Tether choosing to confront S&P head-on is probably the most explosive news recently.
On November 26th, S&P published a report downgrading its assessment of Tether’s asset quality from “constrained” to its lowest tier, “weak.” S&P noted that the proportion of high-risk assets backing the stablecoin has increased, including corporate bonds, precious metals, Bitcoin, and secured loans. As of the end of September, these assets accounted for 24% of total reserves, significantly higher than 17% a year earlier.
From an asset allocation perspective, an excessive proportion of high-risk assets results in very low fault tolerance, especially under the current downward trend in BTC price, which may lead to under-collateralization risks for the stablecoin.
What does this mean? Simply put, S&P believes Tether’s asset composition is unhealthy, with too many high-risk assets. Once something goes wrong, it becomes prone to liquidity shortages, which could affect USDT’s ability to maintain its peg to the U.S. dollar.
As the world’s largest stablecoin, USDT has a circulating supply of about $184 billion. In response to such criticism, Tether’s CEO chose to confront S&P directly. Tether CEO Paolo Ardoino responded to the rating, saying the agency’s traditional models have “been hurting investors for decades,” and emphasized that Tether is well-capitalized and has “no toxic reserves.” Finally, Paolo Ardoino expressed a strong and uncompromising stance: “We wear your disgust as a badge of honor.”
The cause and effect are clear, but the story is far from over. Many people’s first reaction is: USDT has never depegged in all these years—so why is S&P suddenly taking harsh action?
Why Did S&P Choose to Downgrade USDT Now?
On the surface it’s about reserves, but fundamentally it’s the result of long-term risk accumulation. Superficially, S&P's reasons seem straightforward:
- •Increased proportion of high-risk assets
- •Insufficient disclosure transparency
- •Reserve management not aligned with traditional financial standards
- •Lack of a clear asset segregation system
- •Declining high-risk asset prices may cause under-collateralization
But you must understand: these issues are not new in 2024—they have always existed. Then why is the downgrade happening now?
1. Global Interest Rates Have Entered a "High Plateau Turning Point," and Stablecoin Reserve Risk Models Are Being Re-evaluated
For institutions of this magnitude, decisions are not made based on micro-level factors—they are based on macroeconomic shifts. The biggest variable in 2024–2025: Persistent uncertainty around the Federal Reserve’s policy direction.
High interest rates → U.S. Treasury yields surge → stablecoin issuers generate explosive profits.
This has created a structural shift: Stablecoin profits are now tightly linked to their exposure to risk assets.
In other words: Previously, stablecoin issuers could easily earn yield simply by buying short-term U.S. Treasuries. But now, issuers are holding increasing amounts of:
- •Bitcoin
- •Gold
- •Corporate bonds
- •Secured loans
- •Non-standard assets
This raises a key concern for traditional rating agencies: Have stablecoins transformed from low-risk financial tools into “unregulated shadow money” with embedded credit risk?
This is the first major implication behind S&P’s downgrade: Stablecoins are no longer simple digital representations of dollars—they have become “quasi-financial institutions carrying portfolios of risky assets.”
2. After the Crypto Market Crash, Risk Assessment Models Have Tightened Again
Looking from a broader macro lens: The December 2025 crypto market crash forced all risk assets into a new scrutiny cycle.
- •BTC dropped 30% in under two months.
- •Ethereum ETF saw continuous outflows.
- •Tech stocks faced valuation doubts.
Under such conditions, rating agencies must reassess the shock absorption capacity of stablecoins. Thus, S&P’s downgrade is essentially a natural result of cyclical market behavior:
- •When markets rise → risks are ignored
- •When markets panic → risks are emphasized
This is not about targeting Tether—it is a “risk recalibration” for the entire industry.
3. Global Regulators Increasingly View Stablecoins as Systemic Financial Infrastructure
Regulation has always been the strongest force shaping crypto. From EU MiCA to U.S. stablecoin legislation, there is a clear trend: Stablecoins will be incorporated into formal financial regulation.
Under this trend, rating agencies must release early warning signals: “Stablecoins must reach banking-level standards for transparency and reserve structure.”
Thus, this downgrade is a signal flare announcing the arrival of the “fully regulated stablecoin era.”
The Real Risk of USDT Is — It’s Too Important, Too Systemically Critical to Fail
Many people ask after seeing the downgrade: Will USDT depeg?
To answer this, one must understand a crucial premise: USDT’s biggest risk is not a small deviation from $1—Its biggest risk is systemic contagion.
Here’s USDT’s role in crypto:
- •Largest stablecoin globally
- •Over $184 billion in market cap
- •Almost all DeFi architecture relies on it
- •OTC desks, market makers, exchanges use it as settlement base
- •Even functions as a “shadow dollar replacement” in several countries
So the real danger is not price fluctuation—It’s that if USDT faces a confidence crisis, the liquidity backbone of the entire crypto market collapses.
That is why this downgrade has an impact 10× larger than normal.
Below Are the Key Risk Points the Industry Is Concerned About—Exactly What S&P Targeted.
1. Higher Proportion of High-Risk Assets → More Volatile Collateral Quality
Industry data estimates:
- •2023: 7%
- •2024: 17%
- •2025: 24%
In under two years, the high-risk asset share tripled. With U.S. Treasury yields already lucrative, why does Tether hold high-volatility assets? There is only one reason: to expand profits.
But higher profits = higher risks. Especially with BTC: If BTC drops by 20–30%, collateral coverage deteriorates rapidly. And the more fearful the market becomes, the greater the redemption pressure on USDT. The greater the redemption, the larger the liquidity stress. This becomes a systemic feedback loop.
This is one of S&P’s core reasons for rating USDT as “weak.”
2. No Banking-Level Asset Segregation Mechanism
Traditional finance requires:
- •Asset segregation
- •Independent custody
- •Counterparty risk disclosure
- •Transparent risk exposure
But Tether’s structure is:
- •Reserves managed internally
- •Custodians not fully disclosed
- •Risk appetite determined internally
- •Disclosure not aligned with traditional auditing frameworks
Meaning: If Tether encounters corporate-level issues, its reserves may not necessarily prioritize protecting USDT holders. This is unacceptable in traditional financial systems.
3. Transparency Remains Insufficient — Reports Are Not Full Audits
Tether releases quarterly “Reviews,” not “Audits.”
The difference:
- •Review: checks whether numbers appear reasonable
- •Audit: rigorously verifies authenticity of every number and process
This is why institutions have long questioned: If the data is fine, why not do a full audit? Transparency remains USDT’s biggest vulnerability.
What Chain Reactions Will the Downgrade Trigger in the Crypto Market?
1. USDT’s Status as the “Strong Dollar Substitute” Weakens
Over the years, in:
- •High-inflation countries like Argentina, Turkey, Nigeria
- •OTC and exchange liquidity
- •DeFi settlement
- •GameFi and derivatives
USDT has functioned as the de facto dollar. But with the downgrade: Institutions, custodians, exchanges, cross-chain bridges will be forced to reassess USDT’s risk profile.
This could lead to:
- •Some institutions reducing exposure
- •Other stablecoins gaining market share
USDC, FDUSD, etc., will likely grow over time. It won’t happen overnight, but it will happen.
2. USDC, FDUSD, PYUSD and Other “Regulated Stablecoins” Will Accelerate Market Share Growth
The stablecoin market will likely evolve into: “Regulation-backed vs. Market-consensus-backed” dual competition.
This downgrade could be a strong boost for USDC:
- •U.S. regulatory alignment
- •Strict auditing
- •High transparency
- •Conservative reserve structure
In Ethereum and DeFi ecosystems, USDC’s acceptance will continue rising.
3. Crypto Liquidity Models Must Be Rebuilt
USDT is the largest “USD entry point” in crypto.
If trust weakens:
- •Liquidity decreases
- •Market-making depth declines
- •Volatility increases
- •Cross-chain bridge TVL drops
- •Derivatives depth weakens
This means the market’s medium-term volatility may increase, not decrease.
4. Exchanges Will Face Stronger Pressure to Diversify Stablecoin Offerings
Three categories of exchanges will form:
● Category A: USDT-dependent exchanges
Common in Asia and Latin America — difficult to escape reliance.
● Category B: Risk-diversified multi-stablecoin exchanges
Binance, OKX, Bybit already adding FDUSD, FDX, USDC, etc.
● Category C: Exchanges issuing their own stablecoins
In-house stablecoins will become part of their liquidity pools. After the S&P downgrade, Category B and C exchanges will grow faster.
5. DeFi Protocols Must Recalibrate Risk Models
USDT plays a critical role in DeFi infrastructures like:
- •MakerDAO
- •Aave
- •Curve
- •Uniswap
- •Lido
- •GMX
When stablecoin risk ratings drop, they must adjust:
- •Lower leverage ratios for USDT collateral
- •Recalculate liquidation curves
- •Update risk parameters
- •Add alternative stablecoin pools
This reduces systemic risk but also reduces capital efficiency.
6. Bitcoin May Face Short-Term “Sell Pressure Contagion”
This is a widely overlooked point.
If USDT redemptions surge, Tether may need to:
- •Sell BTC
- •Sell gold
- •Sell corporate bonds
Meaning: BTC may face downward pressure due to stablecoin redemption, not because of its own fundamentals. S&P explicitly highlighted this: BTC price decline → USDT under-collateralization risk. This is one of the first times a major institution has directly linked “BTC downside risk” with “stablecoin systemic risk.”
7. Regulators Will Use This Event to Accelerate Stablecoin Legislation
This downgrade gives regulators strong justification.
In the future, stablecoins may be required to:
- •Use banking-level audits
- •Adopt asset segregation
- •Disclose custodians
- •Provide daily reserve transparency
- •Cap high-risk asset ratios
- •Participate in cross-border regulatory frameworks
Regulatory pressure on USDT will only increase.
Summary
S&P downgrading USDT essentially signals: The stablecoin industry is moving out of its “wild growth era” into an era of regulatory restructuring. Then, market liquidity structures must evolve, and high-risk reserve models will not remain viable. Investors will need to reassess systemic risks.
Tether will remain strong, but it must adapt to the new rules. What this event truly changes is not USDT itself — but how the global crypto market understands safety, transparency, and trust. This will become one of the most important long-term themes in the future crypto industry.
