Tether Financial Analysis for 2025: Requires an Additional $4.5 Billion in Reserves to Maintain Stability
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Tether Financial Analysis for 2025: Requires an Additional $4.5 Billion in Reserves to Maintain Stability
If a stricter, fully punitive approach to $BTC is adopted, the capital shortfall could be between $12.5 billion and $25 billion.
Navigating Web3 tides with focused insightsAuthor: Luca Prosperi
Translation: TechFlow
When I graduated from university and applied for my first management consulting job, I did what many ambitious yet timid male graduates do: chose a firm that specialized in serving financial institutions.
In 2006, banking was “cool.” Banks were typically housed in the grandest buildings in the most beautiful neighborhoods of Western Europe, and I saw this as a chance to travel. But no one told me this job came with a more obscure and complex condition: I would be “married” to one of the world’s largest but most specialized industries—banking—and indefinitely. Demand for banking experts never disappears. During economic expansions, banks become more creative and need capital; during contractions, they need restructuring, and still need capital. I’ve tried to escape this vortex, but like any symbiotic relationship, breaking free is much harder than it seems.
The public generally assumes bankers understand banking. This is a reasonable assumption—but wrong. Bankers often divide themselves into silos by industry and product. A banker specializing in telecoms may know everything about telecom companies (and their financing traits) but little about banking itself. Those who spend their lives serving banks—the so-called “bankers’ bankers,” or Financial Institutions Group (FIG)—are a peculiar breed. And generally disliked. They are the “losers among losers.”
Every investment banker, while editing spreadsheets at midnight, dreams of escaping banking for private equity or entrepreneurship. But FIG bankers are different. Their fate is sealed. Trapped in golden “servitude,” they live in an insular industry, largely ignored by others. Banking for banks is deeply philosophical, occasionally even beautiful, but mostly invisible—until the rise of decentralized finance (DeFi).
DeFi made lending fashionable, and suddenly every marketing genius in fintech felt qualified to comment on topics they barely understood. Thus, the ancient and serious discipline of “banking for banks” resurfaced. If you walk into DeFi or crypto with a box full of brilliant ideas about reshaping finance and understanding balance sheets, know this: somewhere in Canary Wharf, London, Wall Street, or Basel, an anonymous FIG analyst probably thought of those same ideas twenty years ago.
I too was once a miserable “banker’s banker.” And this article is my revenge.
Tether: Schrödinger’s Stablecoin
It has been two and a half years since I last wrote about the most mysterious topic in crypto: Tether’s balance sheet.
Few things capture the imagination of insiders quite like the composition of $USDT’s financial reserves. Yet most discussions still revolve around whether Tether is “well-capitalized” or “insolvent,” lacking a framework to make the debate more meaningful.
In traditional corporations, solvency has a clear definition: assets must at least match liabilities. But when applied to financial institutions, this logic begins to wobble. In financial firms, cash flows matter less, and solvency should instead be seen as the relationship between the risk carried on the balance sheet and the obligations owed to depositors and other fund providers. For financial institutions, solvency is more statistical than arithmetic. If this feels counterintuitive, don’t worry—bank accounting and balance sheet analysis remain among the most specialized corners of finance. Watching people improvise their own solvency frameworks is both amusing and disheartening.
Understanding financial institutions requires flipping the logic of traditional businesses. The starting point isn’t the profit & loss statement (P&L), but the balance sheet—and cash flows are irrelevant. Debt here isn’t a constraint but raw material for the business. What truly matters is how assets and liabilities are structured, whether there’s enough capital to absorb risks, and whether sufficient returns are left for capital providers.
The Tether discussion was recently reignited by a report from S&P. The report itself is simple and mechanical, but what’s interesting is not its content but the attention it received. By the end of Q1 2025, Tether had issued approximately $174.5 billion in digital tokens, mostly USD-pegged stablecoins, with a small amount in digital gold. These tokens grant eligible holders 1:1 redemption rights. To support these redemption rights, Tether International, S.A. de C.V. holds approximately $181.2 billion in assets—meaning it has about $6.8 billion in excess reserves.
Is this net asset figure satisfactory? To answer this (without inventing another custom evaluation framework), we must first ask a more fundamental question: what existing framework should apply? And to choose the right one, we must start from the most basic observation: what kind of business is Tether?
A Day in the Life of a Bank
At its core, Tether’s business involves issuing on-demand digital deposit instruments that circulate freely in crypto markets, while investing those liabilities into a diversified portfolio of assets. I deliberately use “investing liabilities” rather than “holding reserves” because Tether does not simply custody funds passively with matching risk/tenor profiles. Instead, it actively allocates assets and profits from the spread between asset yields and near-zero-cost liabilities—all under broad guidelines for asset deployment.
From this perspective, Tether resembles a bank far more than a mere payment conduit—in fact, an unregulated bank. In the simplest framework, banks are required to hold a certain amount of economic capital (here I treat “capital” and “net assets” as synonyms, apologies to my FIG friends) to absorb expected and unexpected fluctuations in their portfolios, along with other risks. This requirement exists for a reason: banks enjoy a state-granted monopoly over safeguarding household and corporate funds, and this privilege demands they buffer potential risks on their balance sheets.
Regulators focus on three key aspects for banks:
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The types of risk a bank must consider
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The nature of what qualifies as capital
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The amount of capital a bank must hold
Risk Types → Regulators define various risks that could erode the redeemable value of a bank’s assets, which manifest when assets are ultimately used to repay liabilities:
Credit Risk → The possibility that borrowers fail to meet obligations in full when due. This risk accounts for up to 80–90% of risk-weighted assets (RWAs) at most global systemically important banks (G-SIBs).
Market Risk → The risk of adverse movements in asset values relative to the liability’s currency—even without credit or counterparty deterioration. This can occur if depositors expect USD redemptions, but the institution holds gold or Bitcoin ($BTC). Interest rate risk also falls under this category. Typically accounts for 2–5% of RWAs.
Operational Risk → Potential risks arising from business operations: fraud, system failures, legal losses, and various internal errors that could damage the balance sheet. Usually represents residual risk, with low weightings in RWAs.
These requirements form Pillar I of the Basel Capital Framework, which remains the dominant system for defining prudential capital for regulated entities. Capital is the essential buffer ensuring sufficient value exists on the balance sheet to meet liability redemptions (under typical liquidity risk conditions).
Nature of Capital
Equity is expensive—as the most junior form of capital, it is indeed the costliest way to finance a company. Over time, banks have become extremely adept at reducing both the quantity and cost of required equity through innovative instruments. This gave rise to so-called hybrid instruments—financial tools that behave economically like debt but are structured to meet regulatory definitions of equity capital. Examples include perpetual subordinated notes (no maturity, loss-absorbing); contingent convertible bonds (CoCos), which automatically convert to equity when capital falls below a trigger; and Additional Tier 1 Instruments, which may be fully written down under stress. We saw these tools in action during Credit Suisse’s restructuring. Due to their widespread use, regulators distinguish capital quality. Common Equity Tier 1 (CET1) sits at the top—the purest, most loss-absorbing form of economic capital. Below it lie progressively less robust forms.
For our purposes, we can temporarily set aside internal classifications and focus directly on **Total Capital**—the overall buffer available to absorb losses before liability holders are exposed.
Amount of Capital
Once a bank risk-weights its assets (according to regulatory capital definitions), authorities require minimum capital ratios against these risk-weighted assets (RWAs). Under Pillar I of the Basel Capital Framework, classic minimum requirements are:
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Common Equity Tier 1 (CET1): 4.5% of RWAs
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Tier 1 Capital: 6.0% of RWAs (including CET1)
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Total Capital: 8.0% of RWAs (including CET1 and Tier 1)
On top of this, Basel III layers additional context-specific buffers:
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Capital Conservation Buffer (CCB): +2.5% to CET1
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Countercyclical Capital Buffer (CCyB): +0–2.5% depending on macroeconomic conditions
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G-SIB Surcharge: +1–3.5% for systemically important banks
In practice, this means large banks must maintain 7–12%+ CET1 and 10–15%+ Total Capital under normal Pillar I conditions. But regulators don’t stop at Pillar I. They also impose stress testing regimes and add further capital requirements when necessary (i.e., Pillar II). As a result, actual capital requirements can easily exceed 15%.
If you want to deeply understand a bank’s balance sheet composition, risk management practices, and capital levels, review its Pillar III disclosures—this is not a joke.
For reference, 2024 data shows G-SIBs averaged a CET1 ratio of ~14.5%, with total capital ratios ranging from 17.5% to 18.5% of RWAs.
Tether: The Unregulated Bank
We can now see that debates over whether Tether is “good” or “bad,” “well-capitalized” or “insolvent,” “FUD” or “fraud,” miss the point entirely. The real question is simpler and more structural: Does Tether hold enough Total Capital to absorb volatility in its asset portfolio?
Tether does not publish Pillar III-style disclosures (for reference, here’s UniCredit’s); instead, it provides only a simplified reserve report—the latest version. While extremely limited by Basel standards, this document allows us to attempt a rough estimate of Tether’s risk-weighted assets.
Tether’s balance sheet is relatively straightforward:
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~77% invested in money market instruments and other USD-denominated cash equivalents—these carry negligible or very low risk weights under standardized approaches.
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~13% invested in physical and digital commodities.
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The remainder consists of loans and miscellaneous investments not detailed in disclosures.
Risk Weighting Category (2) requires careful handling.
Under standard Basel guidance, Bitcoin ($BTC) carries a risk weight as high as 1,250%. Combined with the 8% total capital requirement on RWAs (see above), this effectively mandates full backing—i.e., a 1:1 capital deduction—for $BTC, assuming zero loss-absorption capacity. We include this in our worst-case scenario, though the requirement clearly appears outdated—especially for issuers whose liabilities circulate within crypto markets. We believe $BTC should be treated more consistently as a digital commodity.
There are already established frameworks and common practices for physical commodities like gold—Tether holds a significant amount of gold: if directly custodied (as with some of Tether’s gold holdings, likely also true for $BTC), there is no inherent credit or counterparty risk. The risk is purely market-based, since liabilities are denominated in USD, not commodities. Banks typically hold 8–20% capital against gold positions to buffer price volatility—equivalent to 100–250% risk weighting. A similar logic applies to $BTC, adjusted for its vastly different volatility profile. Since the approval of Bitcoin ETFs, $BTC’s annualized volatility has ranged from 45–70%, versus 12–15% for gold. Thus, a simple benchmark is to scale $BTC’s risk weight roughly three times that of gold.
Risk Weighting Category (3), the loan book, is completely opaque. For the loan portfolio, transparency is nearly zero. Without knowledge of borrowers, maturities, or collateral, the only reasonable choice is to assign a 100% risk weight. Even this remains a relatively lenient assumption given the complete lack of credit information.
Based on these assumptions, for a total asset base of approximately $181.2 billion, Tether’s risk-weighted assets (RWAs) could range from ~$62.3 billion to $175.3 billion, depending on how its commodity portfolio is treated.
Tether’s Capital Position
Now we can complete the final piece: examining Tether’s equity or excess reserves relative to its risk-weighted assets (RWAs). In other words, we calculate Tether’s Total Capital Ratio (TCR) and compare it to regulatory minimums and market norms. This step inevitably involves subjectivity. My goal is not to deliver a definitive verdict on whether Tether holds enough capital to reassure $USDT holders, but to provide a framework helping readers break down the issue into manageable parts and form their own assessment in the absence of formal prudential regulation.
Assuming Tether’s excess reserves are ~$6.8 billion, its TCR would fluctuate between 10.89% and 3.87%, depending on how we treat its $BTC exposure and our conservatism regarding price volatility. In my view, while fully reserving $BTC aligns with Basel’s strictest interpretation, it is overly conservative. A more reasonable baseline is holding enough capital to withstand 30–50% price drops in $BTC—a range well within historical volatility.
Under this baseline, Tether’s collateralization level roughly meets minimum regulatory thresholds. However, compared to market benchmarks (e.g., well-capitalized large banks), performance is less satisfactory. By these higher standards, Tether may need an additional ~$4.5 billion in capital to sustain current $USDT issuance. With a stricter, fully punitive treatment of $BTC, the capital shortfall could reach $12.5–25 billion. I find such requirements excessively harsh and ultimately impractical.
Standalone vs. Group: Tether’s Counterargument and Controversy
Tether’s standard rebuttal on collateralization is that, at the group level, it holds substantial retained earnings as a buffer. These numbers are indeed impressive: as of end-2024, Tether reported annual net profits exceeding $13 billion, with group equity surpassing $20 billion. More recent audited results for Q3 2025 show year-to-date profits already exceeding $10 billion.
But the counter-rebuttal is that strictly speaking, these figures cannot be considered regulatory capital for $USDT holders. These retained profits (on the liability side) and proprietary investments (on the asset side) belong to the group level and sit outside segregated reserves. While Tether has the ability to funnel these funds down to the issuing entity if problems arise, it has no legal obligation to do so. This structure of liability segregation gives management optionality to recapitalize the token business when needed—but not a binding commitment. Therefore, treating group retained earnings as fully available to absorb $USDT losses is an overly optimistic assumption.
A rigorous assessment requires examining the group’s balance sheet—including holdings in renewable energy projects, Bitcoin mining, artificial intelligence and data infrastructure, peer-to-peer telecom, education, land, and gold mining and royalty companies. The performance and liquidity of these risky assets, and whether Tether would be willing to sacrifice them in a crisis to protect token holders, will determine the fair value of its equity buffer.
If you’re looking for a definitive answer, I’m sorry—you’ll likely be disappointed. But that’s precisely the Dirt Roads way: the journey is the reward.
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@LucaProsperi
