What is the Problem With Tether’s Banking Reserves?

Tether Limited has placed itself in the high ranks of the crypto industry thanks to the success of its stablecoin, USDT. The asset itself is the largest stablecoin, as well as one of the most valuable cryptocurrencies in the world.

What is the Problem With Tether’s Banking Reserves?

However, a lot of questions have recently been raised about USDT and its reserves. The company’s competitors, as well as regulators, have raised eyebrows about how USDT tokens are backed and its inability to provide proper answers hasn’t been encouraging.

Stablecoins and Their Importance

As many know, USDT is a stablecoin - a cryptocurrency whose value is tied to that of the dollar. Stablecoins get their name from this feature, with their currency pegs making them more stable than traditional cryptocurrencies like Bitcoin and Ethereum. They offer the best of both worlds: the stability of traditional money and the transaction speed (and borderless nature) of cryptocurrencies.

The true value of stablecoin is in payments. These assets make payments possible across different parts of the world, offering lower fees and quick transactions. In this sense, the biggest competitors for stablecoins are payment processors like PayPal and Square. Stablecoins also offers investors an opportunity to store value as investors exit cryptocurrency trades. They can even be used in margin trading.

Tether’s Sketchy History

Typically, when a stablecoin is created, there’s a reserve of assets. USDT is backed by the dollar, meaning that Tether Limited is supposed to keep one physical dollar in the bank for each unit of USDT that it mints.

Well, that was the initial plan, anyway. When Tether launched USDT as “Realcoin” in 2014, it claimed the asset would be backed one-for-one by the dollar. At one point, the coin’s website even read, “Every tether is always backed 1-to-1 by traditional currency held in our reserves.”

All of that changed in February 2019, when the text changed to:

“Every 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’).”

“Affiliated entities.” You might want to keep that in mind.

In 2014, Tether also inked a milestone partnership with Bitfinex, one of the top cryptocurrency exchanges in the world at the time. As of 2017, leaked papers showed that the two companies, Bitfinex and Tether Limited, were under the control of one parent company - iFinex.

Both companies continued to operate, but things took a nasty turn in 2019 when New York State Attorney General Letitia James opened an investigation into the two companies. At the time, the State AG claimed Bitfinex had lost $850 million and used USDT funds to hide these losses. In a response, Tether’s lawyer admitted the company had only blacked 74 percent of the USDT in circulation.

After years of back and forth, both partners eventually settled the case. The settlement agreement included an admission that Tether had no reserves for its stablecoins at the time. Tether had published an assertion of its cash reserves in 2018, claiming its tokens were blacked at a Bahamian bank called Deltec Bank & Trust Ltd. The very next day, however, money began moving from that account into Bitfinex’s bank accounts.

Definitely something fishy.

Tether’s Quarterly Reports

As part of the agreement with the New York AG, Tether committed to paying $18 million in fines. The company also agreed to release quarterly results showing the backing of its assets for at least two years.

The company’s first report came in Q1 2021, claiming that about 76 percent of USDT was backed by cash and other cash equivalents. These “equivalents” included commercial paper, which made up a vast majority of USDT reserves. That was about half of all of Tether’s collateral - worth about $30 billion at the time.

In a more recent report, Tether claimed that about 50 percent of the $62.8 billion in assets was held in certificates of deposit and commercial paper. Twenty-five percent of the assets were held in treasury bills, which are known to be pretty safe assets, much to the pleasure of many clients. Moore Cayman, a financial accounting firm, claimed the company had more money in its reserves than it needed.

The issue with this remains the ambiguity. No one knows whose commercial paper Tether holds, and the company remains unwilling to share any details. For comparison, this is a report showing JPMorgan’s money market funds. It shows the issuers, amount invested, specific identification code, and other details for each holding. Throw that up against Tether’s, and you’ll see why everyone’s so concerned about the company and its reserves.

Right now, the Securities and Exchange Commission (SEC) is looking to gain better oversight of cryptocurrencies - stablecoins in particular. If it does, it could have massive reach to clamp down on Tether and how it operates.


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