Tether: How Stable Are This Stablecoin’s “Reserves” ?

If You're Buying "Stable"coins, You Should Be
Reasonably Certain the Reserves are "Stable"

The 3 June FT Lex Column had a call-out box on Tether “Stablecoins/bitcoin: unTethered to reality”.

Citing information published by Tether, Lex noted that only 2.94% of the value of outstanding Tethers is backed by pure cash.

The remainder is “backed” by a variety of instruments:

• commercial paper (49.6%),

• short term deposits (18.36%),

• Treasury Bills and reverse repo notes (4.96%)

• secured loans (12.55%),

• corporate bonds, funds, and precious metals (9.96%), and

• other investments (1.64%), which include “digital tokens”

No real disclosure on the other items, except that “secured” loans weren’t to affiliates.

The lack of disclosure is troubling as will be discussed in the next post.

Lex dryly noted that not all of Tether’s reserves were held in risk free assets.

Indeed!

That directly impacts stability.

If the reserves are subject to volatility, then so is the value of the “stablecoin”.

So much for the “stable” in “stablecoin”.

But there’s a bit more here to think about.

This is quite a diverse set of assets.

1. What is Tether’s overall investment objective and strategy? It sure doesn’t look like “preservation of capital”.

2. How does this collection of assets achieve the objective and strategy?

3. What are the required criteria for investments, e.g., asset class, industry, individual investor or counterparty characteristics (credit grade, etc), tenor, etc?

4. Is Tether’s management capable of designing, executing, monitoring, and adjusting the strategy and portfolio as needed? They are by all accounts either certified tech geniuses or perhaps self-certified tech geniuses. But are they really financial geniuses as well?

5. If not, is Tether using third parties? If so, how are these selected?

6. Who are they? Goldman Sachs or Oz at Crypto Capital in Panama? What additional risk do these third parties pose in addition to obligor and counterparty risks?

7. Given the “diversity” of assets in the reserves, it might also be worthwhile to ask if any of these were used to purchase Tether. That is, has a customer or have customers bought Tether with any of the “reserve” assets rather than with cash.

8. If you’ve read paragraph 38 of the settlement agreement with the NYS AG, you’ll notice that in October 2018 Bitfinex “repaid” US$ 400 million in loans from Tether via the “redemption of 400 million tethers”. That is, via a non cash transation. It doesn’t seem likely that these were clients’ Tethers, assuming no sketchy dealing by Bitfinex. So were they Bitfinex’s own Tethers? And, if so, how did it obtain them?

It the next post we’ll look a bit more into other issues surrounding the valuation of the reserves.