed pushing worldwide regulators to challenge such models.

In an official statement, Tether said it strongly disagrees with the characterization presented in the report, emphasizing its track record of withstanding banking crises, exchange failures, and extreme market volatility while maintaining full stability and redeemability.

The company pointed to its $10 billion in profits over the first three quarters of 2025 and $13 billion profit in 2024 as evidence of its financial strength. Tether also noted its role as systemically important financial infrastructure in emerging markets.

Market Implications and Competitive Landscape

Despite the downgrade, USDT has maintained notable price stability even during recent crypto market volatility, as S&P acknowledged. The stablecoin continues trading at its intended $1 peg and processed billions in redemptions while maintaining uninterrupted stability during recent market stress.

However, the assessment creates a stark contrast with Tether's main competitor. Circle's USDC maintains an S&P rating of "2 (strong)", significantly outperforming USDT's new "weak" designation despite having less than half the market capitalization at approximately $75 billion.

The downgrade comes as regulators worldwide increase scrutiny of stablecoins. The recent passage of the GENIUS Act in the United States requires stablecoin issuers to hold 1:1 backing with short-term U.S. government bonds and liquid assets, which may influence Tether's reserve strategy in coming months.

Broader Crypto Market Impact

The assessment highlights growing institutional concerns about stablecoin reserve quality as these digital assets become more embedded in global financial markets. S&P's increasing focus on bitcoin-linked liquidity risk recently extended to other crypto companies, with Michael Saylor's MicroStrategy receiving a B-minus credit rating due to its heavy Bitcoin exposure.

For the broader cryptocurrency ecosystem, Tether's dominance means any stability concerns could have far-reaching implications. USDT serves as the primary trading pair and liquidity source across most crypto exchanges and DeFi protocols, making its health critical to market functioning.

XRP and Stablecoin Market Dynamics

While the S&P downgrade doesn't directly impact XRP or Ripple, it underscores broader stablecoin market dynamics that could influence the crypto ecosystem. Ripple has been expanding its own stablecoin initiatives, including partnerships with Circle to bring USDC to the XRP Ledger and its $200 million acquisition of Rail, a stablecoin payments platform.

These developments could potentially benefit alternative stablecoin infrastructures like those built on XRP Ledger, especially if regulatory pressure or stability concerns drive institutions to seek more transparent and compliant alternatives to USDT.

Regulatory and Technical Challenges Ahead

S&P indicated that Tether's rating could improve if the company reduces its allocation to high-risk assets and provides fuller disclosures about reserve composition and banking relationships. However, such changes would require fundamental shifts in Tether's business model and reserve management strategy.

The rating agency's framework evaluates stablecoin depegging risks and structural resilience, considering factors including reserve quality, governance, transparency, liquidity, and regulatory environment. Tether's incorporation in El Salvador, while providing regulatory clarity, remains less robust than U.S. or EU frameworks according to S&P's assessment.

Conclusion

S&P's downgrade of USDT to "weak" signals growing institutional scrutiny of stablecoin reserve practices and transparency standards. While Tether maintains its market leadership and operational stability, the assessment highlights fundamental questions about risk management in a rapidly evolving regulatory landscape.

The confrontation between Tether and S&P represents broader tensions as traditional financial institutions grapple with crypto-native business models. Whether Tether can address these concerns while maintaining its market position will likely influence the broader stablecoin sector's evolution and regulatory treatment.

For investors and institutions relying on stablecoins, the downgrade underscores the importance of understanding reserve compositions and transparency practices when evaluating digital dollar alternatives.

Sources

1. Reuters - S&P cuts Tether stablecoin rating to 'weak' on disclosure gaps
2. Bloomberg - Tether Stablecoin Stability Rating Reduced to 'Weak' at S&P
3. The Block - Tether's USDT stability score cut to 'weak' level
4. DL News - S&P downgrades Tether's stability rating to 'weak'
5. Decrypt - S&P Downgrades Tether's USDT Stability to 'Weak'
6. CryptoBreaking - S&P Global Downgrades Tether's Stablecoin Stability Assessment
7. TheStreet - S&P downgrades Tether to lowest rating
8. Crypto Briefing - Tether fires back at S&P after USDT downgraded

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