tl;dr Summary: The latest source of Fear, Uncertainty and Doubt (FUD) surrounding crypto’s biggest stablecoin, $USDT, is in relation to its commercial paper reserves. Tether has come out in a statement to fiercely deny speculation related to the origin of this commercial paper, and has finally committed to a full audit of reserves!
Tether, $USDT, is cryptocurrency’s largest stablecoin. It is also the third-largest cryptocurrency by market cap, which currently sits around $66 billion. $USDT is a fiat-backed stablecoin, meaning the one-dollar peg is maintained by physical reserves of US dollars. Indeed, in the initial Tether whitepaper it was claimed that USDT could only be issued when customers deposit fiat dollars to Tether. This claim has been highly controversial, and the intense speculation related to the transparency of $USDT and the coin’s reserves is seemingly never ending.
Despite a prolonged reluctance to publicly disclose their holdings, Tether finally began to release ‘assurance reports’ in March 2021, produced by independent accountant MHA Cayman. The most recent assurance report, in March 2022, attested that 86% of Tether’s $82 billion on 31st March was held in cash and “cash equivalents”. It is the use of cash equivalents that is the latest source of controversy with Tether, as this term encompasses both US government debt (treasury bonds) and more controversially, commercial paper.
Commercial paper is essentially short-term debt, created by loaning money to private companies. Companies generally use this money to meet short term financial obligations, and then pay this back at a predetermined time, when their cash flow is improved. Although treasury bonds are generally considered safe, the security of commercial paper obviously depends on the company which you are loaning the money to. For those familiar with Tether and the crypto industry as a whole, it is unsurprising to hear that rumors have been circling suggesting that Tether’s commercial debt was far from ‘A-grade’…
On Jun 15, Tether released a statement around rumors claiming its commercial paper holdings:
“Tether is aware of rumours being spread that its commercial paper portfolio is 85% backed by Chinese or Asian commercial papers and being traded at a 30% discount. These rumours are completely false and likely spread to induce further panic in order to generate additional profits from an already stressed market.”
The statement went on to reference Tether’s most recent assurance report, which recognises that 47% of $USDT reserves are now US treasuries, with commercial paper making up less than 25% of reserves. It is planned to gradually reduce commercial paper holdings to zero and ‘roll’ these into short term US treasuries upon their expiration.
It seems that Tether is an easy target for FUD and recent news surrounding troubled CeFi platform Celsius and likely insolvent crypto hedge fund Three Arrows Capital has led to rumors of USDT’s involvement with both parties. Tether stated they had “zero exposure” to Celsius other than “a small investment” made out of Tether equity, and that any rumors about lending exposure to Three Arrows Capital were “categorically false.”
Despite Tether’s attestations, $USDT’s market cap has been consistently falling since the collapse of TerraUSD, shrinking almost $17 billion from a high of $83 billion in May 2022. Considering the market cap of rival stablecoins like $USDC have increased during the same time period, this clearly represents a lack of consumer confidence in $USDT. Tether CTO Paolo Ardoino referenced the coin’s shrinking market cap on Twitter, however viewed it as a sign of strength, referencing the fierce volatility that followed TerraUSD’s implosion:
“In 48 hours Tether processed 7B in redemptions, averaging 10% of our total assets, something almost impossible even for banking institutions.”
In the thread, Ardoino responded to claims that traditional hedge funds had been orchestrating coordinated attacks to short $USDT. He emphasized Tether’s ongoing reduction in commercial paper and increasing transparency, concluding that the “Tether portfolio is stronger than ever.”
In a recent interview with Euromoney, the Tether CTO confirmed that the company will undergo a full audit with a top accounting firm, something that not even rival ‘transparent’ stablecoins such as $USDC have been willing to commit to. This will certainly go a long way to calming fears surrounding Tether’s reserves, however as yet there is no specific timescale in which the audit will take place.
Despite this, it is clear that Tether is taking steps in the right direction, and as yet, the peg has held firm amongst market stress that few could have imagined just a few months previously. Long may this trend toward increased transparency continue!
