Cantor CEO says he’s got Tether’s T-bills, so where’s the audit?

Tether’s fabled cache of U.S. T-bills may actually exist, but that only deepens the mystery of why the world’s largest stablecoin issuer refuses to submit its reserve assets to a full-fledged audit.

On Tuesday, Howard Lutnick, CEO of U.S. trad-fi giant Cantor Fitzgerald, gave a lengthy interview to CNBC’s Money Movers podcast. Around 36:00 in, Lutnick abruptly declared himself “a fan of the stablecoin Tether,” partly because “I hold their treasuries … and they have a lot of treasuries. They’re over $90 billion now.”

Lutnick’s assertions require some parsing. While the market cap of Tether’s USDT stablecoin is indeed over $90 billion at present, Tether’s most recent ‘attestation’ as to the reserves backing the then-$83 billion in circulating USDT claimed only around $56.6 billion in U.S. treasuries ($72.6 billion if you count overnight reverse repo agreements, term reverse repurchase agreements, money market funds, etc.).

In February, Cantor Fitzgerald was first revealed/exposed as Tether’s T-bill custodian in a Wall Street Journal article. The article claimed Cantor managed a portfolio of Tether assets worth $39 billion, roughly equivalent to the $39.2 billion in T-bills that Tether claimed to possess as of December 31, 2022.

Tether bulls and BTC maximalists who recognize USDT’s historical role in propping up the BTC token immediately began taunting so-called ‘Tether truthers’ on social media, claiming Lutnick’s comments were proof that USDT was always fully backed 1:1 with the U.S. dollar (despite some costly legal settlements offering irrefutable proof that this was not the case).

There are signs that not everyone is taking Lutnick at his word. Proof that Tether’s treasuries exist should have lit a fire under BTC’s fiat price. Instead, the token’s value actually fell by around $1,000 in the immediate aftermath of Lutnick’s comments.

Where’s the money, Lebowski?

If Lutnick’s offhand public comments are accurate, it only underscores the absurdity of Tether’s steadfast refusal to submit its reserves to a full audit by an independent accounting firm. Unless, of course, the other categories of Tether’s assets wouldn’t survive outside scrutiny.

This includes Tether’s controversial ‘secured loans’ to parties unknown, which have been increasing despite Tether’s pledge to eliminate them by the end of this year. As of September 30, there was still over $5 billion in loans on Tether’s books, without any clarity regarding how these loans were collateralized.

Questions have also been raised about how much of the nearly $1.7 billion worth of BTC in Tether’s Q3 reserves attestation may be collateral put up by loan recipients. The reserves also contain nearly $2.3 billion in unspecified’ other investments,’ $3.15 billion in ‘precious metals,’ and over $88 million in corporate bonds.

Tether is unique among its stablecoin rivals in that its terms of service require customers to potentially accept “in-kind redemptions of securities and other assets held in the Reserves,” i.e., not the actual dollars with which customers (allegedly) purchased their USDT. Tether also reserves the right to refuse to transact with any of its customers “for any reason (or for no reason) at any time.”

Remember that Sam Bankman-Fried’s FTX exchange collapsed 13 months ago after an $8 billion hole in its balance sheet left it unable to process customer withdrawals. Tether’s redemption policies are far more restrictive than FTX’s, including $100,000 minimums and only by individuals/entities to whom/which Tether directly issued USDT.

But if some dramatic incident were to occur that convinced enough customers to come calling all at once and Tether has an undisclosed asset/liability gap—even one measured in the hundreds of millions rather than billions—how would Tether respond?

As T-bill interest rates rose over the past year, Tether began crowing about the corresponding rise in the value of its ‘excess reserves.’ But this excess may not be sufficient to cover the cost of a legal settlement with the U.S. Department of Justice (DoJ) for Tether’s various escapades—bank fraud, the popularity of USDT with terrorist groups, etc.—over the years.

Last month, the DoJ settled with the Binance exchange, which agreed to pay $4.3 billion to atone for its own misdeeds. Binance was a major recipient of USDT over the years, and its settlement obligates the company to assist the DoJ in all related investigations. Tether’s name is likely front and center in those discussions.

By custodying its T-bills with a U.S.-based entity, Tether handed the DoJ all the leverage it needs to impose whatever settlement it desires. Given the shady cast of characters that have embraced USDT over the years, that could prove problematic should Tether be left unable to meet all its redemption requests.

S&P: Tether lacks transparency

Concerns over Tether’s enduring aversion to transparency aren’t strictly for ‘truthers.’ As Lutnick spoke to CNBC, S&P Global Ratings issued a Stablecoin Stability Assessment that ranked stables in terms of their asset quality risks. S&P also judged stables’ ability to maintain their peg to the U.S. dollar based on their governance, legal and regulatory framework, redeemability and liquidity, technology and third-party dependencies, and finally, their track records.

S&P gave Tether a ranking of ‘4’ (‘constrained’), the second-lowest ranking possible in terms of both its assets and stability. The low marks reflect the “lack of information on entities that are custodians, counterparties, or bank account providers of USDT’s reserves.” S&P assigned this ranking “notwithstanding that a large share of USDT’s reserves comprise short-term U.S. treasury bills and other U.S. dollar cash equivalents.”

S&P also flagged Tether’s “significant exposure to higher-risk assets with limited disclosure” and its “limited transparency on reserve management and risk appetite, lack of a regulatory framework, no asset segregation to protect against the issuer’s insolvency, and limitations to USDT’s primary redeemability.”

S&P clarified that its assessment “could improve if there is increased disclosure … in particular … on the creditworthiness of the custodians, counterparties, and bank account providers.” Given the serendipitous timing of Lutnick’s Tether comments, was Tether trying to front-run this review?

Circle: better, but issues remain

By contrast, S&P gave Tether’s rival USDC (issued by Boston-based Circle) the highest possible ranking (1, ‘very strong’) in terms of its assets. S&P noted that Circle’s reserves are held by BlackRock in a fund registered with the Securities and Exchange Commission (SEC), and Circle publishes monthly attestations of its reserves, compared with Tether’s quarterly reports.

However, USDC received only a 2 (‘strong’) rating regarding its stability, with S&P citing USDC’s de-peg from its 1:1 ratio with the dollar following this spring’s collapse of Silicon Valley Bank (where Circle held 8% of USDC’s reserves). While Circle recovered those funds thanks to a federal bailout of SVB, the S&P review expressed concern over “the bankruptcy remoteness of the collateral assets” should more dire events impair Circle’s ability to carry on.

GUSD, the stablecoin issued by the U.S.-based Gemini, received similar marks as USDC, but nobody uses the Winklevoss twins’ stable (market cap below $40 million), so who cares?

TUSD: Run from Sun

S&P also examined Justin Sun’s TrueUSD (TUSD) stablecoin, which, like Tether, received the second-lowest mark (4) in terms of its assets. The S&P said it had “no information on the nature of the assets in the reserve or the creditworthiness of institutions holding these assets.”

Worse, TUSD received the lowest mark possible (5, ‘weak’) in terms of its stability, based on “the scarcity of public information about the segregation of TUSD’s underlying assets” and the “lack of clear guidance on asset management.” S&P also expressed concern over TUSD’s “bankruptcy remoteness from Techteryx,” the shadowy Asia-based ‘consortium’ that took over TUSD this summer.

S&P notes that Techteryx opened a Swiss bank corporate account, which “does not explicitly specify that the funds are escrowed on behalf of TUSD holders or that Techteryx is not entitled to use them.” And while the attestations of TUSD’s reserves claim that “Techteryx and its agents are not entitled to these assets and that there are no liens, claims, or security interest in the assets, [S&P] have not seen any legal opinion to back this statement.”

FDUSD: not good, definitely not great

And then there’s FDUSD, the new dollar-denominated stablecoin that debuted (and trades almost exclusively) on Binance this summer. S&P gave FDUSD a middle rating (3, ‘adequate’) for its assets, expressing uncertainty about “the identity and creditworthiness of some financial institutions where these reserves are deposited.”

But FDUSD got a ‘4’ rating for stability, as S&P noted that “FDUSD is not subject to regulation or supervision by a regulatory authority.” There’s also “no publicly available information about the segregation of FDUSD’s assets and their remoteness from a bankruptcy of the issuer, First Digital Labs.”

FDUSD’s market cap has grown significantly in recent months and now tops $1.25 billion, with nearly $200 million of that being minted on Wednesday alone. Even more impressive is FDUSD’s tendency to trade at over three times its market cap in a single 24-hour period on multiple occasions, including this week. FDUSD’s top two trading pairs on Binance are with BTC (66% of total volume) and USDT (28%).

Stop us if you’ve already heard this one…

Stablecoins are also garnering fresh attention in Washington, DC. This includes the recent request from the Treasury Department’s deputy secretary for Congress to authorize new powers to rein in “dollar-backed stablecoin providers outside the United States” who are “using our currency without the responsibility of putting in place procedures to prevent terrorists from abusing their platform.”

On Tuesday, Punchbowl News reported that Senators Kirsten Gillibrand (D-NY) and Cynthia Lummis (R-WY) were working on new standalone legislation to tackle the stablecoin question. The pair previously introduced other digital asset legislation, including last year’s Responsible Financial Innovation Act, in which stablecoins were just another ingredient in the ‘crypto’ stew. And like most ‘crypto’ bills, it didn’t gain much traction.

Details of the new bill remain sparse, but the focus appears to be on resolving how the Federal Reserve would oversee state-chartered stablecoin issuers. Punchbowl quoted Gillibrand saying she and Lummis “think we have a nuanced position that might be the sweet spot” between the big bad Fed and the states’ rights crowd.

There’s already a ‘payment stablecoin’ bill that emerged from the House of Representatives last year, but its forward progress has similarly stalled. That bill’s author, Rep. Patrick McHenry (R-NC), recently announced that he won’t be seeking re-election next year, apparently frustrated by the inability to approve any legislation amid all the current partisan name-calling.

In the meantime, it will be up to law enforcement and financial regulators to bring some order to this Star Wars ‘crypto’ cantina. Forcing an overdue reckoning with Tether would be a great place to start.

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FTX and Tether—who have co-opted the digital asset revolution and turned the industry into a minefield for naïve (and even experienced) players in the market.

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