Key Takeaways
- USDC is a lower-risk stablecoin for institutional use. Circle's A-equivalent rating reflects conservative reserves, regulatory oversight, and a straightforward balance sheet.
- USDT carries speculative-grade credit risk. Agio Ratings finds a equivalent credit rating of BB+/B- reflecting higher leverage, market risk exposure from Bitcoin and gold holdings, and dependence on discretionary parent entity support.
- Circle is less risky than Tether from a default perspective. Counterparty pricing, collateral policy, and concentration limits should reflect the difference between USDC's A-equivalent rating and USDT's BB+/B- rating.
Stablecoins are not risk free
Stablecoins sit at the center of digital asset markets. They're the settlement layer for exchanges, the base pair for DeFi protocols, and increasingly a tool for cross-border payments. Stablecoins are backed by real world assets, often the US dollar, with redemption mechanisms allowing for users to trade in digital markets without the volatility of a traditional token. But, "stable" doesn't mean "risk-free."
When you hold USDT or USDC, you're exposed to the creditworthiness of the issuer behind the token. If that issuer can't meet redemptions, your dollar-pegged asset is no longer worth a dollar leading to capital losses.
Data in this article comes from our proprietary models at Agio Ratings. We publish independent credit risk assessments for custodians, exchanges, brokers and stablecoin issuers. Recently, we published credit risk assessments of both Tether (USDT issuer) and Circle (USDC issuer), applying probabilistic frameworks to determine the likelihood of defaults and their precipitating scenarios.
Our Verdict: USDC Is the Lower-Risk Stablecoin
Circle earns an A-equivalent credit rating from Agio Ratings. Tether lands at BB+ with parent company support, or B- without it.
Circle holds conservative reserves, operates under SEC oversight, and maintains a straightforward balance sheet. Tether maintains higher leverage, holds Bitcoin and gold exposure, and depends on discretionary parent company support to maintain its stronger rating.
How Credit Analysts Measure Stablecoin Risk
Traditional credit analysis focuses on one question: what's the probability that this borrower won't pay me back? Stablecoin analysis asks a parallel question: what's the probability that this issuer can't redeem my tokens for dollars?
Three metrics anchor the risk assessment. Agio Ratings has calculated each for both Circle and Tether:
Probability of Default (PD) measures the likelihood that an issuer fails to meet its obligations over a given time horizon, typically 12 months. A 1% PD means there's roughly a 1-in-100 chance of default in the next year.
Loss Given Default (LGD) estimates how much you'd lose if default actually occurs. An LGD of 30% means you'd recover about 70 cents on the dollar. This depends on the quality and liquidity of reserve assets, legal claims in bankruptcy, and how quickly assets can be sold.
Expected Loss combines the two: PD multiplied by LGD. This gives you the annualized cost of credit risk, which is useful for pricing, provisioning, and comparing across instruments.
Circle: Investment-Grade Risk Profile
Key Metrics at a Glance
- 12-month probability of default: 0.11%
- Cumulative 3-year default probability: 0.92%
- Loss given default: ~20%
- Expected annual loss: ~0.02%
- Equivalent credit rating: A
A 0.11% default probability and ~20% loss given default put USDC in the same risk category as unsecured debt from a well-capitalized corporate borrower like Charles Schwab.
Reserve Composition and Management
Circle's reserves sit primarily in the Circle Reserve Fund, an SEC-registered money market fund investing in short-dated U.S. Treasuries and repurchase agreements. The fund is managed and custodied by institutional providers, with daily third-party reporting available through BlackRock.
The remaining reserves are held as cash at major banks. There's no exposure to Bitcoin, gold, corporate bonds, or other volatile assets. Duration is short. Credit risk on the underlying assets is minimal.
From a revenue standpoint, Circle earns interest on these reserves while USDC holders receive none. The company went public on the NYSE in 2025, which brought additional disclosure requirements and regulatory scrutiny.
Where Circle's Risk Lives: Operational Tail Events
Credit and market risk on reserve assets aren't what keep risk managers up at night with USDC. The reserves are too conservative for that.
The real exposure comes from operational, legal, and criminal tail risks at the issuer level: fraud, cyberattacks, processing failures, regulatory penalties, or litigation. These events are low-probability but potentially high-severity.
Most operational incidents would be manageable. But there's a small chance of an extreme event that exceeds Circle's capital buffers. Operational tail risk accounts for the bulk of Circle's 0.11% default probability.
What an A-Equivalent Rating Means
A-rated corporate bonds have historically defaulted at rates below 0.1% annually. Circle's USDC fits that profile. For most institutional risk frameworks, this qualifies as investment-grade exposure suitable for core holdings and settlement activity.
Tether: Speculative-Grade Risk Profile
Key Metrics at a Glance
- 12-month probability of default (with parent support): 0.69%
- 12-month probability of default (without support): 14.55%
- Loss given default: ~30%
- Expected annual loss: ~0.21%
- Equivalent credit rating: BB+ (with support) / B- (without support)
Tether's default probability ranges from 0.69% to 14.55% depending on whether Tether Holdings would recapitalize the issuers under stress. The large range in Tether's probability of default based on potential parent entity support greatly increases the baseline risk of USDT.
Tether's Potential Risk Mitigation Through Parent Entity Support
USDT is issued by several special-purpose vehicles controlled by Tether Holdings Ltd. The parent company has extracted substantial value from these entities; roughly $14.2 billion in dividends over the 12 months ending September 2025, against $14.9 billion in profits.
If Tether Holdings suspended dividends and returned up to $10 billion in prior distributions, Agio Ratings estimates the annual default probability drops to 0.69%. Without that support, it rises to 14.55%.
There's no legal obligation for the parent to provide support. The decision would depend on whether management views the USDT franchise as worth saving. Agio Ratings’ base case assumes support is likely, but the uncertainty itself is a risk factor.
Where Tether's Risk Lives: Leverage, Bitcoin, and Dividend Extraction
Unlike Circle, Tether's risk profile isn't dominated by operational tail events. The primary drivers are structural:
Leverage: As of September 2025, Tether's capital ratio stood at roughly 3.7%, down from 5.4% in December 2023. Agio Ratings estimates a Common Equity Tier 1 ratio of about 3.6% — well below the 8% minimum required for regulated banks. USDT issuance has grown while equity has stayed flat.
Market risk exposure: Tether holds meaningful positions in Bitcoin and physical gold beyond what's needed to back its gold token (XAUT). These introduce volatility into an otherwise conservative reserve portfolio. A sharp decline in Bitcoin or gold prices could erode the equity buffer.
Dividend extraction: The pattern of distributing nearly all profits to the parent leaves limited cushion for adverse scenarios.
Credit risk on reserve assets is minimal, as roughly three-quarters are U.S. Treasuries or repos. Liquidity risk is also low, with redemptions typically processed within several days. But the capital structure amplifies what would otherwise be manageable market risk.
What a BB+/B- Rating Means
BB+ is the highest tier of speculative-grade credit—think Ford Motor Company. B- sits lower, indicating higher credit risk and limited margin for error—think Strategy (formerly MicroStrategy). Tether's rating swings across that range depending on assumed parent support, reflecting meaningful uncertainty in how the issuer would behave under stress.
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Institutional takeaway:
If USDT is treated as cash-equivalent on your balance sheet, your model is underpricing risk.
→ See how Agio Ratings prices stablecoin credit risk in real time.
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Side-by-Side Comparison
MetricCircleTether12-month default probability0.11%0.69% (with support) / 14.55% (without)Loss given default~20%~30%Expected annual loss~0.02%~0.21%Equivalent credit ratingABB+ / B-Capital ratioModest but improving~3.7% (declining)Reserve compositionTreasuries, repos, cashTreasuries, repos, Bitcoin, goldPrimary risk driversOperational tail eventsLeverage, market risk, dividend policyRegulatory statusSEC-registered fund, NYSE-listedOffshore, limited regulatory oversight
Why Circle and Tether Have Different Risk Profiles
Capital Structure
Circle operates with a conservative balance sheet. Tether runs lean and is profitable, but has limited equity cushion relative to liabilities. When a firm backs $181 billion in tokens with $6.8 billion in equity, the room for error is limited.
Market Risk Exposure
Circle's reserves carry virtually no market risk. Tether's Bitcoin and gold positions introduce volatility that can erode capital in a downturn.
Transparency and Regulatory Standing
Circle publishes monthly attestations from a Big Four accounting firm, operates an SEC-registered reserve fund, and files public company disclosures with the NYSE. Tether provides quarterly attestations but operates offshore with limited regulatory oversight.
What This Means for Institutional Portfolios
For trading firms, Circle’s investment-grade rating versus Tether’s speculative-grade rating has practical implications:
Counterparty exposure pricing: A BB+ counterparty warrants wider spreads and tighter limits than an A-rated one. If you're treating USDT and USDC as interchangeable for risk purposes, you're mispricing one of them.
Collateral policy: Firms applying haircuts or concentration limits based on credit quality should treat USDT's speculative-grade profile differently than USDC's investment-grade standing.
Settlement preferences: When you have a choice, settling in the lower-risk stablecoin reduces credit exposure without changing economic terms.
Stress testing: Models should account for the conditional nature of Tether's risk profile. The with-support and without-support scenarios produce materially different outcomes.
USDT remains the most liquid stablecoin in crypto markets, with deep order books across every major exchange. But liquidity isn't the same as credit quality, and risk management requires accounting for both.
How Agio Ratings Calculates Stablecoin Credit Risk
Agio Ratings applies quantitative credit frameworks developed for traditional finance, adapted for the specific risk factors present in digital asset markets. The methodology incorporates balance sheet analysis, reserve composition, capital adequacy, market risk exposure, and operational risk assessment.
Unlike traditional rating agencies that rely heavily on qualitative judgment and issuer cooperation, Agio Ratings’ models incorporate on-chain data, public disclosures, and statistical techniques that detect shifts in risk profiles as market conditions change.
Use Agio Ratings to Incorporate Risk Management into your Stablecoin Allocation
Agio Ratings' data platform provides credit risk ratings and monitoring across 70+ exchanges, custodians, brokers and issuers in the digital asset market. Firms looking to price stablecoin exposure, set concentration limits, or stress test counterparty risk can explore Agio Ratings’ full suite of ratings products.
Frequently Asked Questions
How risky is Circle?
Circle carries low credit risk. Agio Ratings assigns Circle an A-equivalent rating with a 0.11% annual probability of default. Circle's reserves are held in U.S. Treasuries, repos, and cash—no Bitcoin, no gold, no volatile assets. The primary risk comes from operational tail events like cyberattacks or regulatory action, not from the reserves themselves.
How risky is Tether?
Tether carries speculative-grade credit risk. Agio Ratings assigns Tether a BB+ rating with parent support, or B- without it. The annual probability of default ranges from 0.69% to 14.55% depending on whether Tether Holdings would recapitalize the issuers under stress. Risk comes from leverage, Bitcoin and gold exposure, and a pattern of extracting nearly all profits as dividends.
Is Tether safe?
While default on USDT is unlikely, it is not appropriate to treat it as a cash equivalent, as holders are exposed to issuer credit risk without guaranteed capital protection. Tether has a risk of default similar to a BB+ rated corporate obligation with parent support, or B- without it. Assets at this credit level are considered speculative-grade from a credit risk perspective and would typically require mid–single-digit yields to compensate investors for risk.
Which is less risky: USDC or USDT?
USDC is less risky. Circle's A-equivalent rating from Agio Ratings puts it in the same category as investment-grade corporate debt. Tether's BB+/B- rating falls into speculative-grade territory. For risk managers, USDC is the safer choice when both options are available.
How does Agio Ratings measure credit risk for stablecoins?
Agio Ratings’ models incorporate balance sheet analysis, reserve composition, capital adequacy, market risk exposure, and operational risk. Unlike traditional agencies, Agio also uses on-chain data and statistical techniques to detect shifts in risk profiles as conditions change.
How can I get updated ratings on stablecoins?
Agio Ratings' data platform provides credit risk ratings and monitoring across 70+ exchanges, custodians, brokers and issuers in the digital asset market. Visit agioratings.io to explore the full suite of ratings products.
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