Tether (USDT) redemptions fuel fears about stablecoin’s backing

Investors have withdrawn more than $7 billion from tether since it briefly dropped from its dollar peg, raising fresh questions about the reserves underpinning the world’s largest stablecoin.

Tether’s circulating supply has slipped from about $83 billion a week ago to less than $76 billion on Tuesday, according to data from CoinGecko.

The so-called stablecoin is meant to always be worth $1. But on Thursday, its price slipped as low as 95 cents amid panic over the collapse of a rival token called terraUSD.

Most stablecoins are backed by fiat reserves, the idea being that they have enough collateral in case users decide to withdraw their funds. But a new breed of “algorithmic” stablecoins like terraUSD, or UST, attempt to base their dollar peg on code. That’s been put to the test lately as investors have soured on cryptocurrencies.

Previously, Tether claimed all its tokens were backed 1-to-1 by dollars stored in a bank. However, after a settlement with the New York attorney general, the company revealed it relied on a range of other assets — including commercial paper, a form of short-term, unsecured debt issued by companies — to support its token.

The situation has once again placed the subject of the reserves behind tether under the spotlight. When Tether last disclosed its reserve breakdown, cash made up around $4.2 billion of its assets. The vast majority — $34.5 billion — consisted of unidentified Treasury bills with a maturity of less than three months, while $24.2 billion of its holdings was in commercial paper.

These “attestations” produced by Tether each quarter are signed off by MHA Cayman, a Cayman Islands-based firm which has only three employees, according to its LinkedIn profile.

Tether has faced repeated calls for a full audit of its reserves. In July 2021, the company told CNBC it would produce one in a matter of “months.” It has still not done so.

Tether was not immediately available for comment when contacted by CNBC for this article.

Responding to a Twitter user who urged Tether to release a full audit, Paolo Ardoino, the company’s chief technology officer, insisted its token was “fully backed” and had redeemed $7 billion in the past 48 hours.

“We can keep going if the market wants, we have all the liquidity to handle big redemptions and pay all 1-to-1,” he said.

In a further tweet, Ardoino said Tether is still working on an audit. “Hopefully regulators will push more auditing firms to be more crypto friendly,” he said.

The destabilization of tokens which have the sole purpose of maintaining a stable price has rattled regulators on either side of the Atlantic. Last week, U.S. Treasury Secretary Janet Yellen warned of the risks posed to financial stability if stablecoins are left to grow unfettered by regulation, and urged lawmakers to approve regulation of the sector by the end of 2022.

In Europe, Bank of France Governor Francois Villeroy de Galhau said the turmoil in crypto markets recently should be taken as a “wake-up call” for global regulators. Cryptocurrencies could disrupt the financial system if left unregulated, Villeroy said — particularly stablecoins, which he added were “somewhat misnamed.”

Meanwhile, European Central Bank Executive Board Member Fabio Panetta said stablecoins like tether are “vulnerable to runs,” referring to “bank runs” where clients flee a financial institution en masse. The European Union is planning to bring stablecoins under strict regulatory oversight with new rules known as the Markets in Crypto-assets Regulation, or MiCA for short.

Frances Coppola, an independent economist, explained it’s crypto exchanges — not retail investors — that are pulling billions of dollars out of Tether in wholesale transactions. To redeem tethers for dollars on Tether, clients must make a minimum withdrawal of $100,000, according to the company’s website.

“Its customers really are the exchanges,” Coppola said. “Then the exchanges sell tokens to traders, dabblers and small investors.”

Tether is a crucial part of the crypto market, facilitating billions of dollars worth of trades every day. Investors often park their cash with the token in times of heightened volatility in cryptocurrencies.

Monsur Hussain, head of financial institutions research at Fitch Ratings, said Tether would have “few difficulties” in selling down its Treasury holdings.

But the source of those holdings is unclear. In a recent interview with the Financial Times, Tether’s technology chief refused to provide details on its Treasury holdings, saying the company doesn’t “want to give our secret sauce.”

Anxiety surrounding tether appears to have boosted demand for rival tokens like Circle’s USDC and Binance’s BUSD, whose respective market values have increased around 8% and 4% in the past week. Experts said that’s because these tokens are deemed “safer” than tether.

While not yet large enough to cause disruption in U.S. money markets, Tether could eventually reach a size where its owning of U.S. Treasurys becomes “really scary,” Carol Alexander, a professor of finance at Sussex University, said.

“Suppose you go down the line and, instead of $80 billion, we’ve got $200 billion, and most of that is in liquid U.S. government securities,” she said. “Then a crash in tether would have a substantial impact on U.S. money markets and would just tip the whole world into recession.”