Author: Luca Prosperi Translator: Deep Tide TechFlow
When I graduated from university and applied for my first management consulting job, I did what many ambitious but cowardly male graduates often do: choose a firm that specializes in serving financial institutions.
In 2006, banking was a symbol of "cool." Banks were typically located in the grandest buildings in the most beautiful neighborhoods of Western Europe, and I was looking forward to using that opportunity to travel. However, no one told me that this job came with a more secretive and complex condition: I would be "married off" to one of the world's largest but also most specialized industries—banking—indefinitely. The need for banking experts has never disappeared. During economic expansions, banks become more innovative, and they need capital; during economic contractions, banks need restructuring, and they still need capital. I tried to escape this vortex, but like any symbiotic relationship, getting out of it is much harder than it seems.
... The public often assumes that bankers are experts in banking. This is a reasonable assumption, but it's a misconception. Bankers tend to isolate themselves in industry and product "silos." A telecommunications banker might know everything about telecommunications companies (and their financing practices), but little about banking itself. Those who dedicate their lives to serving the banking industry (the "banker's banker," or the group of Financial Institutions Groups (FIGs)) are an anomaly. And generally, they are disliked. They are the "losers among losers." Every investment banker dreams of escaping banking and moving to private equity or entrepreneurship while editing spreadsheets late at night. But FIG bankers are different. Their fate is sealed. Trapped in a golden "enslavement," they live in a self-enclosed industry, almost ignored by everyone else. The business of serving the banking industry is philosophical, occasionally revealing a kind of beauty, but most of the time it's invisible. Until the advent of decentralized finance (DeFi). DeFi has made lending fashionable, and suddenly, every marketing genius at every fintech company feels entitled to comment on topics they know almost nothing about. Thus, the ancient and serious discipline of "banking for banks" has 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 somewhere in London's Canary Wharf, Wall Street, or Basel, an unknown FIG analyst may have already conceived of these ideas two decades ago. I, too, was once a tormented "banker's 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 the most mysterious topics in the crypto space—Tether's balance sheet. Few things have captured the industry's imagination as much as the composition of USDT's financial reserves. However, most discussions revolve around whether Tether is "solvent" or "insolvent," lacking a framework to make the debate more meaningful. In traditional businesses, solvency has a clear definition: assets must at least match liabilities. However, when this concept is applied to financial institutions, the logic becomes less stable. In financial institutions, the importance of cash flow is downplayed, and solvency should be understood as the relationship between the amount of risk carried on 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 among the most specialized areas in finance. It's both amusing and frustrating to see some people improvise their own solvency assessment frameworks. In fact, 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 must be ignored. Debt here is not a constraint, but rather the raw material of the business. What truly matters is the arrangement of assets and liabilities, whether there is sufficient capital to cope with risk, and whether sufficient returns are left for capital providers. The topic of Tether has recently been reignited by a report from S&P. The report itself is simple and mechanical, but what's truly interesting is the attention it has garnered, rather than the content of the report itself. By the end of the first quarter of 2025, Tether had issued approximately $174.5 billion in digital tokens, mostly stablecoins pegged to the US dollar, with a small amount of digital gold. These tokens offered eligible holders a 1:1 redemption right. To support these redemption rights, Tether International, S.A. de C.V. held approximately $181.2 billion in assets, meaning its excess reserves were approximately $6.8 billion. So, is this net asset value figure satisfactory? To answer this question (without creating a new, customized valuation framework), we need to ask a more fundamental question: which existing valuation framework should be applied? And to choose the right framework, we must begin with the most fundamental observation: what kind of business is Tether? A Day in the Life of a Bank Essentially, Tether's core business is issuing on-demand digital deposit instruments that can circulate freely in the crypto market, while investing these liabilities in a diversified portfolio of assets. I deliberately chose the term "investment liabilities" rather than "holding reserves" because Tether doesn't simply hold these funds in custody with the same risk/maturity; instead, it actively allocates assets and profits from the spread between its asset yields and its liabilities (which have virtually zero cost). All of this is done under a few broadly defined asset allocation guidelines. From this perspective, Tether is more like a bank than a simple money transfer institution—more precisely, an unregulated bank. In its simplest framework, banks are required to hold a certain amount of economic capital (I will use "capital" and "net assets" as synonyms here, my FIG friends please forgive me) to absorb the impact of expected and unexpected fluctuations in their asset portfolios, as well as other risks. This requirement exists for a reason: banks enjoy a state-granted monopoly on safeguarding the funds of households and businesses, and this privilege necessitates that banks provide corresponding buffers for potential risks on their balance sheets. For banks, regulators pay particular attention to the following three aspects: The types of risks banks need to consider; the nature of the risks that meet the definition of capital; and the amount of capital banks must hold. Risk Types → Regulators have regulated various risks that could erode the redeemable value of bank assets, which will become apparent when the assets are ultimately used to repay their liabilities: Credit Risk → The possibility that a borrower will fail to fully perform its obligations when required to do so. This type of risk accounts for as much as 80%-90% of the risk-weighted assets of most global systemically important banks (G-SIBs). Market risk refers to the risk that an asset's value will fluctuate adversely relative to the currency in which its liabilities are denominated, even in the absence of credit or counterparty deterioration. This could happen when depositors expect to redeem their assets in US dollars (USD), but the institution chooses to hold gold or Bitcoin ($BTC). Interest rate risk also falls into this category. This type of risk typically accounts for 2%-5% of risk-weighted assets. Operational risk refers to the various potential risks faced by a company in its operations: such as fraud, system failures, legal losses, and various internal errors that could damage the balance sheet. This type of risk typically accounts for a smaller proportion of risk-weighted assets (RWAs), representing residual risk. These requirements form the first pillar (Pillar I) of the Basel Capital Framework, which remains the dominant system for defining prudent capital for regulated entities. Capital is the fundamental raw material for ensuring that balance sheets have sufficient value to cope with redemptions by liability holders (i.e., liquidity risk at typical redemption rates). Equity is expensive—as the lowest form of capital, it is indeed one of the most expensive ways for companies to finance themselves. Over the years, banks have become extremely adept at using various innovative methods to reduce the amount of equity required and its cost. This gave rise to a series of so-called hybrid instruments, financial instruments that behave like debt in economic terms but are designed to comply with regulatory requirements and are thus considered equity capital. Examples include perpetual subordinated notes, which have no maturity date and can absorb losses; contingent convertible bonds (CoCos), which automatically convert into equity when capital falls below a trigger point; and Additional Tier 1 instruments, which can be completely written down under stress scenarios. We witnessed the role of these instruments in the Credit Suisse restructuring. Due to the widespread use of these instruments, regulators differentiated the quality of capital. Common Equity Tier 1 (CET1) sits at the top, representing the purest and most loss-absorbing form of economic capital. Below it are other capital instruments with progressively decreasing purity. However, for the purposes of our discussion, we can temporarily disregard these internal classifications and focus directly on the concept of **Total Capital**—the overall buffer used to absorb losses before liability holders face risk. Once a bank has risk-weighted its assets (and categorized according to regulatory definitions of capital), regulators require banks to maintain a minimum capital ratio for these risk-weighted assets (RWAs). Under Pillar I of the Basel Capital Framework, the classic minimum ratio requirements are as follows: Common Equity Tier 1 Capital: 4.5% of Risk-Weighted Assets (RWAs) Tier 1 Capital: 6.0% of RWAs (including CET1 capital) Total Capital: 8.0% of RWAs (including both CET1 and Tier 1 capital) Basel III adds additional situation-specific buffers:
Capital Retention Buffer (CCB): Increase CET1 by 2.5%
Countercyclical Capital Buffer (CCyB): Increase by 0–2.5% depending on macroeconomic conditions
Global Systemically Important Bank Surcharge (G-SIB Surcharge): Increase systemically important banks by 1–3.5%
In effect, this means that under normal Pillar I conditions, large banks must maintain a CET1 of 7–12%+ and total capital of 10–15%+. However, regulators do not stop at Pillar I. They also implement stress testing regimes and, when necessary, add additional capital requirements (i.e., Pillar II).
Risk-weighted classification (3), loan ledger is completely opaque. For loan portfolios, the transparency is almost zero. Since information such as borrowers, maturity dates, or collateral is unavailable, the only reasonable option is to apply a 100% risk weight. Even so, this is still a relatively loose assumption given the complete lack of any credit information. Based on the above assumptions, for Tether (USDT), with total assets of approximately US$181.2 billion, its risk-weighted assets (RWAs) could range from approximately US$62.3 billion to US$175.3 billion, depending on how its commodity portfolio is treated.

Tether's Capital Situation
Now, we can put the last piece of the puzzle in and examine 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 with regulatory minimums and market practices. This step of the analysis inevitably carries a certain degree of subjectivity.

Therefore, my goal is not to draw a definitive conclusion on whether Tether has sufficient capital to reassure $USDT holders, but rather to provide a framework to help readers break down this issue into easily 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 Adequacy Ratio (TCR) will fluctuate between 10.89% and 3.87%, depending primarily on how we treat its $BTC exposure and how conservative we are about price volatility. In my view, while fully reserving $BTC aligns with the most stringent Basel interpretation, it seems overly conservative. A more reasonable baseline assumption is holding sufficient capital buffers to withstand $BTC price volatility of 30%-50%, a range well within the historical fluctuation range. Under the aforementioned baseline assumptions, Tether's collateral level generally meets the minimum regulatory requirements. However, compared to market benchmarks (such as well-capitalized large banks), its performance is less satisfactory. By these higher standards, Tether might require an additional approximately $4.5 billion in capital to maintain its current $USDT issuance. With a more stringent, fully punitive approach to $BTC, the capital shortfall could be between $12.5 billion and $25 billion. I believe this requirement is overly demanding and ultimately does not meet practical needs. Independent vs. Group: Tether's Rebuttals and Controversies
Tether's standard rebuttal on the collateral issue is that, from a group perspective, it has a large amount of retained earnings as a buffer. These figures are indeed impressive: as of the end of 2024, Tether reported annual net profits exceeding $13 billion, and its group equity exceeded $20 billion. The more recent third-quarter audit for 2025 shows that its year-to-date profit has exceeded $10 billion.
However, a counter-rebuttal to this is that, strictly speaking, these figures cannot be considered as the regulated capital of $USDT holders.
These retained earnings (located on the liabilities side) and proprietary investments (located on the assets side) are both at the group level and outside the segregated reserves. While Tether has the capacity to allocate these funds to the issuing entity in the event of problems, it has no legal obligation to do so. This liability segregation arrangement gives management the option to inject capital into the token business if necessary, but it does not constitute a hard commitment. Therefore, viewing the group's retained earnings as capital 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, artificial intelligence and data infrastructure, peer-to-peer telecommunications, education, land, and gold mining and concession companies. The performance and liquidity of these risky assets, and whether Tether is willing to sacrifice them to protect token holders in times of crisis, will determine the fair value of its equity buffer. If you're expecting a definitive answer, I'm sorry to say you might be disappointed. But that's precisely Dirt Roads' style: the journey itself is the greatest reward.