Tether, the leading stablecoin issuer, is under scrutiny following its strategic pivot towards increased investments in Bitcoin and gold. This move, according to BitMEX co-founder Arthur Hayes, could expose the company to significant insolvency risks, especially during market downturns.
In a recent post on X, Hayes raised alarms about Tether’s diminishing reliance on the more stable interest-bearing Treasury assets. The company’s latest moves appear to position it for lower interest rates as anticipated cuts from the U.S. Federal Reserve loom. This shift signals a transformation in Tether’s asset diversification strategy, trading traditional financial securities for the more volatile cryptocurrencies and precious metals.
Shift in Tether’s Reserve Composition
The latest reserve report from Tether reveals a substantial management of total assets estimated at $181 billion. While a significant portion remains in cash, Treasury bills, and money market instruments, notable adjustments see nearly $13 billion now held in precious metals and approximately $10 billion in Bitcoin.
Hayes cautioned that a hypothetical 30% decline in these volatile asset values could entirely deplete Tether’s equity buffer, leaving USDT at theoretical risk of insolvency. He emphasized the need for heightened transparency, suggesting that exchanges and institutional investors may demand more real-time insights into Tether’s financials to mitigate potential solvency concerns.
S&P Flags Weak Stability Due to Volatile Assets
The anxiety surrounding Tether’s financial health has been echoed by S&P Global Ratings, which recently assigned Tether a “weak” stability score. The rating agency pointed to the rising proportion of Bitcoin and gold in Tether’s reserves as increasing the risk of undercollateralization under stress conditions.
This rating has ignited discussions within financial circles. Some industry analysts assert that the S&P score inadequately reflects Tether’s complete financial landscape, as it does not account for assets such as its extensive Bitcoin reserves, mining infrastructure, and other strategic investments not disclosed in their regular attestations.
Tether’s Profits and Corporate Resilience
Despite these concerns, other financial experts remain optimistic about Tether’s resilience. It is reported that the stablecoin issuer generates around $10 billion annually from its Treasury holdings, which amount to nearly $120 billion. This healthy income, combined with low operational costs, positions Tether favorably in terms of profitability.
Furthermore, the structural mechanics of Tether’s operations, which depend entirely on reserve transparency rather than central bank support, differentiates it from traditional banking. Some estimate Tether’s total corporate equity to range between $50 billion and $100 billion, factoring in its performance and past fundraising efforts.
In a rebuttal to the S&P downgrade, Tether’s CEO, Paolo Ardoino, criticized outdated rating methodologies, arguing that they have historically failed to foresee risks within traditional institutions. He assured stakeholders that Tether remains solidly capitalized and committed to operational transparency.
Hayes Says USDT Faces Pressure Without Transparency
As the narrative unfolds, Hayes reiterates that although Tether does not possess any “toxic” assets, its strategy of bolstering Bitcoin and gold reserves heightens its exposure to volatility. He cautions that if the Federal Reserve fails to act on interest rate cuts or if the cryptocurrency and commodity markets falter, Tether’s ability to maintain its peg could face severe pressures.
Ultimately, Hayes suggests that growing demands for real-time financial transparency from institutional and exchange participants could force Tether to disclose more regarding its financial standing, a move that may be necessary to sustain confidence in the stablecoin ecosystem.
