Sunday, October 10, 2021

Latest On Stablecoins and Tether

Tether is back again in the news because of an investigative article from Bloomberg. I would link to it but you need a subscription to read it. It uncovered a bit more about Tether:

  • Tether loaned Celsius $1bn USDT in exchange for Bitcoin as collateral. This would mean that some of the reserves are loans to Celsius. [Side question: Where is the BTC from Celsius coming from?]
  • Commercial Paper: Tether has loads of it. If Bloomberg is right, it would make Tether the 7th largest holder of this type of debt. There was no breakdown of what this commercial paper is but according to a document seen by the writer, it includes billions in Chinese company debt.
  • A previous banker that worked with Tether said that they had put reserves at risk by investing as if it were a “hedge fund”.
  • Tether’s main bank in the Bahamas no longer holds the bulk of the assets. They only retain about $15 billion. Where are the rest of the Tether reserves? Is it tied up in more speculative lending practices?

These are serious concerns that yet again raises the question of whether Tether is fully backing their stablecoin. Centralized stablecoins are always going to have this issue, even if they are regulated.

Tether, however, is still operating. There hasn’t yet been a time that they have denied a redemption request…yet. But, the big use of Tether is to keep crypto people in crypto. Redemption is a rare event I suspect. The counter-argument is that large crypto companies from exchanges to lending platforms routinely redeem billions of USD with Tether. If Tether is a Madoff pyramid scheme, Tether could just mint more Tether, sell it for USD and use that to pay redemptions. I have not heard of any of these large crypto companies being suspicious. However, if you are being paid on redemptions, there is no need to sound the alarms. Madoff was able to funnel 10’s of billions in to his fund before it came crashing down.

Tether was able to settle their case with the New York DA. Would the DA settle if there was an issue? Doesn’t seem so but in today’s political environment, a company with $70B of your money in reserves certainly could shake loose of a pesky legal inquiry.

The main risks for Tether are what regulators have planned. It seems pretty clear that the current administration would like to regulate stablecoins like banks.

USDC received a subpoena from the SEC and is cooperating with them. Two days ago, it was reported that the White House was considering a wide-ranging executive order on cryptocurrencies - one that you can be certain will be targeted at stablecoin issuers.

If US regulators require exchanges to only use US registered stablecoins, it could severely damage the liquidity of offshore stablecoin issuers like Tether. Any restrictive regulation could cause the redemption crisis, a bank run, on tether. This could be the point where we are able to see what is really going on with Tether.

Stablecoins are crucial for crypto trading and in the future for crypto payments. Regulation overreach will only cause innovators to move off-shore and accelerate the decentralization of stablecoins.

OP: u/lanceparkerusa CEO @ r/BankX


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