Disclaimer
~ I wrote this blog based on my own research and talking to people. It is entirely my own opinion. This blog is not a financial investment advice. If I have made any mistakes, please correct me in the comments ~
Tether is making waves on the news
In recent days I have been reading a lot news about Tether, the company behind the USDT stable coin, has been downgraded by S&P rating to five (i.e.: weak). This is the lowest possible grade on their scale. It is the absolute bottom. Reuters even quoted:
S&P cuts Tether stablecoin rating to ‘weak’ on disclosure gaps
This is not just a mild warning. This is like the financial equivalent of flashing red siren for any serious institutional investor. What did S&P see that made them downgrade Tether? It gets right to the heart of Tether’s financial strategy. S&P’s critique stems from this deep concern over the composition of Tether’s reserve which is the makeup of what they are holding. S&P is arguing that Tether is behaving less and less like a stable vault and more like an aggressive unregulated hedge fund that’s just out there chasing yield.
Who is Tether?
Tether is a private technology company. It issues USDT which is by far the world’s most widely used stable coin. It is really the single most critical asset holding the entire multi-trillion-dollar ecosystem together. It is just the ultimate paradox. One USDT stable coin promises to be worth US One Dollar. Tether has been relentlessly criticised for a lack of transparency and how the USDT the company has created (or called “minted” in their technical term).
On one hand, the USDT cryptocurrency just feels like magic to me as it pegs with the US dollars. So, no risk, right? Tether is effectively acting as a kind of private digital bank but without a banking licence. It does accept massive amount of fiat money from customers through deposit. Then it issues tokens that are interchangeable with the US dollar on one-to-one exchange rate. For every single USDT token Tether issues, the company holds one real US dollar or an equivalent. It does release back the fiat money to customers through withdrawal.
So, what is the difference between Tether and traditional banks? Tether allows customers to make lightning-fast trades to get out of volatile positions in something like Bitcoin or just the movement of funds between different exchanges without ever having to use traditional banking system.
Why did S&P downgrading Tether to the lowest 5?
Tether’s entire business model and their whole existence are to guarantee a dollar peg. Therefore, stability should be the only thing that matters. Why is the company taking risks in order to chase yield? I personally do not have a clue.
When it comes down to regulatory arbitrage and profit, Tether is holding tens and tens of billions of US dollars in reserves. As Tether is acting like a “Digital Bank”, if they just hold all of these reserves in cash, they would make zero profit. By investing those reserves, by moving them from simple cash i.e.: the very safe US dollars, into riskier assets, they can dramatically increase the profit margins for their private company. The stability of the entire crypto market is potentially being put at risk as a result of Tether’s tactics of making higher profits from its holdings. This is precisely S&P’s concern.
Historically, the financial market assumed that Tether’s reserves were overwhelmingly backed by highly liquid short-term US treasuries. Government debts are always seen as risk free and can be sold instantly. But this is not the case anymore. There is a pretty significant shift into assets that S&P considers to be significantly riskier such as larger holdings of corporate bonds and crypto assets like Bitcoin. Such shift has changed the picture completely from stability to vulnerability as US treasuries are the most liquid asset on earth while corporate bonds or secured loans are just far less liquid. Compounding that risk with Tether’s own Bitcoin holdings, which are already volatile on their own. For example, if the price of Bitcoin crashes 30%, a huge chunk of Tether’s reserve backing just disappears instantly. This could trigger the digital version of a bank run. Due to the peg to the US Dollar, the risk is that if Tether’s assets crash, their total reserves might fall below the total amount of USDT tokens out there. If the market suspects they Tether is running a fractional reserve operation, every major exchange dealing directly with Tether would rush to redeem their USDT for the US dollars. If Tether cannot meet that demand, the USDT-USD peg will break and confidence will evaporate. This will result a cascading financial failure across the entire crypto world.
Tether has at times operated with less than 100% cash backing with the cash sitting in a bank account. This is the pivotal moment in Tether’s track record. Tether relies on less liquid assets such as commercial paper, secured loans and even inter-company loans using reserves that back USDT. The company acts like a private Federal Reserve as the company created liquidity not from verified instant cash but from assets with questionable value and liquidity – much like a bank relying on its loan portfolio. However, at least traditional banks are regulated by governments. Tether isn’t.
Why is Tether so opaque?
Tether’s opacity and lack of clarity around their financial health have always been the key criticism. According to S&P, Tether doesn’t provide the kind of verifiable proof expected from major financial institutions manging this massive amount of money. Critics always point out the Tether only provides this periodic attestation of its reserves which is just a snapshot and not the whole picture.
Traditional banks are highly regulated. They have to conduct full deep forensic audits of every single transaction, every counterparty, every custodian and every risk exposure over the past year to submit to the regulators. Regulated banks have to provide the full picture while Tether only provides a snapshot.
The plan to launch USAT
To reduce the opacity, Tether relocated their headquarters from the British Virgin Islands (BVI) to El Salvador in 2025 and planned to launch a new digital asset called USAT aiming at complying with the impending US regulatory frameworks. However, the high yield risky offshore operation on BVI is still ongoing. Tether is put one foot in both worlds. I am still baffled why people can deposit massive amount of fiat money which is a legal tender to a company registered on the British Virgin Islands where the population is just under 40,000 or even El Salvador which has an annual GDP of merely US$36 billion and sits on 108th position in world ranking by GDP out of 190 countries in the world. What happens if Tether disappears? Neither the government of BVI nor El Salvador would be able to afford to compensate the depositors.
What is USDT?
USDT is a digital asset in the form of a token created (minted) by Tether through blockchain software. Since USDT is designed to match the value of the US Dollar, new tokens are minted only when Tether receives an equivalent amount of fiat currency or other qualifying reserves. This usually represents new fiat deposits made by institutional clients. When USDT is redeemed for fiat currency, the tokens are returned to Tether and are then burned (deleted from the software), reducing the total circulation.
A Shadow Bank with US$181 billion reserve
A shadow bank takes in fiat money, creates money-like instruments. It uses the reserves to lend or invest just a like traditional bank but without holding a banking licence and is not supervised the way traditional banks are. Tether is acting like a shadow bank. So, why on earth would anyone willingly deposit a staggering US$181 billion to a shadow bank knowing that a shadow bank is not regulated? Why don’t people just trade the actual regulated dollars for this digital IOU? From a consumer’s viewpoint, I cannot use cryptocurrency to buy a house or buy a car. However, cryptocurrencies are not targeting consumers. There are 2 other groups of people who are perfect customers for Tether. They are:
Professional Traders
Professional traders such as hedge funds managers and investment institutions. Their use case is based entirely on speed. Typical consumers see money as a means to an end the final purchase. But professional traders see money as a vehicle. It’s something to be moved, to be multiplied and then later converted into consumer goods. For them, every second lost is a potential profit missed. And traditional banking is just ridiculously slow and restrictive for that purpose. It is indeed a massive impediment. For example, if someone is trying to transfer US$50 million from a trading desk in New York to an exchange in Hong Kong, they have to relay on the SWIFT network which is only open Monday to Friday and it usually takes a couple of days for settlement. It involves high wire fees and it triggers all these intensive KYC (know-you-customer) and AML (anti-money-laundering) checks by multiple banks in the middle who might just freeze the transfer if the find anything specious. But USDT just obliterates all that friction completely. USDT transfers happen 24/7/365 globally in seconds for almost zero fees and critically without the permission or interference of a bank. This speed is not just a nice feature. It is the entire financial utility. USDT is the high-octane fuel. It is like a high-performance sports car with turbocharged engines and high compression ratios. So, what are these professional traders are sophisticated players doing with all this velocity? They are not just sitting on these digital numbers. They use the USDT as a bridge for immediate high-volume movement. The primary use is arbitrage. The exchanges in different parts of the world often have slightly different prices for the same asset, for example, Bitcoin is trading for US$92,000 on an exchange in the US and US$92, 050 on an exchange in Japan. That US$50 difference doesn’t sound like a lot to an individual, but if a professional trader can instantly move US$10 million in capital via USDT, a process that takes seconds, they can exploit that tiny difference. They buy the cheaper Bitcoin and sell the more expensive Bitcoin at the exact same time. They can do this hundreds of times a day, and that small margin adds up. That US$50 margin multiplied by millions of dollars being moved quickly becomes a massive low-risk profit. Therefore, they are converting the velocity of the digital asset, then converting back to fiat currency profit later on. They need that instantaneous capital mobility to make it work coupling other key uses are market making where they use large USDT holdings to provide liquidity to exchanges just constantly buying and selling at slightly different prices to earn a consistent spread and leverage and leverage collateral. Huge funds use massive USDT deposits on derivates exchanges to borrow even larger sums of money, opening enormous positions in futures markets to magnify their returns. The ability to instantly move millions globally without asking for permission is just fundamentally powerful which covers the profit motive.
Economic Survivors
The second group is the Economic Survivors. Their reasons for choosing the USDT or other cryptocurrency over traditional currency are well far more profound and honestly kind of heartbreaking. This is where that consumer logic completely breaks down. This is the core humanitarian use case for stable coins. For citizens living in unstable economies, the premise that money holds value is an almost non-existent. This is because their local currency is guaranteed to lose value sometimes overnight or access to their savings is just frozen by government decree. For them USDT is not speculation. It is simply a temporary shelter. It is a digital lock box to preserve value. Below are a number of examples of Economic Survivors:
Lebanon
Lebanon’s financial crisis was just catastrophic. In Lebanon, when the crisis hit, the banks imposed these draconian capital controls. Customers’ US dollar savings account they had worked years to accumulate were just frozen. They could see the number on their bank statement, but they couldn’t withdraw it or transfer it. That unusable frozen money became known as the Lollar (the Lebanese dollars). The money was legally theirs, backed by the banks, but functionally it was worthless and at the time the local currency was collapsing simultaneously. The Lebanese currency has lost over 98% of its value due to hyperinflation. So, if people held LRA, their money just melted. If people held US dollars in the bank, their money was inaccessible. The only way is to bypass this state-controlled freeze was to convert LRA into crypto and use stable coins like USDT. Suddenly, that digital number created from computer code was more reliable and more accessible that the money sitting under the so-called protection of the state. It was the only thing that worked.
Argentina
Argentina is dealing with inflation rates that regularly soar above 200%. People receive their pay cheque today knowing that by the time they pay their rent and bills, that money has lost 5% of its purchasing power. By the end of the month the equivalent of an item they bought at the beginning of the month has just vanished. That’s why in Argentina property is priced and transacted almost exclusively in US dollar because the local currency is evaporating and the government actively restricts citizens from even purchasing US dollars because USDT offers an escape hatch. For example, someone who gets paid in the Argentinian gets paid in pesos immediately converts the pesos into USDT just to stop the decay. People freeze their savings in a stable unit of account and they only convert it back when they absolutely have to in order to pay rent or buy groceries. The choice isn’t between fiat currency and digital asset created out of computer software code. The choice is between USDT, which has maybe 50% risk of collapsing compared to the Argentinian peso which has 100% guarantee of devaluation. The digital asset is the only rational store of value to them. For these survivors, USDT is the only accessible functioning dollar they have. It is pure survival economics.
Turkey
In Turkey, inflation hovers around 60 to 80% a year. Businesses price their goods in US dollars or euros because they can’t trust the Turkish Lira. Employees paid in Lira are in a constant race against time. The moment the money hits their bank account, they are racing to convert it. That urgency is what gives Tether its value. For these people, USDT is the most efficient, non-insurable way to move from a melting local currency to the digital currency. They are not using it for speculation. They are using it to buy a few more weeks of stability. They are accepting the potential risk of catastrophic failure of Tether because the guaranteed failure of their own government’s monetary policy is already a proven daily reality.
Capital Control Avoidance
In addition, there is a major use case of just avoiding government controls and surveillance. This applies to the wealthy, but also to anyone operating under an authoritarian regime. This is pure capital flight. This is a core benefit of permissionless access. For example, a wealthy individual in China who is facing strict capital controls that limit how much money they can transfer out of the country, or a wealthy Russian facing global sanctions. They cannot walk into a traditional bank or wire tens of millions of dollars to London or New York. However, they can convert millions of fiat dollars into USDT and move it to anywhere in the world in minutes. They bypass the entire compliance structure, the paperwork, the bank approvals, the government monitoring, the taxes. USDT facilitates this rapid, frictionless transfer of wealth across borders. This method provides freedom from the traditional banking system that is actively surveilling its customers. And that freedom is often worth the significant risk
Why can’t we pay our shopping with Cryptocurrency
They reason why we can’t pay our mortgages or buy our groceries cryptocurrency is cryptocurrency has no legal tender status. It is not government backed fiat currency due to its volatility. If a retailer accepted cryptocurrency such as Bitcoin or Ethereum, pricing becomes a nightmare. It is a nightmare for retailers to manage their inventory particularly if the value of the payment just received swings 3% between the time the price tag was printed and the customer actually paid. The regulatory nightmare is probably the most paralysing factor for any big retailer. In jurisdictions like the UK, the HMRC treats cryptocurrency not as a currency but as an asset like a stock or a bond. If a customer buys a pint of milk with cryptocurrency, that single transaction triggers a capital gains or a capital loss event for the customer. Even worse, the retailer now has to track and report capital gains or losses on the asset they received for their tax purposes. Imagine tracking millions of microtransactions for capital gains. It is an administrative and regulatory non-starter. On the top of that, retailers are terrified of losing their banking relationships if they start handling high-risk crypto funds. Banks tend to view large volumes of high-risk irreversible crypt transactions as a massive money laundering and compliance threat. A major retailer risking its entire banking infrastructure for a form of payment that 99% of its customers don’t even want is just nonsensical. Moreover, cryptocurrency lacks all the core consumer protections we take for granted. Why would a low margin business such as supermarket take on the kind of liability such as no-chargebacks, no refunds, high fraud risk, no undo button? Therefore, the conclusion for the consumer is pretty clear. Traditional fiat currency is just appropriate for consumption and wealth storage because of its legal status in a stable economy and country. Although cryptocurrency solves traders and economy survivors with speed, efficiency, cost savings, it does not solve retail problems, stable pricing, lower fraud and clear tax compliance.
Conclusion
In conclusion, Tether’s downgrade by S&P has highlighted some critical issues. These include the lack of transparency. This also involves risky asset composition such as corporate bonds and volatile Bitcoin holdings. Shadow banking operations are another concern. These resemble an unregulated hedge fund. It chases yields at the expense of stability. This poses a severe threat. It affects the multi-trillion-dollar crypto ecosystem. It could trigger a digital bank run. This happens if reserves falter. Nonetheless, USDT remains very useful to professional traders as they can exploit arbitrage through lightning-fast, low-cost transfers. It also aids economic survivors. This is in nations like Lebanon, Argentina and Turkey. It offers a resilient escape. This is from hyperinflation and capital controls. However, its volatility is a problem. There is an absence of consumer protections. Regulatory complexities exist too. These have made it impractical for routine retail transactions such as buying groceries or paying mortgagess.
Cryptocurrency is simply not for me, as it is essentially generated out of thin air and operates entirely outside established financial protection schemes. Should the digital ledger recording my USDT holdings be destroyed, my wealth would vanish irrevocably, with no legal recourse or claim against anyone. This absolute risk of digital annihilation is utterly terrifying for someone like me, accustomed to government-backed deposit insurance. Without governmental or banking safeguards, the vulnerability feels overwhelming, far removed from the security of traditional finance.