Stablecoins are designed to offer the best of both worlds: the speed and flexibility of cryptocurrency with the stability of traditional fiat currencies. At the center of this ecosystem stands Tether (USDT), the largest stablecoin by market capitalization. Recently, Tether released its latest proof of reserves, highlighting a strategic shift toward safer, more liquid assets—particularly U.S. Treasury bills. While this move strengthens confidence in its backing, experts like Barclays’ Joe Abate warn that even a fully collateralized stablecoin could face a sudden liquidity crisis or a “death spiral” under stress.
This article explores Tether’s evolving reserve strategy, the risks tied to redemption mechanics, and why market psychology might override even the strongest balance sheet.
Tether Strengthens Reserves with More U.S. Treasuries
In its most recent reserve report, Tether disclosed total consolidated assets of at least $82.42 billion, reinforcing claims of being “fully backed” and “highly liquid.” Paolo Ardoino, Tether’s Chief Technology Officer, emphasized that the past week served as a real-world test of the stablecoin’s resilience—and it passed.
The key takeaway? A clear pivot toward safety and liquidity:
- Commercial paper holdings dropped by about 17%, falling from $24.2 billion to $19.9 billion.
- Since April 2022, Tether has reduced its exposure to commercial paper by 20%, a trend that will be reflected in Q2 reporting.
- The average credit rating of remaining commercial paper improved from A-2 to A-1, indicating higher-quality short-term debt.
- Secured loans were reduced by $1 billion.
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- Investments in money market funds and U.S. Treasury bills rose from $34.5 billion to $39.2 billion—an increase of over 13%.
- This shift significantly enhances the overall quality and liquidity profile of Tether’s reserves.
By replacing riskier commercial paper with government-backed Treasuries, Tether is aligning itself more closely with traditional money market funds, which are known for capital preservation and daily liquidity.
Why Even "Fully Backed" Doesn’t Mean Risk-Free
Despite these improvements, Barclays strategist Joe Abate raises a critical point: Even if every USDT is fully backed by $1 in high-quality assets, it could still collapse under pressure. Not due to insolvency—but due to illiquidity and investor behavior.
Abate argues that a "death spiral" scenario remains possible, driven not by flawed reserves, but by structural limitations in how USDT can be redeemed.
The Redemption Bottleneck
Unlike traditional financial instruments, Tether imposes strict conditions on direct redemptions:
- Users must open an approved account.
- Minimum redemption amount: $100,000 worth of USDT.
- A 0.1% fee applies to all redemptions.
These barriers effectively exclude retail investors and smaller institutions from redeeming directly for USD. As a result, most users rely on secondary markets—crypto exchanges—to convert USDT back into fiat.
But here’s the problem: secondary market liquidity is not guaranteed, especially during periods of panic.
When crypto prices fall, buyers vanish. Even modest selling pressure can cause USDT to trade below its $1 peg. In May, concerns over stablecoin safety caused USDT to dip as low as **$0.95, meaning holders accepted a 5% loss** just to exit quickly.
That willingness to take a haircut signals something deeper: a lack of trust in timely access to underlying reserves, regardless of how strong those reserves appear on paper.
The Broken Arbitrage Mechanism
In traditional finance, pricing imbalances are corrected by arbitrage. If an ETF trades below its net asset value (NAV), market makers buy shares and redeem them at NAV for a profit—restoring equilibrium.
In theory, the same should happen with USDT: if it trades at $0.95, arbitrageurs should buy low and redeem at $1 via Tether’s portal.
But Abate explains why this mechanism often fails:
- Redemption is slow and costly – The $100K minimum and 0.1% fee make small-scale arbitrage impractical.
- Funding requirements are high – Arbitrageurs must lock up capital during the redemption process, exposing them to market risk.
- No guarantee of execution speed – Delays could lead to further price drops, turning potential profits into losses.
- Market sentiment overrides fundamentals – In crypto’s momentum-driven world, fear spreads faster than logic.
“Even if the collateral is solid, liquidity doubts can trigger a self-fulfilling rush to exit,” says Abate. “When everyone wants out at once, there’s no floor.”
Without efficient arbitrage, the peg becomes fragile—especially when confidence wavers.
FAQ: Understanding Stablecoin Risks in 2025
Q: Is USDT still pegged to the U.S. dollar?
A: Yes, USDT is designed to maintain a 1:1 peg with the U.S. dollar. However, temporary deviations can occur during periods of high volatility or market stress.
Q: Can I redeem USDT for USD directly?
A: Only if you’re an approved entity with a minimum of $100,000 in USDT and complete Tether’s verification process. Most users trade USDT on exchanges instead.
Q: What backs USDT?
A: As of the latest report, USDT is backed by a mix of cash, cash equivalents, U.S. Treasury bills, secured loans, and other assets—with Treasuries now making up a growing share.
Q: Could USDT lose its peg permanently?
A: While unlikely under normal conditions, a sustained loss of confidence—combined with redemption bottlenecks—could lead to a temporary or even prolonged depegging event.
Q: How does USDT differ from other stablecoins like USDC?
A: USDC offers daily attestations and allows retail redemptions through regulated partners, giving it greater transparency and accessibility. USDT relies more on periodic audits and caters primarily to institutional players.
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The Bigger Picture: Trust Over Collateral
Tether’s shift toward U.S. Treasuries is a positive step toward long-term sustainability. But Abate’s warning underscores a crucial truth: in digital finance, perception is as important as reality.
Even with strong reserves, a stablecoin lives or dies by its liquidity infrastructure and user trust. If investors believe they can’t get their money out quickly—or at full value—they’ll act preemptively, creating the very crisis they fear.
This dynamic mirrors bank runs in traditional finance: solvency doesn’t matter if everyone demands cash at once.
Final Thoughts: What’s Next for Stablecoins?
Regulators worldwide are watching closely. The EU’s MiCA framework and U.S. legislative proposals aim to impose stricter reserve and redemption standards on stablecoins. These rules could force Tether and others to improve accessibility and transparency—or risk losing market share.
For investors, the lesson is clear:
✅ Monitor reserve composition
✅ Understand redemption terms
✅ Watch for early signs of depegging
And for traders navigating volatile markets:
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Core Keywords
- Tether (USDT)
- U.S. Treasury investments
- Stablecoin liquidity
- Death spiral risk
- Proof of reserves
- Redemption mechanics
- Market confidence
- Cryptocurrency stability
While Tether continues to strengthen its foundation, the path forward depends not just on balance sheets—but on behavior, psychology, and trust in an ecosystem where speed often trumps substance.