Tech

Tether increases reserves in Treasury bills

10/04/2022
Bitcoin Ethereum News

Yesterday, Tether announced that it had increased its reserves in Treasury Bills to 58%. In June, this percentage was less than 44%. 

Although the company has now demonstrated that it has reserves to cover 100% of the USDT issued, it is still often criticized for the quality of these reserves. 

In particular, over the course of time, it has been accused of opting for an excessive imbalance of reserves in commercial paper, or trade receivables. 

Commercial papers in the US are considered virtually risk-free financial products because their high face value makes them almost inaccessible to small retail investors. However, they are mainly used to finance short-term working capital needs, and many have always disliked USDT being covered by instruments that are commonly used to cover short-term needs. 

Over time, Tether has greatly reduced its hedges in commercial paper, so much so that it now holds a total value of less than $50 million of them. Given that USDT capitalizes about $68 billion, this is now a decidedly negligible percentage. 

The needs of Tether’s reserves

The fact is that Tether must have the ability to possibly convert large amounts of reserves into cash very quickly in order to meet any USDT redemption demands. 

It is enough to note that after the implosion of the Terra ecosystem in May, it was forced to repay about 10 billion USDT in just ten days, and apparently had no problem doing so. 

Since mid-July, however, the requests for repayment have practically dried up, so that the capitalization has gone back up, from a scant 66 billion in mid-July to the current 68 billion. 

Thus at this stage, it no longer seems to have any need to hold assets in its portfolio that can be easily liquidated to meet huge volumes of redemption requests in a short period of time. 

It is therefore not surprising that their strategy has changed regarding the choice of USDT hedges. By now, most of these are in Treasury Bills (T-Bills), or short-term US government debt securities. These are commonly considered among the most important liquidity instruments available in the market. 

The third quarter of 2022 ended a few days ago, and Tether has made a commitment to be as transparent as possible in reporting official hedging data as of 30 September. 

The above data are only a foreshadowing of what will be revealed. 

The trend is already clear: the reduction of commercial paper, which has now become a marginal hedging instrument, continues, and at the same time so does the increase of hedges deemed to be of better quality by USDT owners, insomuch that they have become dominant. 

At present, it is possible to say both that the company has somewhat demonstrated that it has hedges for 100% of the USDT issued and that it is also significantly improving their quality. 

There are still doubts about the authority of the agencies used for the audits, but Tether has chosen others that are significantly more authoritative for the new audits, and it has also been compelled by a US court to produce to the court all the necessary documentation to prove that it has all the hedges. 

It is worth noting that the market value of USDT continues to never deviate by significant percentages from parity with the dollar, and even during the implosion of the Terra ecosystem, it never fell below $0.99. 

USDT stablecoin and the collaboration with Lugano

Meanwhile, the collaboration with the City of Lugano continues, to the point that one of the most important European crypto events of the year will be organized in the Swiss city at the end of October. 

By now Lugano, which is the third most important financial center in Switzerland, has decided to become a completely crypto-friendly city, so much so that even at McDonald’s it is possible to pay in Bitcoin. 

The goal is to make anything payable in the city with cryptocurrencies, and in particular BTC and USDT. 

Indeed, the event at the end of October, organized in collaboration with Tether, is called Lugano Plan ₿, and it will feature Tether’s own CTO, Paolo Ardoino, as one of its main protagonists. 

One of the main topics will be the developments around Lightning Network, which is Bitcoin’s layer 2 that enables immediate, anonymous, and low-cost transactions. 

Although USDT is primarily traded on the Ethereum and Tron blockchains, it was actually born on Omni, i.e., a Bitcoin sidechain, and thanks to Lightning Network it could return to being traded on the Bitcoin blockchain as well, albeit indirectly, in large volumes. 

The payments revolution thanks to USDT and LN

LN in particular is great for payments, including those of insignificant amounts, and USDT is definitely a better payment medium than real cryptocurrencies such as BTC. Combining the commercial strength of USDT with the technological power of LN could be a way to actually begin to imagine true mass adoption of cryptocurrencies, starting with USDT payments. 

A much-underestimated aspect in this respect is the cost of cashing in for sellers. With classic instruments such as credit and debit cards, for example, sellers cashing in fiat currencies have to pay fees on their cashouts, which are far from insignificant. In contrast, with stablecoin payments on LN, not only would sellers no longer pay any fees, because these would be borne by the buyer, but their amount would be almost totally irrelevant. 

At present, it is hard to imagine that many sellers would be willing to cash in BTC because of its volatile market value, so much so that often those who cash in Bitcoin tend to sell them immediately by paying significant fees on fiat currency exchanges. In contrast, being able to cash in USDT might result in not selling them immediately, since USDT has the same low volatility as the US dollar, but involves a way to cash them in easily, quickly, and cheaply. 

Lightning Network can enable this, partly because it is completely decentralized and based on Bitcoin’s blockchain. 

What the City of Lugano is trying to do is precisely to make it as easy as possible for vendors to adopt tools that enable cryptocurrency payments through Lightning Network. 

Source: https://en.cryptonomist.ch/2022/10/04/tether-increases-reserves-treasury-bills/