S&P Faults Biggest Stablecoin, Tether's USDT, as It Debuts New Industry Ranking

Tether's $90 billion USDT, the world's largest stablecoin, was critiqued by S&P Global Ratings for being worse than rivals at doing its core task: being valued at $1.

S&P, famous for its long history in bond and credit ratings, just introduced a system for evaluating stablecoins, which serve as a key piece of the cryptocurrency ecosystem by acting as a bridge between crypto and the conventional financial system. They serve as a stand-in for traditional currencies like the U.S. dollar or euro, and are linked to a fiat currency. (USDT is pegged to $1, others are pegged to 1 euro, etc.) When investors cash out of crypto investments, they can receive that in the form of stablecoins, rather than fiat currencies, and stablecoins are also used as a form of digital payment.

The ratings agency's new Stablecoin Stability Assessment rates stablecoins on a 1 to 5 scale, aiming to "evaluate a stablecoin's ability to maintain a stable value relative to a fiat currency," according to S&P. A score of 1 means a given stablecoin is "very strong," while 5 means "weak."

Tether's USDT, the most popular stablecoin, got a score of 4 (meaning "constrained"). The second-largest stablecoin, Circle Internet Financial's $24 billion USDC, got a 2 ("strong") – the best rating any stablecoin got, an assessment it shared with Gemini dollar (GUSD) and Pax Dollar (USDP).

"The quality of the assets backing the stablecoin is a critical driver of the final assessment," S&P said in a statement introducing the system. "Weaknesses in other areas, including regulation and supervision, governance, transparency, liquidity and redeemability, and track record, contributed to those stablecoins with lower assessments."

Whether this assessment from a stalwart of traditional finance will steer investment decisions is an open question. For highly regulated TradFi firms, a group accustomed to listening to the likes of S&P, USDC is already a more transparent option than USDT, as it provides more information about the makeup of its reserves and published more frequent reports on its holdings.

On the other hand, users of USDT – and there are many – have already shown they don't really care by sticking with that stablecoin in the face of years of questions about the quality of the assets it holds to back USDT.

Read more: Cantor Fitzgerald CEO Howard Lutnick Is a Bitcoin Maxi and Tether Fan

If there are $90 billion of USDT in circulation, then there should be the same amount of assets stashed in something – preferably a safe, stable asset like cash or the equivalent. It has never published an official audit, but does release quarterly "attestations" that describe the assets it holds. Tether said that at the end of the third quarter, it had $86 billion of assets ($72.6 billion of which were U.S. Treasuries, widely considered among the safest investments in the world) backed $83 billion worth of USDT.

Concerns were intensified when Tether and Bitfinex, its corporate sibling, agreed to pay $18.5 million in 2021 to settle allegations from New York state, which said: "Tether's claims that its virtual currency was fully backed by U.S. dollars at all times was a lie."

Of Tether and USDT, S&P wrote: "Unlike some other issuers of stablecoins, Tether Ltd., which is incorporated in Hong Kong and wholly owned by British Virgin Islands-registered Tether Holdings Ltd., is not subject to regulation or supervision of an authoritative body. This contrasts with some stablecoin issuers that are subject to regulatory oversight by an authority, such as the New York State Department of Financial Services (NYDFS), and are required to follow rules set by the NYDFS' stablecoin guidance. We see the lack of regulation and/or supervision of USDT as a weakness."

None of the eight stablecoins that S&P evaluated scored a 1. In addition to USDT, Dai (DAI) and First Digital USD (FDUSD) also got 4s. The lowest rank of 5 was assigned to TrueUSD (TUSD) and Frax (FRAX).

"As we look to the future, we see stablecoins becoming further embedded into the fabric of financial markets, acting as an important bridge between digital and real-world assets," Lapo Guadagnuolo, a senior analyst at S&P, said in a statement. "Nonetheless, it's important to acknowledge that stablecoins are not immune to factors such as asset quality, governance, and liquidity."

USDT is the third-biggest crypto after bitcoin (BTC) and ether (ETH), according to CoinGecko.

Several stablecoins depegged from their intended value in March, when a banking crisis gripped the U.S.

Circle's USDC sank to 87 cents, a harrowing moment for the crypto industry. Tether's USDT depegged, too, but not in the scary way S&P's report might imply was likely: It surged to $1.06 or so.

Read more: USDC Stablecoin Depegs, Crypto Market Goes Haywire After Silicon Valley Bank Collapses

Last month, the Bank for International Settlements – the global organization of central banks – said that most stablecoins have not managed to stay stable. To serve as a medium of exchange, stability is essential, the bank said. The BIS cited concerns over "transparency regarding the availability and quality of these reserves," an issue echoed by S&P.

Tether had not responded to a request for comment by publication time.

See also: Basel Committee Seeks to Consult on Stablecoins Risk Treatment

Nikhilesh De and Krisztian Sandor contributed reporting.

UPDATE (Dec. 13, 2023, 16:05 UTC): Changes lead photo.

UPDATE (Dec. 13, 2023, 17:33 UTC): Revises entire story to add more context and details.