Karen Petrou: Tether’s Tangled Web of High-Risk Assets
Last week, the IMF said that stablecoins could prove a threat to financial stability if widespread adoption is followed by a sudden consumer-confidence shock. A little-noticed report makes it clear that any consumer with confidence in the largest USD-denominated stablecoin, Tether, is betting on fumes and policy-makers touting widespread adoption are playing with fire. As the IMF rightly says, stablecoins may well have valuable use cases, but radical reform is essential for innovation without immolation.
The Tether report comes from S&P, a rating agency with an unfortunate habit of pointing to problems only after they’ve become irreversible and irrefutable. Since its report on Tether was unsolicited, perhaps it’s more objective than many others and thus the early warning the agencies promise, giving markets a chance to retrench and regulators to rethink.
S&P’s report looks at the critical question of whether Tether can convert its dollar-denominated coins into dollars on demand. The GENIUS Act attempts to ensure this with what it hopes are stringent reserve-asset requirements. S&P makes it all too clear that the El Salvador-domiciled issuer has a long, long way to go before it can meet even these requirements.
Since its last rating, S&P has now downgraded Tether to “weak.” This is because the percentage of assets housed in higher-risk and/or volatile sectors actually increased. For example, bitcoin alone accounts for about 5.6 percent of Tether’s reserves, up substantially, with a mix of crypto and high-risk assets now accounting for 24 percent of Tether’s total reserves. Notably, none of …