Tether Promises to Continue Cutting Commercial Paper Holdings

For years, stablecoin issuer Tether insisted that each of its USDT coins was backed by one U.S. dollar, which is how it held its peg to the fiat currency.

When Tether began issuing “transparency reports” showing that its reserves constitute not only cash but also crypto tokens, bonds, cash equivalents and commercial paper (unsecured debt issued by companies), regulators and economists fretted that the stablecoin wasn’t so stable—especially because the firm doesn’t go into more detail about which companies’ debts it holds.

But Tether CTO Paolo Ardoino told CNBC Wednesday that the company is already scaling back its reliance on commercial paper and “will keep reducing the commercial paper” in its reserves. 

According to Tether’s most recent breakdown, from December 31, 30% of its reserves (worth $24.2 billion) are held in commercial paper or certificates of deposit. That represents a reduction in both absolute and percentage terms from September 30, 2021, when $30.6 billion (44%) of its $69.2 billion in reserve was in commercial paper. (Tether’s website, updated on February 21, still shows the 44% figure.)

As of December 31, just $4.2 billion of Tether’s $78.7 billion in reserves was held in actual U.S. dollars. According to CoinMarketCap, Tether currently has a circulating supply of 82.6 billion USDT.

Federal Reserve Chairman Jerome Powell explained before Congress in July 2021 why a stablecoin holding a large portion of its reserves in such a debt instrument was potentially problematic: “Commercial paper are short-term overnight obligations from companies, and most of the time they’re investment grade, most of the time they’re very liquid, it’s all good,” he said. But that hasn’t been the case during 21st-century financial crises, he said, when “the market just disappears. And that’s when people will want their money.”

Powell’s proposed solution was to regulate stablecoins similarly to money market funds (which constitute almost 4% of Tether’s reserves, an uptick from previous allocations). 

As recently as January 2019, Tether claimed that cash comprised 100% of its reserves. But a pile of cash doesn’t make very much sense for companies because it doesn’t generate much interest—though Tether does share its leadership structure with crypto exchange Bitfinex, which has a more obvious profit model. 

In February 2019, Tether updated its website to read: “Every tether is always 100% backed by our reserves, which include traditional currency and cash equivalents and, from time to time, may include other assets and receivables from loans made by Tether to third parties, which may include affiliated entities.”

That same year, the New York Attorney General began probing the firm over $850 million in funds that Tether and Bitfinex’s founders allegedly commingled, which prompted a deeper dive into how Tether’s finances actually worked.

In March 2021, in the immediate aftermath of the settled lawsuit, Tether published a breakdown showing that 65% of its reserves were in commercial paper. 

The distinction between asset types is more than academic. Tether has been gradually losing market share to Circle and Coinbase-backed competitor USDC, as well as algorithmic stablecoins such as Terra USD and Dai, which hold their pegs without keeping fiat in reserve. 

Circle announced in August 2021 that all of its stablecoin reserves would be held in cash and short-term U.S. Treasury bonds. The Stablecoin Transparency Act, recently introduced by House and Senate Republicans, would require all stablecoin issuers to do the same. Even if that bill fails to gain traction, stablecoins are clearly on legislators’ minds. Senator Pat Toomey (R-PA) this month floated a draft bill that would require stablecoin issuers to reveal their holdings every month.

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