Credit rating agency S&P Global, highly respected in the TradFi world, recently launched a rating system for stablecoins. This system aims to evaluate the ability of a stablecoin to maintain a stable value relative to a fiat currency, which is the main function of a stablecoin. While Tether’s USDT is the largest used stablecoin on the market, it has received one of the worst ratings.
Tether USDT: A Disappointing Rating
In this new assessment, Tether (USDT), the most popular and widely used stablecoin with a capitalization of $90 billion, received a rating of 4 on a scale of 1 to 5.
A score of 1 means that a stablecoin is ” very strong “while a score of 5 means that it is ” weak “.
This rating means that USDT is “constrained” in its ability to maintain its stable value against a fiat currency. In contrast, other stablecoins like Circle Internet Financial’s USDC, Gemini dollar (GUSD) and Pax Dollar (USDP) received scores of 2, indicating a “strong” rating. None of the stablecoins received a rating of 1.
GM to all 🤝
S&P Global Ratings launches an assessment of stablecoins!
The USDC of Gemini and Circle stand out with a score of 2, considered “vital”, while the USDT of #Tether and others like Frax and Dai get a 4, considered “constrained”.
S&P points to reserves… pic.twitter.com/WFooBQwNpg
— CryptoSauvage (@CryptoSauvage1) December 14, 2023
Factors Affecting Stability
The quality of the assets backing the stablecoin is a crucial factor in this valuation. S&P emphasized that weaknesses in areas such as regulation and supervision, governance, transparency, liquidity and redeemability, and monitoring have contributed to the low valuations of some stablecoins, including USDT.
“The quality of the assets backing the stablecoin is a critical factor in the final valuation,” S&P said in a statement introducing the system.
The Regulation Challenge for Tether
Another key element of this assessment is regulation. Unlike some stablecoin issuers that are subject to regulatory oversight, Tether Ltd., the company behind USDT, is not subject to regulation or supervision by any authoritarian body.
This contrasts with other stablecoin issuers which are regulated and must follow specific guidelinessuch as those of the New York State Department of Financial Services (NYDFS). The lack of regulation and supervision of USDT was considered a weakness by S&P Global:
“Unlike other stablecoin issuers, Tether Ltd, which is incorporated in Hong Kong and wholly owned by Tether Holdings Ltd, registered in the British Virgin Islands, is not subject to regulation or supervision by a authoritative body. In contrast, some stablecoin issuers are subject to regulatory oversight by an authority, such as the New York State Department of Financial Services (NYDFS), and are required to follow the rules established by the NYDFS Guide to stablecoins. We therefore consider the lack of regulation and/or supervision of USDT as a weakness”
Future Outlook of Stablecoins
S&P Global anticipates that stablecoins will become even more integrated into financial marketsacting as an important bridge between digital assets and real-world assets.
However, it is important to recognize that stablecoins are not immune to factors such as asset quality, governance and liquidity. USDT is currently the third largest cryptoasset after Bitcoin (BTC) and Ethereum (ETH).
Although USDT is widely used, doubts about the quality of assets it holds to support its value remain a matter of concern for investors and regulators.
If there are 90 billion USDT in circulation, there should be the same amount of assets stored with Tether — preferably a secure and stable asset like cash or gold.
Gold, Tether has never released an official auditbut publishes quarterly “certificates” which describe the assets it holds: in its latest report, Tether declared having 86 billion in assets (including 72.6 billion in US Treasury bonds) backed by 83 billion USDT.
In October, Tether promised to publish these reserves in real time from 2024.
Conclusion
S&P Global’s assessment of stablecoins, particularly Tether and its USDT, highlights the challenges these digital assets face, particularly in terms of regulation, transparency and stability. As the stablecoin market continues to grow and diversify, independent oversight and assessments such as that of S&P will become increasingly crucial for investors and market participants.
Source: Coin Desk, Tether, PR NewsWire
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