May 28, 2021
How transparent is Tether’s reserve?
Tether is having the 3rd best market capitalization globally only behind Bitcoin and Ethereum and currently is the most popular stablecoin in the market. It is a name synonymous to all crypto users out there, but being a stablecoin, does it provide enough transparency of its reserves?
Tether’s Backstory
Tether history begins with a project called Realcoin which published its whitepaper in 2014 featuring the names of its co-founders Brock Pierce, Reeve Collins and Craig Sellars. Interestingly the name Realcoin didn’t stay very long, as in November 2014 they decided to give it a new title and the name Tether was created.
Tether is unique in its adaptability due to its using the Omni Blockchain Protocol. USDT (USD Tether) debuted on the cryptocurrency exchange Bitfinex, in 2015 as a stablecoin which was pegged directly to the USD means that every Tether Coin is valued at $1.
Tether enables frictionless transfers between exchanges avoiding the hassles of the banking system. It also acts as a safe haven from the volatility in the market helping Crypto users with a quick entry and exit strategy. It is also the first coin to be hedged with a reserve while it has helped to revolutionize the crypto market, a lot of doubts have been cast on the transparency of its reserves?
Tether’s reserve Transparency
According to The Wall Street Journal, “[Tether] has become a major source of liquidity in the cryptocurrency market. About 80% of all BTC trading is done in Tether, according to data from research site CryptoCompare.” Its connection to Bitcoin is what drives its $10 Million Market Cap in 2015 to currently more than $59 Billion in 2021. While many people may say it’s an amazing achievement, many questions have to be asked whether it really has sufficient reserve to back its huge market cap?
In late 2018, Tether’s Bank, the Bahamas-based Deltec Bank & Trust, published a letter stating that the company had $1.8 Billion in reserves matching the amount of coin circulation but during the investigation by the New York Attorney General’s Office, Tether at one point was only 74% backed by its reserves.
Source: https://www.coindesk.com/
In the audit done recently in March 2021 by an external auditor, Tether’s reserves were composed with 75.85% Cash and Equivalents, 12.55% in secured loans, 9.96% in bonds and precious metals and 1.64% in other investments. The cash section was further broken down into 65.39% Commercial Paper, 24.2% Fiduciary deposits, 3.87% cash, 3.6% reserve repo notes and 2.94% treasury bills. It is unclear on ratings given on those bonds or the commercial papers and identification on the borrower of the loans.
The Problem on its reserves?
While it sounds impossible to store $59 Billion in cash, it is a problem when you consider when the cash they have in hand is only 3.87% of its total coin supply. The problem comes when there is panic exit from investors like the recent bitcoin crash in May 2021, some investors may want to pull out their money for safe haven, does Tether have the sufficient liquidity to support such scenarios?
There is also a problem of its loans and bonds, there is no rating or identification whatsoever of whether the bonds they are holding are AAA-rated and whether the borrowers of their loans are secured. The problem surfaces when most of their bonds or loans default like we have experienced in the 2008 market crash.
As the first and original stablecoin, there is a lot of transparency needed from the tether side to back up the huge trust most crypto users have on tether and other stablecoins. We in Nagaya Technologies firmly believe that transparency is key in this decentralized world. That is what leads us to provide transparency reports on our reserves and subsidiary projects. This all is needed to create a more stable and efficient cryptocurrency system.
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