Tether: an unforeseen trouble

Bloomberg has published a huge article going into the activities of the USDT stablecoin issuer. It once again accuses the Tether company assets of being unreliable. In particular, journalists found Chinese companies’ bonds in Tether reserves.

A month ago, when everyone started talking about the possible bankruptcy of the Chinese mega-developer Evergrande, several Telegram channels reported that Evergrande bonds might be part of Tether’s asset portfolio. It made the stablecoin issuer seem unreliable, to put it mildly.

I remember this incident, though I did not put too much thought into it at the time. After a quarter of a century working in business journalism, I know all too well how the mechanisms of discrediting a particular business work. Still, the question lingered due to the great importance of USDT for the entire crypto community.

Tether Limited is the issuer of the largest stablecoin in the cryptocurrency markets, USDT, with a market capitalization of $ 69 billion. The stablecoin is secured by various assets, mainly held in commercial paper, certificates of deposit, and treasury bills. (Some of the assets are loans, bonds, cash, and cryptocurrencies.) Commercial paper and certificates of deposit account for almost half of Tether’s assets, worth about $ 30.8 billion. Their sheer size puts the company on par with such investment giants as Vanguard and BlackRock.

Several audits of Tether have confirmed that the token is asset-backed. But the audits themselves raised some questions since the last two checks were carried out by a little-known company called Moore Cayman, and the figures for the reports were provided by the stablecoin issuer, not by the audit firm.

And now Bloomberg BusinessWeek has published an article that tried to figure out what the USDT collateral is. As the journalistic investigation revealed, the popular stablecoin is backed, among other things, by short-term loans to large Chinese companies and loans to crypto-lending platforms like the Celsius Network. The Celsius Network CEO Alex Mashinsky said that his company pays Tether a 5-6% interest.

It turns out that Tether gave billions of dollars’ worth of credits to crypto companies, accepting bitcoins as collateral. Such an approach casts doubt on the very ideology of stablecoins.

Even worse, however, is the accusation that Tether’s reserves include multibillion-dollar debt obligations from large Chinese corporations. Bloomberg concludes that the management of Tether put the company’s reserves at risk by investing them to make hundreds of millions of dollars in profit.

And everything would have worked out had it not been for Evergrande’s unexpected astronomical $ 300 billion de facto default. The event coincided with the official Beijing’s pressure on the cryptocurrency industry and an acute energy crisis in China. Against such circumstances, any bonds and shares of Chinese companies can become empty securities at any time, thus devaluing Tether.

We didn’t have to wait long for the official Tether response. They claimed that the authors of the article “took snippets of old news from various places using dubious sources and fitted them into a ready-made story.” It was all done, ostensibly to “perpetuate a false and antiquated narrative about Tether, based on allusions and misinformation shared by disgruntled people who have nothing to do with the business’s operations and have no reliable information about them.”

The statement predictably mentioned how much innovation Tether was responsible for and the success the company had achieved.

The only relatively specific points brought up were assurances that all Tether tokens are fully secured, and the company provides quarterly reports (last one on June 30) confirming this. Moreover, the vast majority of commercial paper owned by Tether belongs to issuers rated A-2 or higher.

Recall that as early as September 15, Tether representatives denied having any Evergrande-issued commercial paper. However, when asked if the company owns Chinese commercial paper at all, they refused to disclose any details. This means that Tether might not actually hold any bonds of the debt-laden Evergrande, instead opting for derivatives from them. Which in no way makes the situation better for USDT holders…

New investigations are now sure to follow – both by journalists and government regulators. If the revelations in the Bloomberg article are at least partially confirmed, it will be a tough blow not only to the stablecoin market but also to the concept of stablecoins itself.

Tether is already too deeply entangled in the global crypto economy, allowing traders to interact with the larger crypto ecosystem. It is a resource for those who do not use banking services, a tool for an evolving payment system, and the most liquid stablecoin on the market. USDT was the first stablecoin to withstand years of volatility.

Yet, most of its users simply do not think about the fact that USDT is not actually backed by the dollar at a 1:1 ratio. In reality, the collateral is a portfolio of several assets with varying degrees of liquidity. In addition, this portfolio is not transparent. Even if the accusations against Tether are not confirmed (which is the likely outcome), many stablecoin users will still start doubting its reliability and stability.

Government regulators, in turn, will have a reason to tighten the terms of stablecoin circulation. On October 6, the chair of the US Securities and Exchange Commission (SEC), Gary Gensler, confirmed that “the problems of financial stability that may arise in connection with stablecoins” are priorities for his department. During a Financial Services Committee hearing in the House of Representatives, Gensler stressed that banning cryptocurrencies is outside the purview of the SEC, saying, “It will be at the discretion of Congress”.

Bloomberg also brings up US Treasury Secretary Janet Yellen back in July summoning the chairman of the Federal Reserve, the head of the Securities and Exchange Commission, and six other senior officials to a meeting to discuss Tether. At the meeting, it was said that Tether had become big enough to threaten the US financial system.

It seems that now, after a new scandal, the best outcome for stablecoins will be the emergence of regulations requiring full transparency for the assets that back them. And if that’s the only consequence, it will be a positive.