Does Tether have enough cash in reserve?
Stablecoin Tether (USDT) is the third biggest cryptocurrency by market capitalization. It’s also the biggest stablecoin on the market. But its popularity doesn’t necessarily make it a safe investment.
Stablecoins play an important role in the cryptocurrency industry. They are pegged to the price of real-world assets such as a commodity or a traditional currency. In Tether’s case, it is pegged to the U.S. dollar.
People use stablecoins to facilitate cryptocurrency trading, transfer money, and earn interest. However, the lack of regulation and transparency surrounding these coins, particularly Tether, have authorities on edge. Here are some of the reasons why:
1. Tether is only backed by 2.9% in cash reserves (the rest comes in other forms)
Holding Tether is not the same as holding U.S. dollars. The price may be pegged to the dollar, but if there was a run on Tether — lots of people tried to swap their Tether for dollars — there’s no guarantee the company would have enough cash to pay out.
Tether originally claimed that every USDT was backed by a U.S. dollar in its reserves. But the reality is more complicated: Tether is backed by a mix of:
- Cash equivalents
- Secured loans
- Corporate bonds
- Other investments
In May, it published details of its reserves in a pie chart. The breakdown showed it had 75.9% in “cash and cash equivalents.” However, looking at that in more detail, only a small proportion of the 75.9% is held in cash:
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- 65.4% is in commercial paper. That equates to almost half of Tether’s total reserves.
- 3.9% is in cash. That equates to 2.9% of its total reserves.
Commercial paper is a type of short-term loan that’s usually made to corporations. The trouble is that Tether hasn’t released information about what types of loans it has made. We don’t know who the borrowers are or what types of debt it is. Most importantly, we don’t know how easy it would be for Tether to access that money.
It should also be noted that the detailed breakdown of Tether’s reserves has not been independently audited. Accounting firm Moore Cayman attested earlier in the year that the figures are “fairly stated,” but that is not the same as a full audit.
2. Tether has had trouble with the New York Attorney General’s office
New York authorities have put in place some of the strictest crypto regulations in the country, and its courts have been the most active in pursuing crypto crime.
In February, after a 22-month inquiry, the New York Attorney General reached a settlement with iFinex, the parent company of Tether and cryptocurrency exchange Bitfinex. Investigators accused the companies of unlawfully hiding losses. Attorney General Letitia James said, “Tether’s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie.”
iFinex had to pay an $18.5 million fine and is no longer allowed to operate in New York. It will have to provide quarterly reports on its reserves — hence the breakdown we analyzed above. The company denies any wrongdoing.
3. If Tether fails, it could shake the whole crypto industry
The Federal Reserve is concerned about stablecoins as a whole, but it has singled out Tether in particular. At the end of June, President of the Federal Reserve Bank of Boston, Eric Rosengren, listed Tether as a potential challenge to financial stability.
He told Yahoo! Finance that: “The reason I talked about Tether and stablecoins is if you look at their portfolio, it basically looks like a portfolio of a prime money market fund but maybe riskier.”
Prime money market funds are basically funds that invest in the type of commercial paper debt mentioned above — the type that makes up almost 50% of Tether’s total reserves.
The worry is that Tether is operating in a similar way to a bank or other financial institution, but without any of the regulations that banks follow to protect consumers and prevent economic crises. That’s why there’s such a push for stricter stablecoin regulation — to protect both the economy and the crypto industry.
As Rohan Grey, assistant law professor at the Willamette University College of Law told the Financial Times, “The growing world of stablecoins arguably underpins the entire crypto community right now. If that collapses, the whole space could collapse.”
Tether is not the only stablecoin
There are several other stablecoins available that are more transparent about what money they hold in reserve. For example, the Gemini dollar (GUSD) is fully one-to-one backed with the U.S. dollar. For every GUSD issued, there’s a U.S. dollar in an audited bank account.
The Fed is considering introducing its own digital dollar, which would put pressure on all stablecoins. A government-backed digital dollar that offered the benefits of blockchain-based currencies (fast, cheap payments), but without the risk and volatility associated with crypto could negate many of the advantages of today’s stablecoins.
If that scenario unfolds, it becomes even more important for consumers to trust that individual stablecoins have enough in reserve. Let’s say the Fed announces in September that it will create its own digital dollar. At that point, many people may try to sell their Tether — and there’s no certainty that Tether can immediately cover that cost.
Fundamentally, investors need to be able to trust the company they are investing in. And that alone is reason to be cautious about Tether.
Ready to buy? Check out The Ascent’s guide to the best places to buy Tether.
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