Here’s why S&P Global Ratings recently downgraded Tether (and its stablecoin USDT) to the lowest rating level — and what it means. 📉

🔎 What S&P did — and the downgrade level

S&P lowered USDT’s “stablecoin stability” rating from “4 (constrained)” to “5 (weak)” — the lowest possible level on its scale.

The downgrade expresses concern about USDT’s ability to maintain its dollar peg under stress.

🚨 Main reasons for the downgrade
• Reserve composition has become riskier

As of September 2025, about 24% of Tether’s reserves backing USDT consist of “higher-risk” assets — up from roughly 17% a year earlier.

These assets include volatile or non-cash instruments like cryptocurrencies (notably Bitcoin), gold, corporate bonds, secured loans, and other investments subject to credit, interest-rate, or market risk.

Specifically, Bitcoin alone now represents about 5.6% of USDT’s reserves, which S&P says exceeds the “safety buffer” (their assessed over-collateralization margin of ~3.9%).

Why does that matter? Because if risky assets drop in value — e.g. Bitcoin crashes — it could erode the reserves that back USDT, threatening its ability to redeem tokens 1:1 with USD.

🔐 Structural & transparency concerns

S&P also flagged several structural and disclosure issues:

Insufficient transparency: lack of clear public information about the custodians, counterparties, and counterpart-creditworthiness behind the reserve assets.

No asset segregation or robust regulatory safeguards: meaning in a worst-case scenario (e.g. insolvency of Tether or one of its custodians), reserve assets might not be adequately shielded or available to USDT holders.

Disclosure gaps & light audit regime: the reserve backing relies on attestations rather than full external audits, which S&P says makes it harder to verify the real health and quality of the reserves.

In short: S&P sees USDT’s backing as less conservative, more opaque, and more vulnerable than ideal for a supposed “stable” coin.

⚠️ What this means — potential risks

Because of the downgrade:

There is increased risk that USDT could become under-collateralized if asset values fall, undermining confidence in its 1:1 USD peg.

Investors, traders, institutions using USDT may view it as less stable and reliable – particularly in market stress.

The downgrade may also increase regulatory and competitive pressure, favoring stablecoins more tightly backed by low-risk assets (e.g. short-term U.S. Treasury bills, cash equivalents).

However — and this is important — S&P itself acknowledges that USDT has kept its price peg so far, even during stressful crypto cycles.

⚔️ How Tether responded

Tether has rejected the downgrade. Their leadership argues:

The methodology applied by S&P is outdated and designed for traditional finance, not for “digitally native money.”