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Tether’s weak. That’s the view of S&P Global Ratings, which today lowered its stability assessment of Tether’s eponymous crypto to rock bottom:
Tether’s dollar-pegged USDT is the world’s most popular stablecoin and the third-most valuable token overall. Tokens in issue had a value of $174.4bn at the end of September.
But with reported reserves at end-September of $181.2bn, collateralisation weakened to 103.9 per cent from 106.1 per cent a year earlier.
Of greater concern is the lack of safe assets held in reserve. Only 64 per cent of Tether’s reserves are in short-term US treasury bills, with a further 10 per cent in low-risk overnight reverse repos.
Tether’s secrecy is flagged as a risk even here. Cantor Fitzgerald is widely reported to be Tether’s T-bill custodian, but there’s no official confirmation. Nor is there disclosure about counterparties and bank account providers. Nor is there disclosure about money market funds, which account for 4 per cent of reserve assets.
What worries S&P even more is the other stuff:
“Other stuff” includes corporate bonds, crypto, gold and precious metals, secured loans, and who knows what else. Tether’s higher-risk investments are now 24 per cent of USDT reserves, up from 17 per cent a year ago.
Efforts by Tether between 2022 and 2023 to sanitise USDT reserves have been reversed over the past 12 months, adding credit, market, interest-rate, and foreign-exchange risks, S&P says.
For example:
Bitcoin now represents about 5.6% of USDT in circulation, exceeding the 3.9% overcollateralization margin, indicating the reserve can no longer fully absorb a decline in its value. A drop in the bitcoin’s value combined with a decline in value of other high-risk assets could therefore reduce coverage by reserves and lead to USDT being undercollateralized.
It doesn’t help that there’s no public disclosure about the type of assets eligible for inclusion in USDT reserves, nor its contingency plan is if any asset were to significantly lose value.
The sum of S&P’s fears is easiest to summarise with bullet points.
Instead of publishing an auditor’s report, Tether employs BDO Italia to prepare end-of-quarter snapshots of its reserves. The Tether website adds headline figures for assets and liabilities, none of which are unaudited.
A corporate restructuring last year split Tether into four divisions and allowed it to take punts on companies like video hosting group Rumble and Adecoagro, a South American agricultural conglomerate. There’s no public disclosure on how it keeps these activities separate from the core stablecoin business.
Having relocated this year to El Salvador, Tether is licensed by its National Commission of Digital Assets, whose minimum requirements are well below those expected by European and US regulators. The CNAD requires only that Tether maintains at least a 1:1 backing. and that at least 70 per cent of the reserve can be liquidated in 30 days, with no requirement to segregate assets.
There is no publicly available information on how Tether segregates assets.
Tether applies a minimum redemption threshold of $100,000, taxed at 0.1 per cent up to $1,000, and will only make whole customers who have paid a $150 verification fee and met its criteria. Everyone else has to take their chances on secondary markets that usually work, but sometimes don’t.
S&P’s report offers a handy overview of the eccentricities of Tether’s business. What it doesn’t address is why things are organised that way.
Why does a company that has collected more than $188bn in deposits, on which it pays no interest, make everything so complicated? The option’s there to park the whole lot in one-month T-bills, collect $8bn-ish a year and split it between so few shareholders they could all fit in an elevator.
Is it really preferable to be making approximately twice that when everyone, from rating agencies down, suspects you might be a bit dodgy? Apparently, yes, it is.
Further reading:
— Tether, the gold whale (FTAV)
— Of Tether, Cantor, and Satoshi statue soft-power diplomacy . . . (FTAV)
