Tether's (USDT) stablecoin collateral includes short-term loans to large Chinese companies and loans to cryptolending platforms like Celsius Network. Such findings are contained in a Bloomberg investigation.
A Bloomberg investigation finds Tether holds some of its reserves in billions of dollars worth of Chinese commercial paper. https://bloomberg.com/news/features/2021-10-07/crypto-mystery-where-s-the-69-billion-backing-the-stablecoin-tether?sref=frV97TwV… by @ZekeFaux
The publication recalled years of industry suspicion of USDT's lack of collateral.
The growth of stablcoin issuance to 69 billion USDT, including 49 billion USDT this year, could put its issuer Tether Limited in the top 50 US banks, if it was not an unregulated offshore company.
The increased scale and lack of transparency of the stablecoin's reserves have attracted the attention of US financial authorities and intensified criticism of the organisation.
In January, an article appeared on Medium. Its author pointed to a "significant" discrepancy between the Tether offering issued since early last year and the funds at Deltec Bank.
According to Bloomberg, the company does not hold all of its assets at the Bahamas-based bank. Chairman Jean Chalopin said it only held extremely low-risk cash and bonds. Only about $15bn is still held by Deltec lately, with Tether having started using other credit institutions for the rest, he clarified.
In September, the host of CNBC's Mad Money show Jim Cramer warned of the risks of a collapse of the entire crypto economy if Tether Limited goes bankrupt. He cited the possible presence of commercial paper of Chinese companies in its reserves, including the brink-of-default real estate developer Evergrande. The USDT issuer has denied this.
Bloomberg pointed to regulators' concerns about the negative impact on financial stability in the event of a massive reverse conversion of stablcoins into fiat. In the absence of full collateralization of USDT, its collapse would eclipse the damage from the Ponzi scheme organized by Bernie Madoff, says the agency.
Bloomberg's interlocutors described Tether as a "high-risk offshore hedge fund". The company's lack of visibility among money market participants and its registration with the British Virgin Islands regulator, as claimed by its management, failed to refute such claims.
Journalists were also suspicious of the scant information about the management of Tether Limited and their reluctance to give interviews.
Stuart Hogner, a lawyer representing the company, responded evasively when asked about USDT collateral. He called the critics' statements misinformation and noted the lack of clients who had been refused a request to make a reverse fiat conversion.
In July, it became known that the US Department of Justice initiated a probe into possible bank fraud by executives of Tether Limited. According to Bloomberg, the authorities were interested in the early stages of the firm's operations.
In February 2021, the stabelcoin issuer and its sister cryptocurrency exchange Bitfinex settled a dispute with the New York State Attorney General's Office over the loss of $850 million. The head of the office, Letitia James, called Tether's claims that its digital asset was fully backed by US dollars a lie. But the company saw this outcome as an endorsement of the company's operations.
A detailed report on USDT reserves was made available to the agency. They were earmarked for short-term lending to Chinese companies amongst other things, contrary to the policy of money market funds. This was before the well-known events around Evergrande.
Journalists were also made aware of bitcoin-backed lending by cryptolending platforms like Celsius Network. According to the founder of the latter, Alex Maszynski, he was paying 5-6% per annum on the $1bn raised.
At the time, Hogner claimed full collateral for Tether, as well as an A-2 rating or higher of commercial paper issuers in the company's reserves.
Bloomberg drew parallels to the 19th century "wild banking" era. Journalists noted the risks of losing the 1:1 peg of USDT to the dollar in the event of default on loans. The losses could exceed the profits from such investments and trigger a run on depositors, they concluded.
Tether Limited called the Bloomberg article a compilation of old unconfirmed speculation in an attempt to defame a market leader "whose track record of innovation, liquidity and success speaks for itself".
The issuer characterised the comments by one of its former partners, with whom the firm continues to sue, as unhelpful.
As a reminder, in August, the parent company of Bitfinex bitcoin exchange and Stablecoin issuer Tether, iFinex, asked the New York Supreme Court to prohibit the media and other organisations from demanding data on the status and structure of USDT reserves over the past few years.
Earlier, audit firm Moore Cayman published a report stating that as of July 30, 2021, USDT Stablecoin was 100% backed by reserves of Tether Holdings Limited.
Meanwhile, 49% of the reserves consisted of $30.8 billion in commercial paper and the share of cash and bank deposits that can be withdrawn in two days or less in USDT collateral was 10% - approximately $6.28 billion.
A large part of the reserves are represented by US tax bills with a maturity of less than 90 days. They accounted for more than 22.5% of the total value or about $15.3 billion.
In October, it became known that the administration of US President Joe Biden is considering including issuers of stabilecoins in the legal framework. They may be subject to the same requirements used to regulate the banking industry.
Earlier, the U.S. Treasury Department discussed the risks and benefits of stablecoins with the banking community and credit unions. In the same month, information appeared about the Treasury's intention to require issuers of stabilecoins to ensure their free conversion into fiat.
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