Is Alameda’s failure a risk to Tether?

After Alameda’s big downfall related to the FTX exchange, many questions and doubts have been raised about the soundness of Tether’s issuance of the USDT stablecoin.

In particular, there has been extensive discussion as to whether Alameda’s failure poses a risk to Tether, the issuer of USDT, the main stablecoin in the market. The answer is very simple: absolutely not, USDT issues are not exposed to risks related to the FTX/Alameda collapse.

Tether’s statements regarding USDT issuance: no real risk 

The failure of Alameda Research, related to the FTX exchange that consequently led FTT to collapses of up to 85%, undoubtedly represents a critical moment for the blockchain world and a watershed in the history of the cryptocurrency industry. 

Indeed, in addition to being one of the biggest financial failures, it also triggered a chain of other leveraged failures that cascaded through the industry. Unfortunately, in this bear market phase, we have seen all the prices of the most prestigious crypto precipitously collapse: Bitcoin, Ethereum, and so many others. 

The story of the Alameda/FTX double bankruptcy is not over and we will probably hear a lot more about it within the next few weeks, with more parties involved. 

In the meantime, Tether has made statements regarding a topic that has emerged since the FTX failure. Is Alameda’s failure a risk to Tether’s stablecoin? 

As already anticipated, USDT is the stablecoin pegged to a stable reserve asset that is based on the US dollar (USD). That is why the question has arisen for many. 

And that’s why Tether was quick to respond with a negative answer: no, there is no real risk for the stablecoin. Let’s see why.

First, it is important to clarify what it means to be a large USDT issuer. Second, it is vital to understand what it means when the bankruptcy of such a major player could trigger a series of negative cascading events, given its interconnectedness with the entire ecosystem. 

How does the issuance of USDT work?

Point one, USDT is issued when institutional parties send USD to Tether and Tether issues USDT on a 1:1 basis corresponding to the amount of USD sent to the stablecoin. In turn, Tether then converts this USD into reliable, liquid, and conservative collateral (US Treasury bonds, etc.).

At that point, all USDT is fully collateralized by Tether’s reserves and each USDT can be redeemed 1:1 with USD. So, what does it mean that Alameda issued USDT? 

It means that they sent Tether USD and stablecoin issues USDT. Hence, here’s the answer key, those reserves are still held by Tether and are not on Alameda’s balance sheet. Thus, Alameda’s collateral securing USDT is not on its balance sheet.

Alameda can only do one thing with its USDT, namely redeem those in their possession through Tether’s redemption function. Moreover, this applies to any other USDT holder worldwide.

Thus, assurance and peace of mind appear to be provided: no risk for Tether, despite the collapse of Alameda and its function as a USDT issuer. 

A problem for many, but not for the USDT stablecoin: no funds lent to Alameda 

Another point on which many companies found serious problems after Alameda’s collapse, and where many people’s confidence in the crypto world faltered, is the large loans made to Alameda before the collapse. 

Indeed, the main problem that countless other companies are facing is that they recklessly loaned Alameda various assets in reliance on extremely illiquid collateral. 

Since Alameda cannot repay those loans right now, those companies are presenting a big hole in their balance sheets. However, Tether also pulls out of this uncomfortable business, as it has never lent Alameda USDT or any other type of fund. 

In addition, Tether has no outstanding loans of USDT from Tether’s reserves or any other fund. This is not how USDT issuance works and is in no way the behavior that stablecoin has adopted with Alameda.

The only time that Tether engages in lending is, as the Celsius example shows, when Tether lent USDT to selected clients on the basis of excessive collateral with extremely liquid assets. 

Indeed, by demonstrating its divergence and concern about the behavior of other companies, Tether stated: 

“We believe the approach of many lenders in this area has been reckless, lending huge amounts of money and accepting FTTs (and other illiquid assets) and sworn pinkies as collateral.”

This is further validated by how, despite the sudden collapse of Celsius, Tether operations were not disrupted. In fact, even during the highly unstable conditions of Terra’s collapse, Tether was able to liquidate Celsius’ collateral with such precision that it was even able to return part of the collateral.

The other doubt against Tether: leverage 

As is well known, leverage played a key role in the dramatic liquidation of FTX. However, Tether does not engage in leverage, leveraged transactions, or collateralized lending against its reserves. 

In fact, Tether does not accept highly leveraged directional bets on digital assets as part of its operations. Far from it, Tether is designed to withstand the incredible volatility in the cryptocurrency markets. 

Although the FTX situation has been unique in many ways, it does not pose a risk threat to Tether or USDT, that is for sure. The stablecoin continues to function normally and processes redemptions whenever they are requested; it has no exposure to FTX or Alameda.