Should Cryptocurrency Investors Be Worried About USDT?

Tether Redemptions Prove USDT is ‘Stable’

Rewind to early on May 11, and the supply of USDT is equivalent to $83 billion. However, it’s on this very day, with the collapse of TerraUSD, that this figure begins to decline, reaching $73 billion by May 21.

Source: CoinGecko

The ‘official’ story behind this decline, according to Tether, is that the stablecoin issuer’s customers — mostly crypto-exchanges — had sent around 10 billion USDT over 10 days for the equivalent in dollars.

Indeed, when we interviewed Paolo Ardoino in 2021, he explained that USDT is issued and sent to Tether’s customers only on the condition that these customers “deposit fiat currency into Tether’s bank account.” This suggests that Tether had the cash reserves ready to meet the recent redemptions, with numerous commentators arguing that these redemptions prove that Tether has “impressive resiliency.”

Source: Twitter

Around the same time, on May 19, Tether also released an update on the composition of its reserves. This showed a decline in the percentage of its reserves made up of potentially risky commercial paper (i.e. short-term corporate bonds), as well as a corresponding increase in the percentage made up of US Treasury bills.

Source: Tether

Taken together with the large-scale redemptions — which did not break USDT’s 1:1 peg with the US dollar — this updated breakdown was intended to reinforce the impression that Tether really is stable. And at a time when TerraUSD went from $1 to $0.065, Tether’s actions appear to have calmed the cryptocurrency somewhat, at least insofar as it has prevented bitcoin from falling beyond $30,000.

Common Doubts About Tether

Of course, ‘Tether is resilient and safe’ is not the only interpretation of the redemptions doing the rounds on the Web. One other major interpretation is that the withdrawals were basically an act intended to manipulate the market into having confidence in Tether at a time when confidence in stablecoins was very low.

This is the view, for instance, of economics author Frances Coppola, who noted that Tether’s own breakdown shows it has very little cash (5.81% according to the breakdown above).

Source: Twitter

Likewise, prominent Tether-Bitfinex critic Bitfinex’ed has tweeted that the redemptions were possible because no real cash changes hands when Tether issues USDT and sends it to an exchange. Instead, Tether’s ‘customers’ simply got their ‘IOUs’ back from the issuer.

Source: Twitter

Unsurprisingly, there’s no real proof that Tether has done this (if only because such proof would require a whistleblower or some kind of confession). Still, such claims are lent some degree of credibility by the simple fact that Tether has not always been upfront and transparent in the past.

For instance, returning to the Paolo Ardoino interview we published in February 2021, Tether’s CTO claimed the following:

“Once verified, the user will first have to deposit fiat currency into Tether’s bank account … Tether will then credit the corresponding amount of USDT into the Tether wallet address provided by the user … Through this process, Tether ensures that all tether tokens are backed 100% by Tether’s reserves.”

This statement gives the impression that Tether’s reserves were composed entirely of cash. However, in May of that year, Tether actually released an unverified breakdown of its own reserves, showing that its cash holdings comprised only 2.9% of the nominal value of the USDT in circulation.

In other words, Tether may not have been entirely honest in early 2021, unless it shifted its reserves from predominantly cash to predominantly ‘cash equivalents’ in the intervening months.

While we cannot prove deliberate lies, the New York Attorney General was assured enough to declare in late February 2021 that Tether has repeatedly misrepresented the status of its reserves between 2017 and 2019. Of course, this doesn’t prove what Tether may or may not have been doing since 2019, but it at least casts serious doubt over any claims it now makes.

As such, skepticism as to the recent redemptions are plausible and hard to dispel with any real confidence.

Is A Bank Run in Process?

One other interpretation of the $10 billion in redemptions is that the cryptocurrency industry (i.e. exchanges and other platforms) are escaping from USDT and Tether to relative ‘quality.’ To put this more dramatically, a bank run on Tether may indeed be in progress, and could only just be beginning.

For instance, it’s interesting to note that, while Tether has experienced redemptions, rival stablecoins USDC and BUSD have continued to experience inflows.

Source: Twitter

This is an interesting discrepancy, and some commentators have taken it to mean that a run is underway. In this respect, it’s also interesting to note that the company which conducted Tether’s recent attestation (which does not qualify as a full audit) — MHA Cayman — declared that it does “not provide any assurance in respect” of the assessment (by Tether itself) that its business is a “going concern.”

There is therefore no independent verification that Tether is safe, and that USDT isn’t vulnerable to the kind of run that crushed TerraUSD. This has potentially grave implications for the cryptocurrency market, given how TerraUSD’s collapse from a market cap of nearly $19 billion to under $1 billion helped bitcoin from around $35,000 to $30,000. Because Tether is much bigger, its collapse could send BTC even lower, especially when market conditions remain very bearish.