It’s still tough out there, folks. When looking specifically at cryptocurrencies, the UST and Luna crash sent panic through the cryptocurrency markets like never before. One of the most intriguing – and downright terrifying – effects of this meltdown was the unpairing of Tether. I’ve been putting off a deep dive into Tether for a while because I feel like it’s the cryptocurrency equivalent of Pharrell’s “Happy” — so over the top I get a headache every time I hear it. But the events of the past week, when Tether entered this decoupling trend that has suddenly become very popular among cryptocurrencies, persuaded me that it was time to write a deep dive.
Table of Contents
unpairing
You know it’s a bad time in the markets when your spell checker is accepting “de-pegging” as a word. But that’s what we got as Tether dropped below 95 cents after the UST burst (May 12). A sell-off was triggered by investors worried that Tether did not have enough reserves to support a bank run following the collapse of the UST da Terra. Fortunately for the ecosystem at large, the market has stabilized and the price has recovered. However, even as I write this 11 days later, the parity has not fully restored, currently trading at $0.999. Last time I checked, it didn’t equal $1. If Tether were to sink, it would undoubtedly cause massive industry-wide contagion – it is still comfortably the most liquid pair on the market and absolutely vital to much that goes on in the space. Since the beginning of May, a staggering $10 billion worth of Tether has been redeemed. Looking at the steady growth of USDT’s market cap historically, it’s clear that this latest episode scared investors more than ever. If you ask me, Tether has the reserves to sustain its $73 billion market cap. But whether or not they do is only part of the question – the crux of the problem is how this is an issue to begin with.
We’ve seen this movie before
Similar to seeing daily coronavirus case numbers in the news two years after the pandemic, I am tired of talking about Tether and the reserve situation. Furthermore, it is detrimental to the industry at large, and that comes from someone who has never been among the Tether skeptics. How difficult is it to simply clear all this up and publish frequent and consistent balance sheet updates? Tether currently does this once a quarter, but they fall far short of the standards that should be maintained for a $73 billion company. The most recent March 31 report describes $82.845 billion in assets and $82.262 billion in liabilities. This implies equity of $162 million, or to use the more colloquial term in this context, overcollateralization of $162 million. Great – looks acceptable. But now let’s do some math. This US$ 162 million constitutes 0.2% of the assets. Therefore, if assets are down 0.2%, Tether is, by definition, undercollateralized. Not so well – and unacceptable. An unsecured stablecoin, what could go wrong?
Constitution of Reservations
You can dispute that all assets are contained in commercial paper, T-Bills and other safe investments, but this is not true. The same report describes $5 billion in “other investments (including digital tokens)”. The $162 million of overcollateralization that Tether currently has is 3.3% of that $5 billion amount. If you’re a cryptocurrency investor, you don’t need me to explain how volatile your friendly neighborhood digital tokens can be. Can you imagine digital tokens dropping 3.3% since March 31 and making Tether undercollateralized? I bet you can. I analyzed this report below, showing that Celsius tokens were one of Tether’s investments, at $62.8 million to be exact. Celsius Network is a lending platform where depositors can earn additional income on their assets (BTC, ETH, etc.) How about taking a look at the Celsius token since October 2021 when Tether invested over $50 million in your Series B? That’s a legal decline of 87%. puts. Again – the asset and liability numbers above are as of March 31, 2022. Since then, the cryptocurrency has been heavily in the red, so who knows what the numbers look like now. But with Tether’s lack of transparency and balance sheet gymnastics, it’s not hard to imagine that the next balance sheet update will paint the picture in a rosier light than it actually is.
Accounting
Tether claims that it recognizes losses but not gains on its balance sheet, and that this influences the small equity slice of $162 million above, which is therefore conservative. But this is really hard to verify with the lack of transparent reporting. Furthermore, you can also play devil’s advocate here and say that if the accounts record the least cost or impaired value, this implies that Tether has invested substantially more in these “other investments (including digital tokens)” than the number of $5 billion currently on its “balance sheet” (reversed commas added there). And if they’re submerged here, who knows where that funding came from and what the health of the organization in general is doing? Again, while the answers to these questions are vitally important, my main point of contention is that they require questions to begin with. Here I am digging through the balance sheet, taking several reports from months ago and trying to put the pieces together so I can see the whole puzzle. But this is a $73 billion stablecoin central to the health of the cryptocurrency system. It just shouldn’t be so opaque; the puzzle must be clear for all to see. Even if all goes well and you have full confidence in these “balance sheet” reports, let’s not forget that the company has a dark history. They originally claimed their reserves were backed by one US dollar before the New York Attorney General’s investigation found this to be a lie. And I don’t use that word lightly. This is what led them to change their rhetoric from “fully supported by the US dollar” to fully supported by “Tether reserves”. In addition, these balance sheet updates are published only in the first place to satisfy the requirement, a consequence of this same investigation. Otherwise, we would be even more in the dark than we are currently.
The Benefits
All of which brings me to why I believe the $10 billion in redemptions in the last month is a good thing. The smaller Tether becomes, the smaller its influence on the industry and the smaller the contagion effect in the doomsday scenario of a meltdown (I’m just looking at hypotheses here). The sooner the industry can put these tedious, repetitive and boring questions about Tether reserves aside, the better. As I said, I don’t believe we are close to a USDT collapse. I would never consider myself a skeptic of Tether, in the same way that many people are constantly campaigning against it, and have been for years. However, with recent company admissions as well as really shoddy efforts on balance sheet reporting, I am feeling increasingly discouraged by USDT. I avoid USDT whenever I can, in favor of more respectable stables. Because it’s a simple question – why not me? There is no inherent advantage in keeping Tether apart from how ubiquitous it is, and other stables are now upgrading. There is, however, a huge downside risk, however unlikely you may believe it to be. And even if you don’t believe in the fact that everything can fall apart, an unlink like this month’s should be enough to persuade you to stick to a more stable stablecoin (As I write this sentence, I’m starting to understand how some people make fun of cryptocurrency. ). I hope the industry does the same, because whether you’re a believer or not, this repeated narrative that just won’t go away is harmful to everyone involved.
Conclusion
This was an $83 billion stablecoin last month. It is now a $73 billion stablecoin. Fortunately, their popularity will continue to wane and the more reputable and transparent stables will gain market share organically. USDT has been a scourge in the industry for a while, which is why I smile when every dollar of USDT is redeemed. I’ll close with the quote below from Tether CTO Paolo Ardoino who said the following last week about Tether’s 100% record in honoring all these redemptions last month: “This latest attestation further highlights that Tether is fully backed. and that the composition of its reserves is strong, conservative and liquid”. But Paolo, isn’t the fact that this statement needs to be made indicative of the problem here? Tether was founded 8 years ago, in 2014. It has grown to a place where it is now worth $73 billion and powers a large part of the industry. And is the CTO still required to release statements arguing that redeeming 15% of the “fully guaranteed” asset proves how safe it is? It’s like I call my mom and say, “Hey mom, you’d be proud of me. I didn’t do heroin today!” I’m really not sure if it’s a huge achievement, no?
