2025 Tether Financial Analysis: An Additional $4.5 Billion in Reserves Needed to Maintain Stability

Author: Luca Prosperi

Translated by: TechFlow

When I graduated from university and applied for my first management consulting job, I did what many ambitious but timid male graduates often do: I chose a firm specializing in serving financial institutions.

Back in 2006, banking was the epitome of “cool.” Banks typically occupied the grandest buildings in the most beautiful districts of Western Europe, and I was eager to seize the opportunity to travel around. However, no one told me that the job came with a more subtle and complex condition: I would be “married” to one of the world’s largest yet most specialized industries—banking, and for an indefinite period. The demand for banking experts never disappears. In times of economic expansion, banks become more creative and need capital; in downturns, banks require restructuring and still need capital. I tried to escape this vortex, but like any symbiotic relationship, getting out is much harder than it appears.

The public usually believes that bankers know a lot about banking. This is a reasonable assumption, but it’s wrong. Bankers often pigeonhole themselves into industry and product “silos.” A banker focused on telecom might know the ins and outs of telecom companies (and their financing characteristics) but know very little about banking itself. And those who spend their lives serving banks (the “bankers’ bankers,” namely the Financial Institutions Group, or FIG crowd) are a peculiar breed—and generally disliked. They are “losers among losers.”

Every investment banker dreams, while editing spreadsheets at midnight, of escaping banking for private equity or the startup world. But FIG bankers are different. Their fate is sealed. Trapped in a gilded “slavery,” they live in a self-contained industry, almost invisible to others. Banking for banks is deeply philosophical, occasionally even beautiful, but mostly invisible. Until the rise of decentralized finance (DeFi).

DeFi made lending cool again, and suddenly, every marketing whiz in every fintech company felt entitled to comment on topics they barely understood. Thus, the ancient and serious discipline of “banking for banks” resurfaced. If you come to DeFi or crypto with a suitcase full of brilliant ideas about reinventing finance or understanding balance sheets, know that somewhere in Canary Wharf, Wall Street, or Basel, an anonymous FIG analyst probably thought of those ideas twenty years ago.

I, too, was once a tormented “bankers’ banker.” And this article is my revenge.

Tether: Schrödinger’s Stablecoin

It’s been two and a half years since I last wrote about one of crypto’s most mysterious topics: the balance sheet of Tether.

Few things ignite the imagination of industry insiders like the composition of $USDT ’s financial reserves. Yet, most discussions still revolve around whether Tether is “solvent” or “insolvent,” lacking a framework that would make the debate more meaningful.

In traditional companies, the concept of solvency is clearly defined: at minimum, assets must match liabilities. However, when applied to financial institutions, the logic becomes much less stable. In financial institutions, the importance of cash flow is diminished, and solvency should be understood as the relationship between the risk carried by the balance sheet and the liabilities owed to depositors and other funding providers. For financial institutions, solvency is more of a statistical concept than a simple arithmetic one. If this sounds counterintuitive, don’t worry—bank accounting and balance sheet analysis have always been among the most specialized corners of finance. Watching some people improvise their own solvency assessment frameworks is both amusing and exasperating.

In reality, understanding financial institutions requires overturning the logic of traditional companies. The starting point for analysis is not the profit and loss statement (P&L), but the balance sheet—and you can ignore cash flow. Debt here is not a constraint; it’s the raw material of the business. What really matters is how assets and liabilities are structured, whether there’s enough capital to absorb risk, and whether enough return is left for capital providers.

The Tether topic has resurfaced recently due to a report from S&P. The report itself is simple and mechanical, but the real interest lies in the attention it sparked, not in its content. By the end of Q1 2025, Tether had issued about $174.5 billion in digital tokens, mostly USD-pegged stablecoins, and a small amount of digital gold. These tokens offer eligible holders a 1:1 redemption right. To support these redemptions, Tether International, S.A. de C.V. holds about $181.2 billion in assets, meaning it has $6.8 billion in excess reserves.

So, is this net asset figure sufficient? To answer that question (and without inventing yet another custom assessment framework), we need to first ask a more fundamental question: what existing assessment framework should apply? And to pick the right one, we must start with the most basic observation: what kind of business is Tether anyway?

A Day in the Life of a Bank

At its core, Tether’s business is about issuing on-demand digital deposit instruments that can circulate freely in crypto markets, while investing those liabilities into a diversified asset portfolio. I deliberately use the term “investing liabilities” rather than “holding reserves,” because Tether is not simply custodizing these funds in a like-for-like risk/maturity fashion, but is actively allocating assets and profiting from the spread between asset yields and nearly zero-cost liabilities—all under broadly defined asset management guidelines.

From this perspective, Tether is more like a bank than a mere funds transfer institution—more precisely, an unregulated bank. In the simplest framework, banks are required to hold a certain amount of economic capital (here I’ll treat “capital” and “net assets” as synonyms—apologies to my FIG friends) to absorb both expected and unexpected swings in their asset portfolios, and other risks. This requirement exists for a reason: banks enjoy a state-granted monopoly on custodying household and corporate funds, and this privilege comes with the requirement to provide a buffer for the risks inherent in their balance sheets.

For banks, regulators focus particularly on three things:

Types of risk banks need to consider

The nature of what qualifies as capital

The amount of capital banks must hold

Risk Types → Regulators define various risks that can erode the redeemable value of a bank’s assets—risks that become evident when assets are ultimately used to repay liabilities:

Credit risk → The chance that borrowers fail to fully perform their obligations when due. For most Global Systemically Important Banks (G-SIBs), this makes up 80%-90% of risk-weighted assets.

Market risk → The risk that asset values move unfavorably relative to the currency of liabilities even without any credit or counterparty deterioration. This can arise when depositors expect to redeem in USD, but the institution holds gold or Bitcoin ($BTC). Interest rate risk also falls here. This typically makes up 2%-5% of risk-weighted assets.

Operational risk → The full spectrum of potential risks from business operations: fraud, systems failures, legal losses, and various internal mishaps that could damage the balance sheet. This is typically the residual risk in risk-weighted assets (RWA).

These requirements make up the first pillar (Pillar I) of the Basel Capital Framework, which remains the dominant system defining prudential capital for regulated entities. Capital is the fundamental buffer ensuring there’s enough value on the balance sheet to meet liability holder redemptions (at typical redemption speeds, i.e., liquidity risk).

The Nature of Capital

Equity is expensive—being the most junior form of capital, equity is indeed the priciest way to finance a business. Over the years, banks have become adept at reducing the amount and cost of equity required, thanks to financial innovation. This led to a range of so-called hybrid instruments: financial tools that function economically as debt, but are structured to meet regulatory requirements for capital. For example, perpetual subordinated notes (with no maturity and loss-absorbing features); contingent convertibles (CoCos), which convert to equity when capital falls below a trigger; and Additional Tier 1 instruments, which can be written off entirely under stress. We saw these in action during the Credit Suisse restructuring. Due to the prevalence of these instruments, regulators distinguish between different qualities of capital. Common Equity Tier 1 (CET1) sits at the top—this is the purest, most loss-absorbing form of economic capital. Below that are other capital instruments of decreasing purity.

However, for our purposes, we can set aside these internal classifications and focus on Total Capital—the overall buffer for absorbing losses before liability holders are at risk.

The Amount of Capital

Once a bank risk-weights its assets (and classifies capital per regulatory definitions), regulators require the bank to meet minimum capital ratios against these risk-weighted assets (RWA). Under Basel’s Pillar I, the classic minimum ratios are:

CET1: 4.5% of RWAs

Tier 1: 6.0% of RWAs (includes CET1)

Total Capital: 8.0% of RWAs (includes CET1 and Tier 1)

On top of this, Basel III adds scenario-specific buffers:

Capital Conservation Buffer (CCB): adds 2.5% to CET1

Countercyclical Capital Buffer (CCyB): 0–2.5% depending on macro conditions

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 do not stop at Pillar I. They impose stress test regimes and add further capital as needed (Pillar II). As a result, actual capital requirements can easily exceed 15%.

If you want to dig into a bank’s balance sheet composition, risk management, and capital levels, check its Pillar III disclosures—seriously.

As a reference, in 2024, G-SIBs average about 14.5% CET1 and 17.5–18.5% Total Capital ratios to RWAs.

Tether: The Unregulated Bank

Now we can see that debates about whether Tether is “good” or “bad,” “solvent” or “insolvent,” “FUD” or “fraud,” all miss the point. The real question is simpler and more structural: Does Tether hold enough Total Capital to absorb volatility in its asset portfolio?

Tether doesn’t publish Pillar III-style disclosures (for reference, here’s UniCredit’s report); instead, it only provides a brief reserves report—here’s the latest version. While these are extremely limited by Basel standards, they’re enough to attempt a rough risk-weighted asset estimate for Tether.

Tether’s balance sheet is relatively simple:

About 77% invested in money market instruments and other USD cash equivalents—under standardized approaches, these require little or no risk weighting.

About 13% invested in physical and digital commodities.

The remainder is loans and other miscellaneous investments not detailed in disclosures.

Risk-weighting Category (2) requires careful handling.

Under standard Basel guidelines, Bitcoin ($BTC) receives a whopping 1,250% risk weight. Combined with an 8% Total Capital requirement on RWAs (see above), this means regulators effectively require full reserve backing—i.e., a 1:1 capital deduction, assuming zero loss-absorption. We include this in the worst-case scenario, though this approach is clearly outdated—especially for issuers whose liabilities circulate in crypto markets. We believe $BTC should more consistently be treated as a digital commodity.

Currently, there are established frameworks for physical commodities like gold—which Tether holds in significant quantities. If it’s directly custodied (as is the case for some of Tether’s gold, and likely for $BTC ), there’s no inherent credit or counterparty risk. The risk is purely market risk, since liabilities are denominated in USD, not the commodity. Banks typically hold 8%–20% capital against gold positions, buffering price swings—equivalent to 100%–250% risk weights. Similar logic applies to $BTC, but requires adjustment for its much higher volatility. Since the Bitcoin ETF launch, $BTC ’s annualized volatility has been 45%–70%, while gold is 12%–15%. A simple benchmark is to multiply $BTC ’s risk weight by about 3x the gold risk weight.

Risk-weighting Category (3) is loans, which are completely opaque. There’s virtually zero transparency on the loan portfolio. With no information on borrowers, maturities, or collateral, the only reasonable choice is to apply a 100% risk weight. Even this is generous, given the total absence of any credit information.

Using the above assumptions, for total assets of about $181.2 billion, Tether’s RWAs likely fall between about $62.3 billion and $175.3 billion, depending on treatment of its commodity portfolio.

Tether’s Capital Position

Now, we can complete the final piece of the puzzle by looking at Tether’s equity or excess reserves as a percentage of its RWAs. In other words, we need to calculate Tether’s Total Capital Ratio (TCR) and compare it to regulatory minima and market norms. This step is inevitably somewhat subjective. So my goal is not to give a final answer on whether Tether has enough capital to reassure $BTC holders, but to provide a framework to help readers break down the question into digestible parts and form their own assessment in the absence of a formal prudential regime.

Assuming Tether’s excess reserves of about $6.8 billion, its TCR would range from 10.89% to 3.87%, depending primarily on how we handle its $USDT exposure and how conservative we are about price swings. In my view, fully reserving $BTC is in line with the strictest Basel interpretation, but overly conservative. A more reasonable base case is to hold enough capital to buffer against a 30%–50% price swing in $BTC —a range well within historical volatility.

Under this base case, Tether’s coverage level basically meets minimum regulatory requirements. However, compared to market benchmarks (such as well-capitalized large banks), the picture is less satisfactory. Under these higher standards, Tether might need an additional $4.5 billion in capital to maintain its current $BTC issuance. Under a stricter, fully punitive $USDT treatment, the capital shortfall could be between $12.5 billion and $25 billion. I think this is excessive and ultimately not fit for purpose.

Standalone vs. Group: Tether’s Rebuttal and Controversy

Tether’s standard rebuttal on collateral is: at the group level, it has a large buffer of retained earnings. These figures are indeed substantial: as of the end of 2024, Tether reported annual net profits over $13 billion and group equity exceeding $20 billion. The most recent 2025 Q3 audit shows year-to-date profits already over $10 billion.

However, the counter to this rebuttal is that, strictly speaking, these figures cannot be considered regulatory capital for $BTC holders. These retained earnings (on the liability side) and proprietary investments (on the asset side) belong at the group level and are outside the segregated reserves. While Tether can, if it chooses, downstream these funds to the issuing entity in case of trouble, it has no legal obligation to do so. This liability segregation gives management the option—but not the obligation—to inject funds into the token business if needed. Therefore, treating group retained earnings as fully available capital to absorb $USDT losses is overly optimistic.

A rigorous assessment would require looking at the group balance sheet, including stakes in renewable energy, Bitcoin mining, AI and data infrastructure, peer-to-peer telecoms, education, land, and gold mining and concession companies. The performance and liquidity of these risk assets, and whether Tether would be willing to sacrifice them in a crisis to protect token holders, would determine the fair value of its equity buffer.

If you were hoping for a clear answer, I’m sorry to disappoint. But that’s the Dirt Roads style: the journey itself is the biggest reward.