Tether's Capital Shortage: What Is the Real Reserve a Stablecoin Should Hold?

Recently, the S&P’s analysis report on Tether was released, reigniting discussions about the $USDT’s( solvency). However, most of the debates so far have been limited to superficial questions like “Do assets cover liabilities?” To truly understand the issue, a more in-depth financial analysis framework is necessary.

Tether is a Bank

Essentially, Tether is an institution that issues circulating digital deposit tools in the crypto market, invests them in various asset portfolios to generate returns. It is not merely a fund transfer platform but more akin to a regulation-free bank.

Unlike typical companies, the capital requirements for banks are not simple arithmetic problems. The core concerns of regulators focus on three key areas:

1) Types of Risks

• Credit Risk: The likelihood of borrower default (accounts for 80-90% of large banks’ risk-weighted assets)
• Market Risk: Adverse fluctuations in asset values (generally 2-5%, higher when held$BTC
• Operational Risk: Fraud, system failures, legal losses, etc.

2) Definition of Capital According to Basel capital frameworks, the capital that banks must hold is an economic buffer capable of absorbing volatility in the asset-liability statement. Starting from Common Equity Tier 1 (CET1), it has a multi-layered structure with decreasing purity.

3) Capital Quantity Banks must maintain a minimum 8% capital ratio on risk-weighted assets (RWAs):

• CET1: 4.5% of RWAs
• Primary Capital: 6.0% of RWAs
• Total Capital: 8.0% of RWAs

In practice, additional buffers—such as capital conservation buffers, countercyclical buffers, etc.—are maintained, and large banks often hold total capital ratios exceeding 15%.

Re-evaluation of Tether’s Risk Assets

As of Q1 2025, Tether has issued approximately 174.5 trillion won($1.745 billion) in tokens and holds about 181.2 trillion won)$1.812 billion( in assets. Excess reserves amount to about 6.8 trillion won)$68 million(.

However, a detailed analysis of Tether’s asset composition shows:

Asset Portfolio:

• About 77%: Money market instruments and dollar equivalents )low risk weights(
• About 13%: Physical and digital commodities )Bitcoin, gold, etc.(
• Remaining: Loans and other investments )completely opaque(

Risk Weight Calculations:

For Bitcoin, Basel standards assign a maximum risk weight of 1,250%. This implies a 1:1 capital deduction. However, this is overly conservative. A more reasonable standard considers Bitcoin’s annual volatility of 45-70%, setting the risk weight for gold at about 100-250%, roughly three times higher.

For gold, if held directly, there is no credit risk, only market risk. With an annual volatility of 12-15%, a risk weight of about 100-250% is appropriate.

Loan portfolios are entirely opaque, so a 100% risk weight should be applied.

Tether’s Capital Adequacy Analysis

Based on these assumptions, Tether’s risk-weighted assets (RWAs) are estimated to be between approximately 62.3 trillion and 175.3 trillion won)$623 million-$1.753 billion(.

Using the current excess reserves of 6.8 trillion won)$68 million(, the total capital ratio (TCR) can be calculated as:

• Optimistic Scenario: about 10.89% )when conservatively assessing Bitcoin volatility(
• Realistic Scenario: about 5-7% )with moderate risk weights(
• Conservative Scenario: about 3.87% )assuming Bitcoin as full reserves(

How Much Is It Short?

Meeting Basic Regulatory Standards: Holding capital buffers capable of absorbing 30-50% Bitcoin volatility, Tether can meet basic regulatory requirements.

Below Market Standards: To maintain a capital ratio above 15%, like large global banks, Tether would need an additional approximately $4.5 billion in capital to sustain its current issuance scale.

Worst-Case Scenario: Treating Bitcoin as full reserves, capital shortfall could range between $12.5 billion and $25 billion.

Can Group Capital be the Solution?

Tether argues that the group holds substantial capital:

• 2024 annual net profit: over $13 billion
• Group capital: over $20 billion
• H1 2025 profit: over $10 billion

However, this cannot be considered regulatory capital due to the asset-liability ring-fencing structure. Tether is not legally obliged to deploy group assets to protect token holders in a crisis. Considering the liquidity and volatility of group assets—such as renewable energy projects, Bitcoin mining, AI infrastructure—it’s difficult to regard these as reliable capital buffers.

Conclusion

Under basic regulatory standards, Tether’s current excess reserves can meet minimum requirements. However, to be recognized as a “capitalized bank” in the market, about $4.5 billion in additional capital is needed, and stricter assessments would demand even more.

Tether’s capital status does not imply imminent bankruptcy, but it is clear that current reserve levels do not meet market standards. This is a structural issue that must be addressed in the process of increasing market maturity and transparency.