Article Authors: May P, Janus R

Source: CoinFound

About CoinFound: CoinFound is a TradFi Crypto data technology company aimed at institutional and professional investors, providing services such as RWA asset data terminals, RWA asset ratings, Web3 risk relationship maps, AI analysis tools, and customized data. From data integration and risk identification to decision support, it helps institutions acquire key intelligence and transform it into actionable insights at lower costs and higher efficiency, building a global RWA underlying infrastructure.

Takeaway

• USDT Rating Downgrade and Controversy: The proportion of non-pegged assets (such as BTC and gold) in USDT reserves has reached about 24%, coupled with insufficient governance and transparency, leading to its perception as an increased risk within traditional financial frameworks, resulting in a rating downgrade. The downgrade of USDT's rating has sparked controversy.
• Tether Significantly Increases Gold and Bitcoin Ratio: In response to inflation hedging, asset diversification, reducing single exposure to the dollar, and enhancing returns, Tether has continuously increased the proportion of gold and Bitcoin reserves in recent years.
• The Nature of the Discrepancy Between S&P and Tether: Traditional finance's risk perception prioritizes "repayment capability," focusing on "the ability to liquidate reserves under extreme runs"; whereas Tether emphasizes "market liquidity first" and long-term value preservation and risk resistance (especially against inflation risk). The dimensions of risk assessment between the two are fundamentally different.
• Strategic Intent of Tether's Reserve Transformation: Tether's reserve model is shifting from a "1:1" cash equivalent reserve to a mixed model of "hard assets (gold) + digital assets (BTC) + low-risk assets (U.S. Treasuries)." Essentially, this is a transformation from a "stablecoin issuer" to a "global liquidity provider + digital asset reserve institution," driven by inflation hedging demand, pro-cyclical yield enhancement (e.g., the anticipated BTC/gold bull market in 2025), and de-dollarization strategies. In fact, Tether is becoming more like a "shadow central bank" rather than a simple stablecoin issuer.
• Limitations of the Current Rating System: S&P's "stability rating" covers "repayment risk" but fails to address investors' demands for Tether's "asset appreciation capability" and "cyclical resilience." The market may require more dimensions of risk rating information in the future, and perhaps a dual-framework model of "stability rating (regulatory + repayment) + investment risk rating (returns + cycles)" to bridge the risk perceptions of traditional and crypto finance.
• Short-term Risks and Long-term Trends of USDT: The anchoring stability of USDT is still supported by on-chain liquidity. However, in the short term, the 24% high-volatility assets (BTC/gold/loans) in reserves may expose risks during the 2026 rate cut cycle and potential crypto bear market (in 2025, Tether's balance sheet showed huge unrealized gains from holding gold and Bitcoin reserves, but the situation may change in 2026). In the long term, the trend of "central bankization" of stablecoins (anti-inflation assets + global networks + energy) will drive the industry towards "transparency + standardization."

1. Event Review: The Controversy and Nature of S&P's Downgrade of USDT

1.1 Event Timeline and Core Contradictions

In November 2025, S&P Global downgraded USDT's "asset/stability assessment" from "constrained" to "weak," with two core reasons:

• Reserve Structure Risk: The proportion of high-volatility assets (BTC, gold, loans, etc.) in Tether's reserves has reached 24% (only 12% in 2023), and such assets cannot be quickly liquidated in a "panic run" scenario;
• Insufficient Governance Transparency: Key custodian information and details of on-chain collateral isolation mechanisms were not disclosed, and only "quarterly assurance reports" were provided instead of complete independent audits.

Tether's counterattack focused on "actual market performance" and questioned the rating methods from the traditional financial system:

• Historical Resilience: USDT maintained its peg during eight extreme events, including the FTX collapse in 2022, the Silicon Valley Bank crisis in 2023, and tightening crypto regulations in 2024;
• Leading Transparency: Since 2021, Tether has provided "real-time reserve data" (checkable on-chain addresses), with quarterly assurance reports covering over 95% of assets, outperforming some traditional money market funds.

(Figure 1: Review of the USDT Rating Downgrade Event)

1.2 The Essence of the Discrepancy: A Collision of Two Risk Measurement Systems

In November 2025, S&P Global Ratings downgraded USDT's stability assessment to the lowest level of "weak." Tether immediately publicly countered, accusing S&P of "using an outdated framework" and ignoring the multiple extreme stress tests USDT has endured over the past decade. This debate is not just a rating controversy but a direct collision of two financial civilizations.

• S&P represents: "Regulation - Capital Adequacy - Repayment Capability"
• Tether represents: "Market Liquidity - Global Trading Demand - On-chain Instant Settlement"
• The ways in which these two measure risk are fundamentally different, making consensus impossible. The dispute between S&P and Tether appears to be a "stability rating" verbal battle, but fundamentally, it reflects two entirely different understandings of risk.
• S&P and Tether come from different backgrounds: one from 100 years of traditional finance, the other from 10 years of on-chain high-frequency markets. S&P uses the logic of "central banks - banks - money market funds"; Tether relies on the logic of "on-chain liquidity - perpetual leverage - insurance funds - automatic liquidation."

The logic represented by Tether is currently not adoptable by traditional financial markets.

1.3 What S&P Sees: The Repayment Logic of Traditional Finance

In the cognitive framework of traditional finance, all "1:1 redeemable instruments" (money market funds, commercial banks, stablecoins) must meet two hard conditions:

1. Reserve assets must be highly secure and immediately liquidable: S&P pointed out in its report that the proportion of BTC, gold, and loan-type assets in Tether's reserves has exceeded 20%, and these assets are volatile with long liquidation cycles, which may not be quickly sold at face value in a "panic run" scenario.

2. Governance structure must be transparent, and custodial arrangements must be penetrable: S&P believes that Tether's custodian information, on-chain collateral isolation, and risk disclosures are still insufficient.

In other words, in S&P's world: the key risk of a "stablecoin" lies in whether it can withstand the moment when everyone comes to redeem it. This is the repayment stability of the traditional system.

1.4 Tether Insists on: The Liquidity Logic of the Crypto World

If the stability of TradFi comes from "whether reserves are sufficient, fast enough, and secure enough," then Tether's stability comes from "whether I can maintain massive liquidity on-chain, whether the risks of the perpetual market can be absorbed, and whether the secondary market can maintain price anchoring." In other words:

• TradFi measures stability in terms of repayment capability, while Crypto measures stability in terms of market liquidity + liquidation stability.
• Tether's decade-long record (including multiple panic scenarios) indeed shows that USDT's de-pegging is often not due to "insufficient reserves," but rather "temporary imbalances in secondary market liquidity," which are quickly corrected each time.

Why does Tether strongly counter? Because it adheres to a different set of "market logic." Tether's response emphasizes three points:

1. USDT has maintained a 1:1 peg under all extreme emotions: This includes multiple exchange collapses, rapid interest rate hikes by the Federal Reserve, regulatory tightening, and bank run events. From Tether's perspective, "I am not theoretically stable; I have operated for ten years without de-pegging. The true rating of a stablecoin is given by the market every day, not by models."

2. Real-time reserve data + quarterly assurance reports are sufficiently transparent: Tether believes it has outperformed some traditional shadow banks or MMFs. However, S&P does not recognize the form of "real-time web disclosure" because its methodology considers "unaudited transparency as credible transparency."

3. BTC/gold are "anti-inflation assets + strategic reserves," not high-risk exposures: The significant rise in BTC and gold in 2025 has led Tether to achieve enormous unrealized gains (over $10 billion). This effectively forms a "hard asset + U.S. Treasuries + loans + digital assets" mixed central bank-like model. Tether's worldview is "I am like a central bank's reserves; my structure is not the traditional dollar system but a new global asset basket." However, S&P's worldview is "you are not a central bank; you are merely a token issuer promising 1:1 redemption."

1.5 Why is There a Complete Conflict in Understanding "Risk" Between Both Parties?

This reveals a key fact: the logic of risk-bearing in the crypto market and TradFi is completely different.

• Arthur Hayes published an article on perpetual contracts on November 27, which is a typical example of how traditional finance and crypto finance cannot currently merge. In traditional finance (TradFi), the risk of forward contracts comes from "infinite liability." In TradFi, if liquidation is not timely, positions are liquidated, and investors lose to negative numbers, they need to continue to supplement funds (Margin Call), even using all personal assets to repay debts. Therefore, TradFi must require reserves of "extremely high-quality assets"; any volatility is unacceptable.
• However, in crypto finance (Crypto), risk is borne by "insurance funds + automatic liquidation + ADL." This is because in crypto perpetual contracts, losses do not incur unlimited liability for traders. In the crypto financial system, liquidation surpluses replenish insurance funds, liquidation fees are injected into insurance funds, ADL (automatic deleveraging) provides a safety net, and exchanges use their own funds to supplement. The end result is that crypto users can lose at most their margin but will not incur debt. Thus, the crypto market can accept high-volatility assets more readily because there is a market structure to back it up.

This is the essence of the disagreement between S&P and Tether: S&P measures the risk of TradFi, which is "if everyone comes to redeem, can you pay out?" Tether addresses the risk of Crypto, which is "in a 7 x 24 high-volatility market, can I guarantee trading, liquidity, and global high-frequency usage?" The two are not measuring systems of the same dimension.

2. Tether's Reserve Transformation: The Strategic Logic from "Stablecoin" to "Shadow Central Bank"

2.1 Time Series Changes in Reserve Structure (2023-2025)

2.2 Why Increase the Proportion of BTC and Gold? Balancing Pro-Cyclical Returns and Long-term Strategy

Tether's reserve structure transformation (2023-2025) is not random but a "triple consideration of returns - risks - strategy":

1. Inflation Hedging Demand: The Federal Reserve's interest rate hikes from 2022 to 2024 have led to a decline in the purchasing power of the dollar (U.S. CPI rose from 2% to 8%), making gold (a traditional inflation hedge) and BTC (digital gold) core assets for hedging inflation;

2. Pro-Cyclical Yield Enhancement: In 2025, the price of BTC rose from $40,000 to $65,000 (an increase of 62.5%), and gold rose from $1,900/ounce to $2,500/ounce (an increase of 31.6%), with Tether's unrealized gains accounting for 70% of its net profit ($10 billion) in the first nine months of 2025 (interest from U.S. Treasuries contributed only $3 billion);

3. De-Dollarization Strategy: Tether's proportion of dollar reserves decreased from 75% in 2023 to 55% in 2025, reducing exposure to a single dollar asset by increasing the proportion of gold and BTC (to address the U.S. debt ceiling crisis and the global trend of de-dollarization).

2.3 The "Sweetness and Hidden Dangers" of Profit Structure: Risks Under Pro-Cyclical Conditions

Tether's performance in 2025 (net profit exceeding $10 billion in the first nine months) appears impressive, but its profit structure is highly dependent on the "bull market cycle":

• Stable Income: Interest income from approximately $135 billion in U.S. Treasuries (with a 1-year yield of about 2.2% in 2025) contributes about $3 billion;
• Floating Income: Unrealized gains from BTC (about 100,000 coins) and gold (about 10 million ounces) contribute about $7 billion (corresponding to BTC rising $25,000/coin and gold rising $600/ounce).

Risk Transmission Mechanism:

• If the Federal Reserve cuts interest rates by 25 basis points in 2026 (market consensus), Tether's interest income from U.S. Treasuries will decrease by $325 million/year ($135 billion * 0.25%);
• If the price of BTC drops by 20% (returning to $52,000) and gold drops by 10% (returning to $2,250/ounce), Tether's unrealized gains will shrink by about $2.5 billion (BTC depreciation of $250 million + gold depreciation of $2.5 billion);
• If the crypto market enters a bear market (as in 2022), the issuance of stablecoins will contract (in 2022, USDT issuance fell from $80 billion to $60 billion), and Tether's U.S. Treasury holdings will decrease, further compressing interest income.

2.4 The Ultimate Goal of Strategic Transformation: From "Stablecoin" to "Shadow Central Bank"

By tracking Tether's on-chain addresses and business layout, we find that it has surpassed the positioning of a "stablecoin issuer" and is building a "shadow central bank" system of "anti-inflation asset reserves + global stablecoin issuance + on-chain distribution network + energy":

• Anti-Inflation Asset Reserves: BTC and gold account for 24%, corresponding to "central bank foreign exchange reserves";
• Global Stablecoin Issuance: USDT accounts for 70% of the total stablecoin trading volume in on-chain transactions across 150 countries, corresponding to "central bank fiat currency issuance";
• On-Chain Distribution Network: Collaborating with over 200 exchanges/DeFi protocols like Binance and Uniswap to achieve global instant transfers of USDT;
• Energy Layout: Investing $1 billion in Bitcoin mining farms (accounting for 5% of global hash rate in 2025) to hedge against energy costs of BTC mining.

2.5 Market Performance: USDT's Anchoring Stability and Liquidity

• Anchoring Deviation: From 2023 to 2025, the price deviation of USDT (the price difference with the dollar) averaged only 0.02%, far lower than USDC (0.05%) and DAI (0.1%);
• On-Chain Liquidity: The liquidity pool of USDT on Uniswap V3 reached $5 billion (only $1 billion in 2023), with market makers' bid-ask spreads stabilizing within 0.01%;
• Institutional Holdings: The proportion of USDT held by institutions increased from 15% in 2023 to 30% in 2025, indicating that institutions view USDT as "a combination tool with liquidity and asset appreciation (rather than a pure stablecoin)."

3. Future Outlook: The Evolution Direction of the Stablecoin Rating System

3.1 Limitations of the Current Rating System: Only Covers Repayment Risk

S&P's stability rating addresses the issue of whether stablecoins can be redeemed, but fails to respond to the core demands of institutional investors:

• Quality of Returns: Is Tether's profit sustainable? (e.g., decline in returns after U.S. Treasury rate cuts)
• Exposure Risk: Is the proportion of BTC and gold too high? (e.g., impact of a 20% drop in BTC on reserves)
• Operational Risk: Is Tether's governance transparent? (e.g., safety of custodial assets)

3.2 Beyond the Current Rating System

In the future, the crypto market may require a more comprehensive rating system that not only focuses on repayment and stability. The potential rating design may include:

Stability Rating (Upgrade of Existing Framework)

• Core Indicators: "Safety factor" of reserve assets (proportion of cash equivalents), "liquidity factor" (liquidation cycle of high-volatility assets), "transparency factor" (coverage of independent audits, disclosure of custodial information);
• Goal: To answer the question of "can stablecoins maintain redemption under extreme runs."

Investment Risk Rating (New Framework)

Core Indicators:

• Quality of Returns: Proportion of stable income (U.S. Treasury interest) (>=50% as "low risk");
• Exposure Management: Proportion of high-volatility assets (<=10% as "low risk");
• Operational Risk: Issuer's profit growth rate (>=10% as "stable"), regulatory compliance (e.g., U.S. MSB license, EU MiCA certification);
• Goal: To answer the question of "can the issuer of stablecoins sustain operations and can its reserve assets appreciate."

3.3 Industry Trends: From "Controversy" to "Standards"

The controversy between S&P and Tether is essentially the "rules output" of traditional finance to the crypto market. We judge that:

• Short-term: Regulation will drive the "mandatory transparency requirements" for stablecoins (e.g., the U.S. Stablecoin Act requires 100% cash equivalent reserves, and the EU MiCA requires complete audits);
• Medium-term: The rating system will develop, and ratings will not be limited to the "regulatory - capital adequacy - repayment capability" system. Institutional investors will stabilize stablecoins in different scenarios based on "stability ratings + investment risk ratings";
• Long-term: Stablecoins may further differentiate into "pure stable tools" (e.g., USDC, 100% cash equivalents) and "stable tools with appreciation" (e.g., USDT, mixed reserves), meeting the needs of different investors.

Risk Warning

1. Price Volatility Risk of Reserve Assets: A decline in BTC and gold prices will lead to a depreciation of Tether's reserves, affecting redemption confidence;

2. Regulatory Policy Risk: If the U.S. and EU require stablecoins to hold 100% cash equivalents, Tether will need to sell BTC and gold, leading to a significant decline in profits;

3. Market Liquidity Risk: In extreme market conditions (e.g., the 2022 FTX collapse), exhaustion of on-chain liquidity may lead to USDT de-pegging;

4. Operational Management Risk: Insufficient governance transparency of Tether may trigger internal operational risks (e.g., custodial assets being stolen).

Download Link for the Research Report "USDT Rating Controversy": https://app.coinfound.org/research/1

Website: https://dataseek.coinfound.org/

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Analyst Statement: This report is based on publicly available information and reasonable assumptions and does not constitute investment advice. The analyst does not hold positions in Tether or USDT.

Copyright Statement: This report is copyrighted by CoinFound.