By Stan Szymanski
The cryptocurrency Tether is a lot like the bank in the game of Monopoly. In Monopoly, unlike the railroads, of which there are 4 (Reading, Pennsylvania, B&O, and Short Line), there is only -one- bank. If you want to play the game you get your money from the -one- bank in town. If you want to buy an asset you use the bank issued money. There is virtually no competition for banking business and the money is pretend.
To get into the cryptocurrency game in most cases (unless you do a person-to-person swap of cash-for-crypto or buy crypto at a crypto ATM) you have to move cash from the banking system into one of the numerous cryptocurrency exchanges such as Binance, Coinbase or Kracken. You establish an account with the crypto exchange and give them your banking information and then authorize the move of cash from your bank into your chosen cryptocurrency exchange. A cryptocurrency exchange is a warehouse for cryptocurrency. That means those funds have to go into one of the bays in the warehouse named for a specific cryptocurrency. Of course when moving cash, you want your money to go into something ‘stable’ before you choose which crypto(s) you actually want to own. That landing pad, 9 times out of 10 times in these exchanges is Tether (typically known on your exchange as USDT).
When one trades out of a cryptocurrency (like Bitcoin) the crypto exchange puts the proceeds of the trade into Tether (USDT) which essentially acts like a brokerage money market (but in reality it is not). When the customer want to purchase another cryptocurrency the assets are taken from Tether.
Tether is generally regarded as a ‘StableCoin’. Investopedia defines a StableCoin as:
A stablecoin is a class of cryptocurrencies that attempt to offer price stability and are backed by a reserve asset. Stablecoins have gained traction as they attempt to offer the best of both worlds—the instant processing and security or privacy of payments of cryptocurrencies, and the volatility-free stable valuations of fiat currencies.
Investopedia further defines Tether thusly:
Tether (USDT) is a blockchain-based cryptocurrency whose tokens in circulation are backed by an equivalent amount of U.S. dollars, making it a stablecoin with a price pegged to USD $1.00. Stablecoins track traditional fiat currencies, like the dollar, the euro, or the Japanese yen, which are held in a designated bank account.
Tether is the lillipad that all the frogs have to jump onto in order to get into their bank cash into the pond known as cryptocurrency at the cryptocurrency exchanges.
The real question that I am raising today (I’m not the only one by the way) is: Does Tether fulfill the definition and expectation of a ‘StableCoin’, or does it fall short to the detriment, disservice and handicap of investors, banks and even the worldwide economic system?
Let us first look at the question of if Tether is really a ‘StableCoin’.
We have heard many times the stories of Lehman and Bear Sterns falling on the rocks at the beginning of the 2008 financial crisis. What really challenged the viability of the system was as follows via Liberty Street Economics:
During the financial crisis in 2008, just one money market fund (MMF) “broke the buck”—that is, its share price dropped below one dollar. The Reserve Primary Fund announced on September 16 that the value of its shares had dropped to 97 cents. As we discussed in a previous post, Reserve’s announcement helped spark a widespread, damaging run on MMFs that slowed only when the federal government intervened three days later to backstop the funds.
So in a financial product that people are depending on to be of rock solid unwavering value and it turns out to be volatile and erratic in its price-that is the stuff that bank runs are made out of. This is what happened in the money market until the government stepped in in 2008.
Relating this to Tether: The worlds largest ‘StableCoin’ has already shown to be variable and unsteady.
Looking at one chart over the last five years is shows that Tether has traded as low at just under $.99 and up to $1.01. That doesn’t seem to bad does it?Unfortunately that is not the truth; not the whole truth.
In late November 2021, Tether crashed on Indian Cryptocurrency exchanges:
Tether (USDT), the world’s largest stablecoin by market value, has turned volatile on Indian exchanges amid renewed regulatory uncertainty. And savvy traders are profiting from the price instability.
The cryptocurrency launched to help mitigate volatility associated with other digital assets should always be worth $1 or rupees (₹) 74.37, as per the current dollar-rupee or USD/INR exchange rate.
However, on Tuesday, USDT crashed on prominent local platforms, hitting as low as ₹60 on the Mumbai-based WazirX exchange while maintaining the 1:1 peg with the dollar on western exchanges.
How can Tether literally crash and go unreported in the Western press and in the charting of Tether? I’m not sure but perhaps it is because that Tether doesn’t just trade on one blockchain; apparently it trades on eight blockchains. This would certainly improve liquidity. Eight blockchains would also make it convenient to pick the one that suits your story best. Your mileage may vary.
Perhaps the most important fact to examine is to consider what is actually backing Tether.
According to the Tether website here is the their ‘Reserves Breakdown’
5.54% Other Investments (Including Digital Tokens)
4.99% Secured Loans (None To Affiliated Entities)
5.22% Corporate Bonds, Funds & Precious Metals
84.25% Cash & Cash Equivalents & Other Short-Term Deposits & Commercial Paper
Here is the further breakdown of Tether Cash & Cash Equivalents & Other Short-Term Deposits & Commercial Paper:
33.35% Treasury Bills
0% Reverse Repo Notes
12.42% Cash & Bank Deposits
1.72% Money Market Funds
52.51% Commercial Paper
So a small math calculation yields the following:
Tether last reported assets under management north of $82 billion.
82,000,000,000 (approximate assets)
X 84.25% Cash Equiv.————————————69,085,000,000 (Short Term)
X. 52.51% (Com. Paper)————————————36,277,000,000 (Comm Paper assets)
So over $36 Billion of Tether assets are in Commercial Paper. Many money markets (of which Tether is not) have substantial positions in Commercial Paper. The problem is this: A properly regulated money market fund gives a quarterly report of what securities are in their portfolio so that the public can see how their money is invested. Tether (a cryptocurrency) has -never- disclosed exactly what securities it holds and is allowed to get away with it…
I ask you-How does malfeasance not only happen, but grow and fester? Apparently when there is no accountability to investors.
Tether does not issue quarterly reports; this past February 21st Tether issued its latest ‘quarterly assurance opinion’. It basically stated that its’ reserves now exceeded its liabilities. But what exactly does Tether invest it’s reserves in?
No one in the public can say they know for sure.
There is one journalist Zeke Fuax who penned ‘Anyone Seen Tether’s Billions? (Bloomberg Businessweek October 11, 2021) who claims to have been given a document detailing Tether Holdings reserves. According to the article the document said that the company held billions of dollars of loans to Chinese companies.
Why is this important? First, a company that wouldn’t tell anyone what they were investing in may have put investors money into the many bankrupt Chinese Real Estate companies such as Evergrande which is all but a lost Communist cause at this point.
Secondly, if it were to be admitted that this is where Tether put anything even remotely approaching a minority stake in bankrupt companies into its portfolio, it would cause the Tether price to fall, perhaps significantly, below the ‘stable’ price of $1.00 which would create a ‘bank run’ on Tether. Any redemption requests that amounted to just over 7% of the coin assets would drain all Tether cash on hand resulting in ‘Force Majeure’. According to a CBMC interview ‘Is Tether Crypto’s Black Swan?’: ‘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…
Tether does not tell the investors what it invests in and if things get bad, they will delay the investors getting their money back if it is their desire to do so. How does that sound to you? Sounds like impropriety to me.
If it became widely known that Tether had been investing in previously unknown to be bankrupt Chinese companies, it would at a minimum crush the crypto market, completely freeze and make insolvent (if it isn’t already) the Chinese Commercial Paper market and crash the Chinese stock market. But because the magnitude of the worldwide involvement in this potential fiasco there would probably not be an unscathed financial market left; a total monetary cataclysm.
Dr. Marco Metzler, whom I have interviewed in written format numerous times, paid a visit to the Cayman Islands to file bankruptcy proceedings (winding up) paperwork against Evergrande (Metzler’s firm owns $200,000 face value of Evergrande bonds) since that is where Evergrande is headquartered. While he was there he also paid a visit to the office of the auditor for the $82 billion StableCoin Tether-Moore Cayman. The extent of the offices for Moore Cayman was this: a Mailboxes Etc. P. O. Box
