Written by: Andrew Folkler

Translated by: Chopper, Foresight News

According to the latest report issued by the auditing firm BDO, Tether generated a net operating profit of $1.5 billion in the second quarter of 2026. This stablecoin issuer has total assets of $187.75 billion and total liabilities of $183.64 billion. USDT still occupies more than 60% of the global stablecoin market share. From various major indicators, this quarter can be described as a performance explosion.

However, beneath the shiny data, there is a structural change in Tether’s balance sheet that deserves closer examination. The so-called excess reserves, which are the safety cushion between the total value of the assets Tether holds and the liabilities owed to USDT holders, dropped from $8.23 billion in a single quarter to $4.11 billion. This security buffer built over many years has shrunk by half in just three months. A company capable of making a profit of $1.5 billion had its reserve buffer at the end of the quarter reduced to just half of what it started with.

To understand this phenomenon, one must consider gold, bitcoin, secured lending, and a fundamental question: what should the balance sheet of a stablecoin issuer look like. Tether's second-quarter performance indicates that this company has a dual identity: it is both the underlying infrastructure for the circulation of dollars globally and aims to create a diversified financial group, with trade-offs between these two roles.

Where did the $4 billion go?

The calculation method for the drop in reserves is straightforward. Tether's excess reserves at the beginning of the first quarter were $8.23 billion, and this quarter's profit was $1.5 billion. In the absence of other changes, theoretically, the buffer funds should have increased to about $9.7 billion. However, the actual result dropped to $4.11 billion. This means that approximately $5.6 billion was consumed from the balance sheet through unrealized losses, capital expenditures, operating expenses, and other means.

The two asset types most affected are gold and bitcoin. In this quarter, Tether increased its gold holdings by 14 tons, raising its total holdings from 132.2 tons to 146.2 tons. However, gold prices fell by about 15% during the same period, with prices slightly above $4,000 per ounce. The result is that even with continued increases, Tether's gold position value shrunk from $19.84 billion to $18.84 billion, with an unrealized loss of about $1 billion.

The situation with bitcoin is similar. Tether increased its holdings by 1,796 bitcoins, reaching a total of 98,933 bitcoins. However, the bitcoin valuation used in the audit report dropped from $68,200 to $58,600, causing bitcoin position value to fall from $6.62 billion to $5.8 billion, with a loss of about $820 million.

Just from gold and bitcoin, Tether shouldered an unrealized loss of about $1.8 billion in the second quarter. When adding in the funds used to increase gold and bitcoin positions, build USAT stablecoin infrastructure, and cover various operating costs, the expected gap of $5.6 billion between anticipated reserves and actual data can be explained. However, being explainable does not mean the risk is controllable.

The contraction in secured loans further adds uncertainty. Tether's outstanding secured loans decreased by about $2.38 billion, a drop of 15%. Generally speaking, reducing secured loans can improve reserve quality, which means replacing counterparty credit risk with directly held assets. However, this reduction occurred in a quarter where reserve buffers were already under pressure from unrealized losses, raising suspicions that some loan reductions might not have been a proactive choice. Tether did not disclose borrower information or corresponding collateral, so analysts could only speculate on whether related loans were settled at maturity, recalled early, or proactively phased out.

The final result is that the current balance sheet has changed significantly compared to three months ago. At the end of the first quarter, Tether could present $8.23 billion in excess reserves, proving that USDT holders had a substantial safety cushion in addition to the required 1:1 reserves. By the end of the second quarter, even with continued profitability, the safety buffer was directly halved. Compared to data from a specific point in time within a single quarter, long-term trends are more concerning.

Controversy over reserve asset structure

In the past three years, Tether's reserve strategy has undergone significant adjustments. The company has shifted most of its reserve assets towards U.S. Treasuries and short-term government bonds, responding to years of external criticism regarding reserve transparency and asset quality. The treasury investment portfolio has now become the core source of Tether's operating profit and the foundation for its claim that USDT is fully backed by high-quality liquid assets.

However, at the same time, Tether has continued to build large gold and bitcoin holdings. These types of assets do not generate interest earnings and are subject to significant price fluctuations. By the end of the second quarter, Tether held approximately $18.84 billion in gold and $5.8 billion in bitcoin. Together, these two assets total $24.6 billion, accounting for about 13% of total assets.

A company whose core obligation is to maintain a 1:1 peg to the dollar has a structural contradiction by allocating 13% of reserves to highly volatile non-dollar assets. When gold and bitcoin prices rise, the excess reserve buffer thickens, and Tether's over-collateralization increases; once prices decline, as happened in the second quarter, even with continuous profitability from core operations, the safety cushion will still rapidly shrink.

The problem is whether Tether's reserve strategy is genuinely serving the stablecoin business itself or serving Tether’s overall development goals. A pure stablecoin issuer would allocate 100% of reserves to short-term dollar assets to maximize liquidity and minimize volatility risk. In contrast, Tether's choice to hold gold and bitcoin represents a different goal: to create long-term asset appreciation for corporate shareholders beyond the stablecoin business.

Profit highly dependent on interest rate environment

Tether's quarterly profit of $1.5 billion is almost entirely dependent on a single variable: the yield on short-term U.S. Treasuries. The company's profit model is to invest USDT users' funds into short-term treasury bills and the repurchase market. In a high-interest rate environment, Tether's profitability is extremely strong; as rates fall, profits will also shrink accordingly.

The current Federal Reserve policy interest rate level makes Tether one of the highest-grossing financial institutions globally per capita. Reports indicate that the company's workforce is fewer than 100 employees. Converted, this means an annualized revenue per employee of over $60 million, far exceeding leading technology companies. However, this profit model lacks a competitive moat and is highly dependent on the macro environment—U.S. high interest rates, which Tether cannot control. Most economists predict that interest rates will enter a downward cycle in the next 12 to 24 months.

Tether CEO Paolo Ardoino stated externally that the second quarter's performance proves the company's resilience. In an official statement, he said, "Despite significant market volatility, USDT is still fully backed by reserves, and our assets are still $4.11 billion greater than liabilities." From a textual standpoint, this statement is not incorrect. However, "fully backed reserves" and "having adequate safety buffers" are two different standards, and the second quarter data clearly shows the difference between them.

If the Federal Reserve lowers interest rates by 200 basis points over the next year, assuming the total circulation of USDT remains unchanged, Tether's annualized profit will decline from about $6 billion to $3 billion. While $3 billion is still a significant profit, the change in trend is critical. A continuing decline in profits will increase the difficulty of rebuilding the reserve buffer, funding various expansion projects, and maintaining gold and bitcoin holdings. The second quarter has already confirmed that during commodity and cryptocurrency price corrections, even within a single quarter, it is possible to incur losses in the billions of dollars.

The 2028 compliance deadline stipulated by the GENIUS Act adds regulatory pressure to the interest rate issue. If Tether needs to restructure its reserves and adjust its business model to meet U.S. stablecoin regulation requirements, the timing for compliance modifications will coincide with a phase of declining interest rates and shrinking profits.

The comprehensive audit that has yet to come

Tether announced in March 2026 that it had hired KPMG to conduct its first complete financial audit. For years, external critics have criticized Tether for relying solely on small- to medium-sized accounting firms for quarterly reserve verification reports, lacking comprehensive audits from the Big Four accounting firms, making this partnership widely regarded as a milestone for the industry.

Five months have passed, and KPMG's audit work is still not complete. Tether’s second-quarter reserve verification report is still issued by the long-time collaborator BDO. The second-quarter announcement only briefly mentioned "ongoing work by the Big Four auditors," without providing a completion deadline, interim conclusions, or timetable.

There is a fundamental difference between a reserve verification report and a complete audit. The verification report merely confirms whether a company’s declared financial data at a specific point in time is accurate; an audit thoroughly examines financial statements, internal control systems, and accounting methods over the entire reporting period. This difference is crucial: a verification report can confirm that Tether held $187.75 billion in assets as of June 30, but it cannot verify how those assets were managed, valued, and flowed during the 90 days prior.

Delays in audits do not necessarily indicate the existence of risks. Audits by the Big Four accounting firms for complex financial institutions generally take 12 to 18 months. However, the lack of a clear timetable leads to ongoing uncertainty. Competitor Circle, the issuer of USDC, has already been regularly publishing audited financial statements. KPMG's prolonged audit delays and lack of publicly available progress could undermine Tether’s reputation, which was originally intended to enhance market trust. If a clean audit opinion is finally issued, the lengthy wait will likely be forgotten by the market; however, if significant issues are discovered or if a qualified opinion is issued, the five-month information gap will be seen as a warning signal that the market could have heeded sooner.

Intensifying industry competition

Tether holds a 60% market share and has substantial power, but it is not unassailable. USDC, issued by Circle, has been steadily growing and now occupies about 25% of the stablecoin market. Circle went public in early 2026, and as a publicly traded company, it regularly discloses complete financial information. For institutional clients with auditing compliance requirements, Circle has a clear advantage in terms of transparency.

The regulatory framework taking shape in the U.S. may further reshape the competitive landscape. According to the current version of the GENIUS Act, stablecoin issuers targeting U.S. users must meet a series of standards regarding reserves, information disclosure, and compliance. Tether is registered in El Salvador, and the offshore structure likely means that to meet relevant regulatory requirements, significant restructuring will be necessary.

At the same time, new entrants to the industry continue to emerge. PayPal’s PYUSD has already captured some market share; institutions like JPMorgan and Bank of America have also launched or announced their own stablecoin products. These competitors share the characteristic of operating within mature regulatory frameworks. As stablecoin regulations improve, this advantage is likely to become a decisive factor.

Tether has chosen to expand beyond the stablecoin space, investing in bitcoin mining, AI infrastructure, and telecommunications, while also launching the USAT stablecoin for the U.S. market and recently going live on Celo as a second mainnet. While diversification may create long-term value, it continuously consumes the funds that could be used to reinforce the reserve buffer. Despite the reserve shrinking in the second quarter, the company continued to invest in expansion.

The privatized structure introduces another layer of complexity. Circle must be accountable to public shareholders, while Tether has very few external constraints. A small portion of management close to the core of the company, along with shareholders, decides on the distribution of funds, including allocating nearly $25 billion in gold and bitcoin, without facing the external oversight that a publicly traded board of directors would provide. If it were a publicly traded company, a situation where the reserve buffer is halved would likely be discussed at the board level before risks materialize.

Questions behind the $184.6 billion figure

In the second quarter, USDT’s circulation increased by only $446 million, the lowest quarterly growth rate in over two years. From 2024 to early 2025, USDT’s circulation often surged by billions of dollars per quarter, but now the growth has nearly stagnated, raising concerns. At the same time, Tether claims to have added over 30 million users this quarter, with the user base continuing to expand.

The disconnection between user growth and circulation growth indicates that new USDT users tend to conduct transactions with smaller amounts, using the tokens more for payments and transfers rather than for long-term holding as a store of value. This aligns with Tether’s narrative of serving the unbanked and providing a dollar channel for emerging markets. However, it also means that, in the current interest rate and market environment, the total circulation of USDT, which underpins Tether’s revenue base, may be approaching a peak.

The addition of 30 million users signifies a substantial expansion in coverage, especially in regions where traditional banking infrastructure is weak and local currencies are depreciating. The company is actively negotiating partnerships in Africa, Latin America, and Southeast Asia, aiming to establish USDT as a daily payment tool. On July 28, Tether signed a memorandum of understanding with the Nairobi Securities Exchange, marking a recent move in this strategy. However, payment transaction volume and stablecoin circulation are two different metrics. A user receiving $50 USDT, completing consumption within hours, and not holding onto any funds can contribute to transaction flow without driving the growth of circulation that can generate revenue for Tether.

The slowdown in circulation growth coincides with intensifying competition for USDC in the institutional market. Circle’s IPO has brought greater transparency, and ongoing developments in U.S. stablecoin legislation may lead some institutional funds that were originally leaning toward USDT to shift toward USDC or other emerging stablecoins. Tether's leading position in retail and emerging market payment sectors remains unchallenged for now, but the incremental funds driving circulation growth increasingly come from user groups with lower average holdings.

If the growth in USDT circulation stagnates and reserve buffers continue to shrink, Tether’s room for development will keep narrowing. The company relies on strong operational profits to rebuild reserves, and these profits are highly dependent on a high-interest rate environment and continuous circulation growth. The market broadly expects interest rates to decline, circulation increments have already slowed, and the reserve buffer becomes the variable in absorbing various risk shocks.

The $4.11 billion excess reserve buffer only accounts for about 2.2% of the total circulation of USDT. To support the repayment obligations of up to $184.6 billion, this safety margin is not sufficient, especially since 13% of reserve assets are highly volatile in price. The record $8.23 billion buffer at the end of the first quarter corresponded to a 4.5% safety cushion. The buffer shrinking directly by half in just one quarter is enough to demonstrate that market volatility can quickly erode a safety barrier built up over many years.