Tether (USDT), the stablecoin with the highest market cap, is a cryptocurrency whose price is pegged to the US dollar. Tether LTD., a Hong Kong-registered company, designed and launched in 2014, issues Tether (USDT) to always peg its worth to $1, that is, 1:1.
Following the recent terraUSD collapse, a panic-driven market initiated a selloff causing USDT to depegg down to $0.95. As shown in the table below, this is hardly a unique event. Although, the 300 million USDT redeemed for US dollars in the space of 24 hours, raised alarm bells about the continuing selling pressure on Tether’s liquidity. Paolo Ardoino, Tether’s CTO reassured onlookers that all the redemptions were honored without breaking a sweat, but what do we know of the USDT pegging and its backing? Let’s take a deep dive.
In 2019, proceedings against iFinex Inc., the parent company of crypto exchange Bitfinex and Tether LTD., were filed in a New York, Supreme Court. The final settlement saw iFinex Inc.: (i) pay $18 million to the State of New York, (ii) agree to submit quarterly reporting of its reserves for two years, and (iii) quit its services to New York customers. How did this come to be?
Investigations by the Attorney General revealed that only 74% of Tether coins were backed by real cash reserves, making Tether’s previous claim of 1:1 backing by the US dollar, a misleading statement. These same investigations also revealed that in 2017 and 2018, a massive loss of funds by Bifinex of around $850 million, was covered by a loan from Tether’s reserves, all of which was kept hidden from investors. The company denied rumors of insolvency and has remained tight-lipped about its innocence or lack thereof, regarding the results of the investigations.
Subsequently, Tether’s reserves disclosure moved away from the 1:1 backing claim and went on to state that, “[e]very tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities (collectively, ‘reserves’).”
Despite being accused of lack of transparency and involved in other controversies surrounding the stablecoin, Tether still went on to become the biggest stablecoin in the crypto market. Its all-time low has been that of $0.57 in 2015, and its all-time high was $1.32 in 2018. As expected, questions regarding its USD reserves have never ceased.
In May 2021, came Tether’s first breakdown of assets, with its biggest portion being made up of cash, cash equivalents, other short-term deposits, and commercial paper (corporate debt of some kind) with the latter making up the biggest portion (65.39%) of this section. In October 2021, Bloomberg published an investigative article alleging that USDT was partially backed by short-term Chinese corporate debt, and raised questions about potential Evergrande debt. Tether discredited the article by calling it dubious, pre-packaged, and pre-determined however, Tether still has the promise of an audit of its assets backing the USDT to fulfill.
Hindenburg Research, a forensic financial research firm, casts doubts on the legitimacy of Tether’s backing and has in October 2021 announced a $1 million bounty for details on Tether’s backing. Yet again, Tether replied by calling this a nothing more than a pathetic bid for attention. What we do know, is that in the past month Tether has repeatedly reduced its commercial paper holdings and moved towards an increase in treasury bills. The reserves breakdown currently stands as follows;
“The company has been in repeated spats over its business practices, but most in crypto accept that Tether is, in a way, “too big to fail.” (https://coinmarketcap.com/currencies/tether/)
Will this status quo persist following terraUSD’s downfall? Not all stable coins are created equal however the ripples of terra’s downfall remain to be seen. Was Tether’s de-pegging the result of investor confusion as Ardoino indicated in his tweet, “I heard that a trader sold some USDt in their firm because they misread it for UST. A “D” can make a world of difference.”, or did the market factor in the cryptocurrency’s weaknesses? Interestingly, as Tether’s peg was falling, USDC reversed its supply contraction trend, and we’ve also seen BUSD’s with DAI’s circulating supply increase.
Tether’s CTO explained that an exchange’s de-pegging does not necessarily mean that 1:1 reserves no longer back the currency, but rather that there is selling pressure on that particular exchange that has exceeded the exchange liquidity. The company prides itself in having processed $7 billion-plus USDT redemptions for verified individuals, as of May 16th, 2022. Jim Bianco, from Bianco research, claims “The Tether story that began last week might not be done. Redemptions in Tether began last week, the day it broke its peg (down to 95 cents). They have not yet stopped.” (https://twitter.com/biancoresearch/status/1526886690736025600)
The May 12th stablecoin tremor has not gone unnoticed by the FED.
“Yellen said on Thursday that Terra’s spectacular tumble shows the dangers of tokens that purport to be pegged to the US dollar. She called for new regulations and added that Treasury was working on a report about the issue” (https://www.bloomberg.com/news/articles/2022-05-12/yellen-says-terra-meltdown-demonstrates-crypto-stablecoin-risks )
Media attention has also since been rife, at times with justifiable questions and others with questionable levels of fear and fud. Nevertheless, one is bound to wonder, what would happen if USDT had to fall? Arcane research has had a go and went on to hypothesize a potential MtGox meltdown. Although, very importantly they also go on to highlight how unlikely the actualization of its event would be. They very much caution against jumping onto the USDT fud bandwagon.
So where does this leave us? USDT is only one of the plethora of stablecoins available for investors. Our next article will take a close look at USDC, the second-largest stablecoin by market cap, so stay tuned for more in this series “ All eyes on stablecoins: 10/10 stablecoin series”.