These questions have been raised since shortly after it was first issued in 2014, in part because the company has never released the kind of audited financial statements that normal deposit-taking banks are required to report. Investor doubts prompted the company to start issuing attestations on its reserves in 2017, currently conducted by external accounting firm BDO Italia (though the Wall Street Journal reported in mid-December that the company was “evaluating” whether to continue its work for Tether and other crypto companies).
FTX founder Sam Bankman-Fried in New York last week, where he was released on conditional bail. FTX’s collapse continues to reverberate throughout the cryptocurrencies sector. AP
As part of a 2021 settlement with the New York Attorney General, which included allegations that Tether lied about its reserves in the past, these attestations are now filed quarterly. In that deal, Tether and its sister crypto exchange Bitfinex were fined $US18.5 million, while another settlement with the Commodity Futures Trading Commission ordered Tether and Bitfinex to pay $US42.5 million in penalties that same year. Some investigations are still ongoing, including a US Justice Department probe into whether Tether executives deceived their banking partners.
What’s known – and not – about Tether’s finances? Attestations aren’t actual audits, like the kind that public companies publish annually for shareholders.
That means that while Tether’s reports say it has about 82 per cent of its reserves in cash and cash equivalents, we don’t know exactly where those assets are held, which money market funds it invests in or other details that might imply the level of risk around its collateral.
For example, the proportion of Tether’s reserves that it lends out to other companies has been rising, according to the attestations — but we don’t know who’s borrowing the money, or what due diligence Tether conducted to make sure they can pay it back. Tether said on December 13 that it plans to steadily reduce its secured lending activities to zero in 2023.
Why is that a problem? Because USDT is supposed to always be worth $US1, crypto investors have tended to treat Tether a bit like a bank – but without the deposit insurance that regular banks carry to protect their customers.
If people start to feel less confident in Tether’s ability to make good on that promise during times of market stress, USDT’s peg to the dollar can erode and leave the cryptocurrency vulnerable to runs. If it’s in trouble, USDT being worth more or less than a dollar for too long would start to affect both how people trade in crypto regularly, and the treasuries of the many crypto companies and projects that use USDT holdings like a regular bank balance.
In 2022, several major company collapses elsewhere in crypto prompted investors to flee to assets they considered to be safer – and Tether’s USDT bore the brunt of that, slipping from $US83 billion in circulation at its April peak.
In May, when the terra ecosystem collapsed, USDT fell to as low as US95¢ because users rushed to offload their USDT tokens for other stablecoins, or just wanted their dollars back. And when FTX was facing imminent bankruptcy in November, Tether briefly lost its peg again. Given how much anxiety investors are feeling since the FTX collapse, any erosion of confidence in USDT would probably eat away further at confidence in crypto in general.
What do regulators think? Stablecoins have been a major point of concern for regulators for a while. They’ve seen what happens when institutions that are like banks but lack the same protections run into trouble.
When US money-market funds couldn’t hang on to their $1-per-share price pledge during the 2008 financial crisis, the Federal Reserve had to step in to provide a bailout. Regulators are also worried because stablecoins are the main point of overlap between the buyer-beware crypto world and the institutions of traditional finance.
Ultimately, they fear about what could happen if USDT grew to be systemically important in the real world without any checks and balances – an even bigger concern after one stablecoin, terraUSD, already went bust last year.
What do they propose? The Financial Stability Board, a panel of global regulators, issued a report in October calling for an approach it summarised as “same activity, same risk, same regulation,” under which stablecoins would come under the same rules as companies that conduct similar activities in the real world.
Meanwhile, lawmakers in the US, the EU, the UK, Japan and others have spent a lot of time considering rules that would overhaul the $US150 billion stablecoin sector. Regulators want a say over the types of assets that stablecoin providers like Tether can use to fill their coffers, and are expected to require more detailed disclosures on their reserves.
This is something that managers of money-market funds are especially keen to see because they compete with Tether and others in buying assets like US Treasuries, which earn a small yield while also being relatively liquid.
Bloomberg Quicktake
