Shallow dive into the USDT problematic
If the economy has anything to teach us right now, it’s that creating money out of nowhere has consequences.
USDT is a USD-backed stablecoin issued by Tether and is present as a counterpart in pairs for 64.38% of the crypto trading volume, worldwide.
Its invention has without a doubt helped the crypto industry blossom like it did by making it easier to trade and exchange crypto. Because the passage from fiat to crypto can be complicated, having an easy entry point through the use of USDT has greatly participated in the on-boarding of the masses.
But questions about the assets that are supposed to back 100% of the USDT total valuation have surrounded its use for a while now. Times and times again, the market and regulators have asked Tether to provide a clear and detailed summary of Tether’s holdings and its use of the funds.
But the creation and early days of Tether weren’t easy. Without even considering foul play, its founders had to go above and beyond to find banks and other financial institutions to accept the custody of all the cash that was coming in. Let alone agreeing to use it, invest it, and share detailed reports. That’s generally not what discrete financial institutions do.
Tether has shown a lack of transparency but also a strong will to answer to the required standards since they have no interest in failing and watching their kingdom end up in a pile of digital dust.
Without making assumptions about the founders’ intentions or motivations we try to look at the situation and assess some of the risks surrounding it.
Why now ?
This issue is no secret and the market has known about it for years. Even if awareness is less present in the retail portion of the market, all centralised exchanges, big players, whales and financial institutions must be well aware of the problem. It seems that the market as a whole is okay with the risk induced by an insufficient collateralization of the issued tokens.
But maybe the market isn’t trustful, it might just not have a choice. The lack of alternatives and the overall acceptance of the token, makes USDT so convenient that the market might be overlooking some of the shaky aspects of the stablecoin.
But the macro conditions of the global economy are dwindling. The war in Ukraine is provoking ripples that will take time to unfold and even more to tame.
What happens if the already-insufficient assets that are backing USDT lose value ? Is this enough to kill the trust the market has put onto Tether ?
Traditional financial system
The financial system has been working on unbacked assets for a while now. The US, led by President Roosevelt, abandoned the gold standard in 1933. The objective was to empower the government by allowing it to artificially inflate the money supply. Thus allowing a faster economical growth.
But when black swan events — which are huge, surprising, bad events — happen and trust in the ability of financial institutions to handle the situation is lost, people tend to try and remove their funds from the system.
Since the system doesn’t have enough cash to serve everyone it triggers a chain-reaction that some people refer to as a “run on the banks”.
The Tether situation
Market capitalisation: 80 898 202 345 $US — at the time of writing.
This means that Tether should be in possession of more than $80B of assets. In different form: cash, bonds, equity… Also, it’s been known that Tether has issued a lot of loans to crypto companies, supposedly always against a Bitcoin collateral worth more than the loan.
If Tether was an American bank, they would take the 41st position in the list of American banks — ordered by total assets under management.
But they’ve been unregulated and virtually unsupervised.
Worst case scenario
The worse that could happen would be for the already insufficient Tether’s treasury to lose value because of the decreasing quality of the assets underlying the mysterious “unspecified commercial paper” category.
People then lose trust in Tether’s ability to pay back every USDT, which makes them sell their USDT — either for USD or other crypto. If enough people do that, Tether won’t be able to pay everyone, causing its value to crash and with it a nice chunk of the crypto market.
With $80B in value to back and knowing full well that it’s not all cash, we have to wonder what is going to happen to the rest of the assets that are backing USDT when the effects of the war and the sanctions imposed to Russia materialize.
The convenience offered by USDT might be challenged and even overthrown by the FUD surrounding the macro market conditions for the years to come.
Alternatives are en route, new algorithmic stablecoins will take market shares away from Tether and if “the move” to other stablecoins is picked up by the market it could create a problematic chain-reaction that would remind of a “run on the banks”.
What Tether has to say
- In their terms of services they declare that “Tether reserves the right to delay the redemption or withdrawal of Tether Tokens if such delay is necessitated by the illiquidity or unavailability or loss of any Reserves held by Tether to back the Tether Tokens […]”
Not sure if good or bad: the centralisation of power around USDT might offer some stability in the event of a “run on USDT”. Delaying or blocking the withdrawals might decrease the probability of a cataclysmic crash.
- “All Tether tokens are pegged at 1-to-1 with a matching fiat currency and are backed 100% by Tether’s reserves.”
The problem here is the wording, it looks like it says that all USDT are backed, but it doesn’t. It’s saying that USDT is only backed by the reserve, whatever proportion that might be. It could just be a way of saying that the only thing backing up USDT is Tether’s reserve.
The real question remains unanswered: what is the nature and the value of Tether’s reserve ?
Let’s assume they have enough assets to cover 100% of USDT tokens, it doesn’t mean that said assets are either liquid or that their value is stable. Meaning that the 100% could quickly drop in bad market conditions.
2B2F
Another aspect worth considering is that Tether became so big, there is no doubt that most actors in the market would help them in the eventuality of a liquidity problem.
No crypto company — except maybe for some of Tether’s competitors — has any interest in seeing the whole market shake in a way that could be risky for the whole industry.
On another note, it is utterly unimaginable that the central banks won’t find ways to severely regulate stablecoins issuers like Tether. This regulation alone could have strong effects on the market but it could very well strengthen the position of Tether, should they find a way to answer to all the regulators’ conditions.
The Swiss city of Lugano just declared USDT as legal tender on its territory. Let’s hope that the people in charge have reasons to trust Tether and have access to more information than us.
Concluding thoughts
Tether’s founders know a lot more about Tether than us. Depending on your mistrust levels, one could believe that those who created this historic institution know what they’re doing.
Others might believe that their human flaws got the best of them, having all this cash while being completely unregulated and extremely unsupervised.
What’s sure is that asking tendencious questions that can’t be verified isn’t a solution. It’s important to understand the risks and prepare accordingly without automatically believing in huge conspiracies.
Forewarned is forearmed.
What you can do to protect yourself from such a crisis ?
- Diversify your stablecoin holdings
- Reduce your exposition to USDT by buying crypto
- Don’t put all your eggs in the crypto basket
Share a tip in the comment section to help others !
For a deeper dive
The objective was to raise awareness around the issue, for more information don’t hesitate to take a look at the following articles:
- https://tether.to/en/transparency
- https://tether.to/en/blog/tethered-to-truth-and-transparency
- https://muellerberndt.medium.com/is-tether-a-black-swan-51095720b01c
- https://www.forbes.com/sites/francescoppola/2019/03/14/tethers-u-s-dollar-peg-is-no-longer-credible/?sh=59935c90451b
- https://www.coindesk.com/markets/2021/05/13/tethers-first-reserve-breakdown-shows-token-49-backed-by-unspecified-commercial-paper/
- https://www.bloomberg.com/news/features/2021-10-07/crypto-mystery-where-s-the-69-billion-backing-the-stablecoin-tether
- https://www.youtube.com/watch?v=dQw4w9WgXcQ
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