Introduction
S&P Global Ratings has issued a rating for the stablecoin Tether, concluding that the digital currency’s ability to maintain its peg to the US dollar is “constrained.” S&P Global Ratings expresses concerns regarding the transparency of Tether’s reserves, the regulatory framework, risk appetite, and other issues.
What Concerns S&P Global About Tether?
Tether currently discloses details about its reserves quarterly, and the rating agency analyzed the latest data, finding some concerns.
First, S&P’s assessment indicates that many of Tether’s reserves are held in “low-risk assets” such as short-term US Treasury securities. Even in such cases, Tether does not provide information about “the custodians of its assets or counterparties or banking account providers.”
Tether’s reserves also include exposure to more risky and opaque assets.
“The riskier assets that make up 15% of the coverage ratio include corporate bonds, precious metals, Bitcoin, secured loans, and other investments,” the report adds. “Given the nature of the assets and limited transparency regarding their composition, such as cash equivalents and the borrowers of the secured loans, there is a potential exposure to credit, market, currency, and interest rate risks that cannot be assessed.”
The report also notes a lack of regulatory framework and constraints on fundamental convertibility, as well as a lack of details regarding asset segregation as other weaknesses of the stablecoin.
This is not the first time Tether’s reserves have come under scrutiny. In 2021, Tether was the subject of enforcement actions by the Commodity Futures Trading Commission (CFTC) and the Attorney General of New York for providing misleading information about the reserves backing the stablecoin.
Tether Is Not Alone
S&P Global Ratings assigned ratings to a total of eight different stablecoins, with USD Coin (USDC), Pax Dollar (USDP), and Gemini Dollar (GUSD) receiving the top rating of 2 or “strong” among those evaluated. The tokens FRAX (FRAX) and TrueUSD received the lowest possible rating of 5 or “weak.” The tokens DAI (DAI) and First Digital USD (FDUSD) received the same rating as Tether.
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Article sources:
– S&P Global Ratings. “Stablecoin Stability Assessment Tether (USDT).”
– U.S. Commodity Futures Trading Commission. “CFTC Orders Tether and Bitfinex to Pay Fines Totaling $42.5 Million.”
– Attorney General of the State of New York. “Settlement Agreement.”
– S&P Global Ratings. “Stablecoin Stability Assessment.”
Source: https://www.investopedia.com/tethers-ability-to-maintain-dollar-peg-constrained-says-s-and-p-8414907
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