2025 Tether Financial Analysis: Needs an Additional $4.5 Billion in Reserves to Maintain Stability

According to an analysis based on the Basel capital framework, Tether basically meets the minimum regulatory requirements under the baseline assumption, but compared to large banks, it still needs an additional $4.5 billion in capital. If a stricter Bitcoin treatment method is adopted, the capital shortfall could reach $12.5 billion to $25 billion.

(Previous context: $30 billion stablecoin defense war: Tether CEO blasts Wall Street rating agencies and Arthur Hayes) (Background supplement: Arthur Hayes: If Tether’s Bitcoin and gold drop by 30%, USDT will be insolvent)

If a stricter, fully punitive $BTC treatment method is used, the capital gap could be between $12.5 billion and $25 billion.

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

In 2006, the banking industry was the symbol of “cool.” Banks were usually located in the most magnificent buildings on the nicest streets of Western Europe, and at the time, I wanted to use this as an opportunity to travel. However, no one told me that this job came with a more hidden, more complicated condition: I would be “married” to one of the world’s largest but most specialized industries—banking—and for an indefinite period. The demand for banking experts has never faded. In times of economic expansion, banks become more creative and need capital; during contractions, banks need to restructure and still need capital. I tried to escape this vortex, but like any symbiotic relationship, getting out is much harder than it seems.

The public usually thinks bankers know a lot about banking. This is a reasonable assumption, but it’s wrong. Bankers often divide themselves into industry and product “silos.” A banker focused on the telecom industry may know the ins and outs of telecom companies ( and their financing characteristics ), but know little about banking itself. And those who spend their lives serving banks—(the “bankers’ bankers,” namely the Financial Institutions Group (FIG) crowd)—are a peculiar breed. And generally not well liked. They’re the “losers among losers.”

Every investment banker dreams of escaping banking while editing spreadsheets at midnight, hoping to move into private equity or start-ups. But FIG bankers are different. Their fate is sealed. Trapped in gilded “servitude,” they live in a self-contained industry, largely ignored by others. Banking for banks is deeply philosophical, occasionally beautiful, but mostly invisible. Until the emergence of decentralized finance (DeFi).

DeFi made lending cool, and suddenly, every marketing genius in every fintech company felt qualified to comment on topics they scarcely understood. Thus, this ancient and serious discipline of “banking for banks” resurfaced. If you walk into the DeFi or crypto industry 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 these ideas twenty years ago.

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

Tether: Schrodinger’s Stablecoin

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

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

In traditional businesses, the concept of solvency has a clear definition: at a minimum, assets must match liabilities. However, when this concept is applied to financial institutions, its logic becomes less stable. In financial institutions, cash flow is de-emphasized, and solvency should be understood as the relationship between the risk carried on the balance sheet and the liabilities owed to depositors and other creditors. For financial institutions, solvency is more of a statistical concept than a simple arithmetic issue. If that 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 businesses. The starting point for analysis is not the profit and loss statement (P&L), but the balance sheet—and cash flow is ignored. Debt here is not a constraint but rather the raw material of the business. What really matters is the arrangement of assets and liabilities, whether there is enough capital to absorb risk, and whether enough return is left for capital providers.

The topic of (Tether) has been reignited recently by a report from S&P (S&P). The report itself is simple and mechanical, but what’s really interesting is the attention it’s drawn, not the content itself. By the end of Q1 2025, Tether had issued about $174.5 billion in digital tokens, most of which are dollar-pegged stablecoins, along with a small amount of digital gold. These tokens provide qualified holders with a 1:1 redemption right. To support these redemption rights, Tether International, S.A. de C.V. holds about $181.2 billion in assets, meaning it has roughly $6.8 billion in excess reserves.

So, is this net asset figure satisfactory? To answer this question (without creating yet another custom assessment framework), we first need to ask a more fundamental question: what existing assessment framework should we apply? And in order to choose the right framework, we must start with the most basic observation: what kind of business is Tether, exactly?

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 these liabilities into a diversified portfolio of assets. I deliberately use the term “investing liabilities” rather than “holding reserves,” because Tether does not simply custody these funds in the same risk/tenor format, but actively allocates assets and profits from the yield spread between its asset returns and its (near-zero cost) liabilities. All of this is done under some loosely defined asset management guidelines.

In this sense, Tether is more like a bank than a mere funds transfer agent—more specifically, it is 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 asset portfolios, as well as other risks. There is a reason for this requirement: banks enjoy a state-granted monopoly to safeguard household and business funds, and this privilege requires them to provide a buffer for potential risks on their balance sheets.

For banks, regulators focus on three main aspects: Types of risks banks need to consider The nature of what counts as capital The amount of capital banks must hold…