The Story Of Tether — A ‘Not So Stable’ Stablecoin

Tether has been going through some difficult times. So, what is going on with this stablecoin?

Before we explain the whole situation, you should know what a stablecoin is. Stablecoins are a type of cryptocurrency that is built to provide more stability than other cryptocurrencies because they are backed by assets like the U.S. dollar or gold. Meanwhile, other cryptocurrencies, such as bitcoin, aren’t pegged to a stable asset. Instead, their value is derived from a combination of peer-to-peer technology and software-driven cryptography.

What about Tether? Tether is a stablecoin, and it says that it is backed by one dollar. But the company is more like a bank. Tether Holdings Ltd., which is the company that issues the currency, takes in dollar from people who want to trade crypto and credits their digital wallets with an equal number of Tethers in return. Once they have Tethers, people can send them to crypto exchanges and use them to bet on the price of Bitcoin or any of the thousands of other coins.

The Problems

In 2014, it was said that “Every tether is always backed 1-to-1, by traditional currency held in our reserves,” as mentioned by The Verge. Then in February 2019, this 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’).”

Then, in 2019, after an investigation by the New York State Attorney General office, Tether’s lawyer admitted that Tether was only 74% backed. After Tether settling the case with the New York state, the settlement agreement read, the office of the attorney general found that Tether had no reserves to back the stablecoins in circulation for periods of time.

Not So Transparent

This means that Tether wasn’t backed all the time, meaning that the company was lying to its investors and wasn’t transparent about its holdings. Do we know anything about what Tether is backed by? As of March 31st, around 76 percent of Tether was backed by cash and cash equivalents, including unspecified commercial paper, which is a kind of short-term debt issued by companies.

The recent attestation (as of 30th June), around half of the $62.8 billion in assets are held in commercial paper and certificates of deposit. A quarter of the assets are in Treasury bills, and according to the accounting firm Moore Cayman, Tether has more money in its reserves than is required for redemption.

Even though we have some idea about Tether’s holdings, we still have no idea whose commercial paper the company is holding. When The Verge reached out to Tether and asked about this, the company’s spokesperson said, “We are a tech company, and we closely guard our counter-party relationships. At this time, we do not disclose the make-up of our commercial paper holdings.” This is a pretty unusual response, considering how big banks disclose their commercial paper holdings all the time.

The Report

Everything about Tether has been a mystery: Is it backed all the time? What kind of holdings does it have? Then, the Bloomberg report by Zeke Faux found some shocking things about the company. Bloomberg Businessweek had obtained a document which showed that the company’s reserves include billions of dollars of short-term loans to large Chinese companies. Why is this a big deal? Because money-market funds avoid putting money in large Chinese companies. However, Tether says that most of its commercial paper has high grades from credit rating companies.

The report also said that Tether has made billions of dollars of crypto-backed loans, and some of those loans have Bitcoin as collateral. We all know that Bitcoin is highly volatile, but Tether’s lawyer says that the secured loans are low risk because borrowers have to put up Bitcoin that’s worth more than what they borrow.

John Betts, the former CEO of Noble Bank International LLC in Puerto Rico, which Tether used, says Tether Chief Financial Officer Giancarlo Devasini had put its reserves at risk by investing them to earn potentially hundreds of millions of dollars of profit for himself. He told Bloomberg, “It’s not a stablecoin, it’s a high-risk offshore hedge fund.” Jean Chalopin, chairman of Deltec Bank & Trust in Nassau, the Bahamas, said that he had only cash and extremely low-risk bonds for Tether. However, recently, he said that the company started using other banks to handle its money.

So Many Questions

The report says how Tether hasn’t been completely honest with its holdings or what it is doing with the investors’ money. This year, Tether Holdings issued a huge number of digital coins. At present, there are 69 billion Tethers in circulation. This means, that the firm supposedly holds a corresponding $69 billion in real money to back the coins. And until now, we don’t have concrete evidence that all of that amount is backed by assets.

For years a persistent group of critics has argued that, despite the company’s assurances, Tether Holdings doesn’t have enough assets to maintain the 1-to-1 exchange rate, meaning its coin is essentially a fraud, writes, Bloomberg. Let’s say that if Tether isn’t actually having $69 billion in its reserves, it means that if a considerable amount of people want to take out their money, the company could face heavy losses. But Tether said that there isn’t any problem. A Tether spokesperson said, as mentioned by The Verge, “Tether has never refused a redemption to a customer — and stress-testing of Tether is not hypothetical.”

Not So Stable

Stablecoins are not so stable, since most of them fail. The research of Bruce Mizrach, an economics professor at Rutgers, found that, of all the stablecoins created in 2015, 80% failed, and 25% of those created in 2018 also failed. But what will happen if Tether fails? Mizrach told The Verge, “Tether, being the largest, would jeopardize all but the most transparent of stablecoins.”

However, some think otherwise. Alan Konevsky, the chief legal officer of tZERO, a security token trading platform, told The Verge, “If Tether went to zero, I’m sure there would be panic in the markets…” He added, “But it’s probably not going to be an utter collapse.”

In The End

Cryptocurrencies, stablecoins, and more such currencies are not regulated by any exchanges, so we can expect that this report and the controversies around Tether will push the Securities and Exchange Commission (SEC) to implement stringent measures to protect the investors. The other way that countries could deal with stablecoins is by creating a digital coin of their own. Many countries are already in the process of doing it.

The reason stablecoins are attractive is that you can avoid higher financial services fees. Mizrach found that Tether’s fees are usually less than a dollar, while out-of-network ATM fees are around $3.08. So, people want to pay lower fees on transactions, so stablecoins are attractive to them. Hence, we have to build a financial system, that is cheaper, faster and more transparent if we want to best problematic stablecoins like Tether.