Tether - How to Correct Deficiencies in Reporting on Reserves and Simultaneously Set Boundaries

So You'll Have to Read the Post Below

The central premise and promise of Tether is that it will maintain the value of its “stablecoin” at US$ 1 for each tether in circulation.

As outlined in previous posts, there are gaps in the information Tether provides that a careful investor would require to evaluate this promise.

1. The strategy that Tether applies to maintain this “stability” so that an investor could check whether that strategy is appropriate. As noted in this post, Tether has not explicitly done this and from the composition of the reserves I find it hard to believe their strategy is fully appropriate.

2. Sufficient periodic disclosure so that an investor could confirm that Tether is adhering to the promised strategy. As noted in this second post, Tether’s current disclosure of its “reserves” is insufficient to enable this. What were the NYS AG thinking when they set the disclosure requirements for reserves in the settlement agreement?

On the other hand, one could make the argument that someone who buys Tether is not a careful investor but rather a speculator or punter. So any information is likely to be ignored.

Or that the best strategy for careful investors is to avoid any investment in Tether. 

If you want a stablecoin backed by the US dollar wait until the UST issues one.

But let’s presume that this information would be useful to some investors. 

Equally it would also set boundaries within which Tether would have to operate. Perhaps, very advisable given past questionable stewardship of the reserves.

Now as we all know and will be told by cryptocurrency aficionados that one of their main reasons for investing in sh*tcoins is that one certainly can’t trust the government.

That same skepticism should be directed to non-governmental entities, especially a party with Tether’s track record.

How do we implement those information requirements? And not just for Tether?

Here’s a suggested minimum standard model: Fidelity’s Money Market Fund SPRXX.

The prospectus and monthly fact sheet set forth the fund’s objectives and strategy.

An investor would therefore have the information necessary to make a determination whether that strategy is appropriate.

Each month Fidelity discloses each of the holdings in the fund.

It also issues a semi-annual and annual audited financial report with that same information. You can access those here.

Similar reports on holdings from Tether would allow an investor to check whether the promised strategy is being adhered to.

As a holder of a stablecoin, wouldn’t you like to have a commitment as to what are the permitted asset classes, issuers, obligor credit ratings, tenors, concentrations, use of derivatives, etc. that your money can be “parked” in?

So you know if your money is on deposit with Oz at Crypto Capital in Panama or with HSBC London? Or invested in less liquid instruments?

Wouldn’t you also like to check periodically to make sure that the commitment was being adhered to?

Apparently the answer to both questions is no.

The February settlement agreement with the NYS AG had little impact on Tether.

As of 31 March the value of outstanding Tether was some US$ 42 billion.

In early June some US$ 62 billion.

There is as they say no vaccine for stupidity.

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.