Author:Luca Prosperi
Compiled by: Deep Tide TechFlow
When I graduated from university and applied for my first job in management consulting, I did what many ambitious but timid male graduates do: I chose a company that specialized in serving financial institutions.
In 2006, banking was "cool." Banks were usually located in the grandest buildings in the most beautiful neighborhoods of Western Europe, and I was eager to travel. However, no one told me that this job came with a more hidden and complex condition: I would be "married" to one of the largest but also most specialized industries in the world—banking—indefinitely. The demand for banking experts never disappears. During economic expansions, banks become more creative and need capital; during economic contractions, banks need restructuring, and they still need capital. I tried to escape this vortex, but like any symbiotic relationship, breaking free was harder than it seemed.
The public generally assumes that bankers understand banking. This is a reasonable assumption but incorrect. Bankers often silo themselves into industry and product segments. A banker specializing in telecommunications may know everything about telecom companies (and their financing characteristics) but very little about banking itself. Those who dedicate their lives to serving banks (i.e., the Financial Institutions Group, or FIG, crowd) are a peculiar breed and are generally unpopular. They are the "losers among losers."
Every investment banker dreams of escaping banking and moving into private equity or entrepreneurship while revising spreadsheets at midnight. But FIG bankers are different. Their fate is sealed. Trapped in golden "servitude," they live in a self-contained industry, almost ignored by everyone else. Banking for banks is deeply philosophical, occasionally exhibiting a certain beauty, but most of the time it remains invisible. Until decentralized finance (DeFi) emerged.
DeFi made lending fashionable, and suddenly, every marketing genius in fintech felt qualified to comment on topics they barely understood. Thus, this ancient and serious discipline of "banking for banks" resurfaced. If you come to DeFi or the crypto industry with a box of brilliant ideas about reshaping finance and understanding balance sheets, know that in some corner of London's Canary Wharf, Wall Street, or Basel, an anonymous FIG analyst probably thought of these ideas two decades ago.
I was once a suffering "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 industry insiders like the composition of $USDT's financial reserves. However, most discussions still revolve around whether Tether is "solvent" or "insolvent," lacking a framework to make this debate meaningful.
In traditional enterprises, the concept of solvency has a clear definition: assets must at least match liabilities. However, when applied to financial institutions, this logic becomes less stable. In financial institutions, the importance of cash flow is diminished, and solvency should be understood as the relationship between the amount of risk carried by the balance sheet and the liabilities owed to depositors and other financing providers. For financial institutions, solvency is more of a statistical concept than a simple arithmetic problem. If this sounds counterintuitive, don’t worry—bank accounting and balance sheet analysis have always been one of the most specialized corners of finance. Watching people improvise their own solvency assessment frameworks is both amusing and frustrating.
In reality, understanding financial institutions requires颠覆ing traditional enterprise logic. The starting point of analysis is not the profit and loss statement (P&L) but the balance sheet—and cash flow is ignored. Debt here is not a constraint but the raw material of the business. What truly matters is how assets and liabilities are arranged, whether there is enough capital to absorb risks, and whether sufficient returns are left for capital providers.
The topic of Tether ($USDT) has recently been reignited by a report from S&P. The report itself is simple and mechanical, but the真正有趣的地方在于它引发的关注度,而非报告内容本身. By the end of Q1 2025, Tether had issued approximately $174.5 billion in digital tokens, mostly USD-pegged stablecoins, with a small amount of digital gold. These tokens provide qualified holders with 1:1 redemption rights. To support these redemption rights, Tether International, S.A. de C.V. holds approximately $181.2 billion in assets, meaning its excess reserves are about $6.8 billion.
Is this net asset figure sufficient to be satisfactory? To answer this question (without creating another custom assessment framework), we must first ask a more fundamental question: What existing assessment framework should be applied? And to choose the right framework, we must start with the most basic observation: What kind of business is Tether, really?
A Day in the Life of a Bank
At its core, Tether's business is essentially 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 "investing liabilities" rather than "holding reserves" because Tether does not simply custody these funds in a same-risk/same-maturity manner but actively allocates assets and profits from the spread between its asset yields and its liabilities (which are almost zero-cost). And all this is done under broadly defined asset usage guidelines.
From this perspective, Tether resembles a bank more than a mere money transmission entity—more precisely, 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, among other risks. This requirement exists for a reason: banks enjoy a state-granted monopoly to custody the funds of households and businesses, and this privilege requires banks to provide a corresponding buffer for potential risks in their balance sheets.
For banks, regulators focus particularly on three aspects:
-
The types of risks banks need to consider
-
The nature of what qualifies as capital
-
The amount of capital banks must hold
Types of Risks → Regulators standardize various risks that could erode the redeemable value of a bank's assets, which would manifest when assets are ultimately used to repay its liabilities:
Credit Risk → The possibility that a borrower fails to fully perform their obligations when required. This risk typically constitutes 80%-90% of the risk-weighted assets (RWAs) of most Globally Systemically Important Banks (G-SIBs).
Market Risk → The risk that asset values fluctuate unfavorably relative to the currency in which liabilities are denominated, even without credit or counterparty deterioration. This can happen if depositors expect redemption in USD but the institution holds gold or Bitcoin ($BTC). Additionally, interest rate risk falls into this category. This risk usually accounts for 2%-5% of RWAs.
Operational Risk → Various potential risks inherent in business operations: such as fraud, system failures, legal losses, and various internal errors that could damage the balance sheet. This risk typically constitutes the remainder of RWAs, at a low percentage.
These requirements form the first pillar (Pillar I) of the Basel Capital Framework, which remains the dominant system for defining prudent capital for regulated institutions. Capital is the basic raw material ensuring that the balance sheet has sufficient value to meet the redemptions of liability holders (at typical redemption speeds, i.e., liquidity risk).
The Nature of Capital
Equity is expensive—as the most subordinated form of capital, equity is indeed the most expensive way to finance a business. Over the years, banks have become extremely adept at reducing the amount of equity required and its cost through various innovations. This has given rise to a series of so-called Hybrid Instruments, financial instruments that behave like debt economically but are designed to meet regulatory requirements and thus be considered equity capital. Examples include Perpetual Subordinated Notes, which have no maturity date and can absorb losses; or Contingent Convertible Bonds (CoCos), which automatically convert to equity when capital falls below a trigger point; and Additional Tier 1 Instruments, which may be completely written down in stress scenarios. We witnessed the role of these instruments during the restructuring of Credit Suisse. Due to the widespread use of these instruments, regulators distinguish the quality of capital. Common Equity Tier 1 (CET1) is at the top, the purest form of economic capital with the greatest loss-absorbing capacity. Below it are other capital instruments with gradually decreasing purity.
However, for our discussion, we can暂时忽略这些内部的分类 and focus directly on the concept of Total Capital—the overall buffer used to absorb losses before liability holders are at risk.
Amount of Capital
Once a bank has risk-weighted its assets (and according to regulatory classifications of capital definitions), regulators require the bank to maintain minimum capital ratios against these Risk-Weighted Assets (RWAs). Under the first pillar (Pillar I) of the Basel Capital Framework, the classic minimum ratio requirements are:
-
Common Equity Tier 1 (CET1): 4.5% of Risk-Weighted Assets (RWAs)
-
Tier 1 Capital: 6.0% of RWAs (including CET1 capital)
-
Total Capital: 8.0% of RWAs (including CET1 and Tier 1 capital)
On top of this, Basel III overlays additional scenario-specific buffers:
-
Capital Conservation Buffer (CCB): An additional 2.5% for CET1
-
Countercyclical Capital Buffer (CCyB): An additional 0–2.5% based on macroeconomic conditions
-
G-SIB Surcharge: An additional 1–3.5% for systemically important banks
In practice, this means that under normal Pillar I conditions, large banks must maintain 7–12%+ CET1 and 10–15%+ Total Capital. However, regulators don't stop at Pillar I. They also implement stress testing regimes and add additional capital requirements where necessary (i.e., Pillar II). Thus, actual capital requirements can easily exceed 15%.
If you want to delve into the composition of a bank's balance sheet, its risk management practices, and the amount of capital it holds, you can check its Pillar III disclosures—this is not a joke.
For reference, 2024 data shows that the average CET1 ratio for G-SIBs was about 14.5%, and the Total Capital ratio was about 17.5% to 18.5% of risk-weighted assets.
Tether: The Unregulated Bank
Now we can understand that debates about whether Tether is "good" or "bad," "solvent" or "insolvent," "FUD" or "fraud" miss the point. The real question is simpler and more structural: Does Tether hold sufficient Total Capital to absorb the volatility of its asset portfolio?
Tether does not publish disclosures类似第三支柱(Pillar III)报告 (for reference, here is UniCredit's report); instead, it only provides a brief reserve report—this is its latest version. Although extremely limited by Basel standards, this information is still sufficient to attempt a rough estimate of Tether's risk-weighted assets.
Tether's balance sheet is relatively simple:
-
Approximately 77% is invested in money market instruments and other USD-denominated cash equivalents—under the standardized approach, these assets require almost no risk weighting or have very low risk weights.
-
Approximately 13% is invested in physical and digital commodities.
-
The remainder consists of loans and other miscellaneous investments not detailed in the disclosure.
Risk-weighted classification (2) requires careful handling.
According to standard Basel guidelines, Bitcoin ($BTC) is assigned a risk weight as high as 1,250%. Combined with the 8% Total Capital requirement for RWAs (see above), this effectively means regulators require full reserve backing for $BTC—i.e., a 1:1 capital deduction, assuming it has no loss-absorbing capacity at all. We include this in our worst-case scenario, although this requirement is clearly outdated—especially for issuers whose liabilities circulate in crypto markets. We believe $BTC should be more consistently treated as a digital commodity.
Currently, there are clear frameworks and common practices for handling physical commodities (like gold)—Tether holds a significant amount of gold: if held directly in custody (as部分黄金的存储方式, $BTC likely is too), there is no inherent credit or counterparty risk. Its risk is purely market risk, as liabilities are denominated in USD, not the commodity. Banks typically hold 8%–20% capital against gold positions to buffer price fluctuations—equivalent to a 100%–250% risk weight. Similar logic could be applied to $BTC, but adjusted for its drastically different volatility characteristics. Since Bitcoin ETF approval, $BTC's annualized volatility has been 45%–70%, while gold's volatility is 12%–15%. Therefore, a simple benchmark approach would be to scale $BTC's risk weight relative to gold's by approximately 3 times.
Risk-weighted classification (3), the loan book is completely opaque. For the loan portfolio, transparency is almost zero. With no information on borrowers, maturities, or collateral, the only reasonable choice is to apply a 100% risk weight. Even so, this remains a relatively lenient assumption, given the complete lack of any credit information.
Based on the above assumptions, for total assets of approximately $181.2 billion, Tether's Risk-Weighted Assets (RWAs) could range from approximately $62.3 billion to $175.3 billion, depending on how its commodity portfolio is treated.
Tether's Capital Position
Now, we can put the final piece in place by examining Tether's equity or excess reserves from the perspective of relative Risk-Weighted Assets (RWAs). In other words, we need to calculate Tether's Total Capital Ratio (TCR) and compare it to regulatory minimums and market conventions. This step of analysis inevitably involves some subjectivity. Therefore, my goal is not to give a final conclusion on whether Tether has enough capital to make $USDT holders feel secure, but to provide a framework to help readers break down this issue into understandable parts and form their own assessment in the absence of a formal prudential regulatory framework.
Assuming Tether's excess reserves are approximately $6.8 billion, its Total Capital Ratio (TCR) would fluctuate between 10.89% and 3.87%, depending primarily on how we treat its $BTC exposure and how conservative we are about price fluctuations. In my view, while full reserve backing for $BTC aligns with the strictest Basel interpretation, it seems overly conservative. A more reasonable baseline assumption is to hold enough capital buffer to withstand 30%-50% price fluctuations in $BTC, a range完全在历史数据的波动范围之内.
Under the above baseline assumptions, Tether's collateral level基本能够满足最低监管要求. However, compared to market benchmarks (e.g., well-capitalized large banks), its performance is less satisfactory. By these higher standards, Tether might need approximately an additional $4.5 billion in capital to maintain the current $USDT issuance scale. And if a more stringent, fully punitive treatment of $BTC is adopted, its capital shortfall could be between $12.5 billion and $25 billion. I find this requirement overly harsh and ultimately impractical.
Independent vs. Group: Tether's Rebuttal and Controversy
Tether's standard rebuttal on the collateral issue is: at the group level, it has a large amount of retained earnings as a buffer. These figures are indeed significant: as of the end of 2024, Tether reported annual net profit exceeding $13 billion, and group equity exceeding $20 billion. More recent Q3 2025 audits show year-to-date profits exceeding $10 billion.
However, 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 own investments (on the asset side) belong to the group level, outside the isolated reserves. Tether has the ability to downstream these funds to the issuing entity if problems arise, but there is no legal obligation to do so. It is this arrangement of liability isolation that gives management the option to inject capital into the token business when necessary, but it does not constitute a hard commitment. Therefore, considering the group's 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 its holdings in renewable energy projects, Bitcoin mining, AI and data infrastructure, peer-to-peer telecommunications, education, land, and gold mining and特许权公司. The performance and liquidity of these risky assets, and whether Tether is willing to sacrifice them in a crisis to ensure token holders' interests, will determine the fair value of its equity buffer.
If you were expecting a clear answer, I apologize for the potential disappointment. But this is precisely the style of Dirt Roads: the journey itself is the greatest reward.
