Leading credit rating agency S&P Global Ratings has reassessed the stability of the Tether [USDT] stablecoin. In its new assessment, it downgraded the stablecoin’s ability to maintain its peg to the U.S. Dollar from 4 (constrained) to 5 (weak) late in November.
“The negative revision reflects an increase in higher-risk assets backing USDT’s reserve since our last review.” It also noted that Tether is the longest-standing stablecoin with the largest circulating volume.
The higher-risk asset in question is likely Bitcoin [BTC]. The Tether reserves report showed that 5.44% of its reserve is Bitcoin, up from 3.6% during the previous reporting period.
Another interesting fact is that the Tether reserves are 80.33% U.S. Treasury Bills. It is considered a sound money equivalent, and the largest holder of this debt instrument is Japan.
The risk from the Bank of Japan
The rising government bond yields is a concern. The BOJ could continue to raise rates, which would further increase yields and further slow down the economy, or it could hold or even cut rates to support growth.
Source: CNBC
The Japanese government finalized a $137 billion (21.3 trillion yen) stimulus package to spur economic growth and cushion its public from inflation. Economist Peter Schiff observed that this stimulus package might be financed by the sale of U.S Treasuries.
This could send bond yields higher and the price of the Treasuries to fall. In times of sharp market stress, combined with a high demand for USDT redemptions, there is fear that USDT could be under-collateralized. This might be highly unlikely, but is possible.
What happens during a Tether de-peg?
A severe Tether de-peg in this incredible scenario would induce a black swan event in crypto. As the largest stablecoin, with 60.18% dominance in the stablecoin market, it would cause chaos in the market. Especially in DeFi.
As the perceived value of USDT drops in the improbable event of a severe de-peg, holders will try to flee to other, quality stablecoins, which could be USDC. They might also try to exchange stablecoins for crypto, that is, buy Bitcoin or Ethereum, and try to ride out the storm.
This threat, while possible, has not occurred dramatically yet. Tether has survived multiple severe scares, such as the Terra [UST] implosion in 2022, and the USDC de-peg and subsequent panic selling of USDT in the aftermath of the Silicon Valley Bank collapse. Its longevity speaks for itself.
Final Thoughts
- It is prudent to be prepared for all risks, even the improbable ones, especially considering how Tether is the backbone of the crypto industry.
- A Tether de-peg would cause a black swan event, and your portfolio likely will not be safe.