Financial punters are betting big that it’s just a matter of time before the crypto’s biggest safe haven will crash and burn, leaving millions penniless.
The punters’ mark is crypto giant Tether, which has found itself at the center of an escalating war over credibility as both sides compete for the trust of crypto investors.
It’s a battle that could make or break the crypto market.
Tether issues the market’s most popular so-called stablecoin, a digital token that’s pegged to a national currency, such as the U.S. dollar. These tokens are often backed by a basket of financial products that can be sold at quick notice to stay on par with the greenback.
Tether’s stablecoin, USD₮, is used by most crypto investors to park their money in a safe place between taking bets on the market and is collectively valued at around $65 billion. Its nearest rival, Circle, is closing in, but its stablecoin, USD Coin, exchanges hands much less frequently among traders.
USD₮’s dominance and size means its collapse would hemorrhage much of crypto’s life blood and deal a crippling blow to market confidence.
The sector is already under strain following a slew of scandals and bankruptcies. TerraUSD, for example, was the third largest stablecoin in circulation with a market value of $18 billion before it imploded in May. Its collapse sent shockwaves through the market, knocking Tether off its U.S. peg by five cents on some exchanges before recovering.
Bankruptcies and the general market downturn have left many crypto investors fearing further losses, giving short sellers an edge. That has prompted Tether’s leadership to counter by dismissing their tactics as a dishonest means of making money by sowing fear, uncertainty and doubt in a volatile market.
As far as the short sellers are concerned, it’s a sure bet.
“You’d be a fool not to short Tether,” said the co-founder of Viceroy Research, Fraser Perring, one of the short sellers who profited from the collapse of Germany’s fintech giant, Wirecard. “It’s time to wake up.”
The 48-year-old is convinced that Tether is lying about its finances to cover up its exposure to crisis-hit real estate developers in China and struggling crypto companies such as Celsius. He even pledged on Twitter Wednesday that he’ll donate $1 million to Tether’s charity of choice if they open their books and prove him wrong. He sent a screenshot of his euro account to POLITICO to prove he has the funds.
Perring has put 30 percent of his wealth into shorting the company. That means he has committed a lot of money into borrowing USD₮ from crypto investors for a fee. He has then sold those stablecoins off with the expectation that he’ll be able to buy them back for pennies in the future and hand them back to the original investor, pocketing the difference. Perring is also shorting Bitcoin on the belief that Tether’s collapse will drive its price even lower, a bet that has so far given him a return of some 45 percent.
Fir Tree Capital Management, another short seller based in New York, has also weighed in on the wager against Tether, according to people familiar with its financial positions. Fir Tree declined to comment.
Tether has refuted all these claims and mocked the short sellers, saying that their bet will result in them bleeding money from the borrowing fees they pay.
Short selling, a centuries-old practice, is loathed by companies on the receiving end because a successful short drives down their share price and ability to raise money. This concern has prompted regulators across the world to issue temporary bans on short selling in times of financial uncertainty to mitigate market panic.
Tether is adamant the same shenanigans are in play now. But in this case, it’s not getting help from policymakers, who believe that stablecoin issuers have to fend for themselves and keep their redemption promises.
That’s a serious dose of tough love, considering the crypto industry is reeling from a crash that saw its market value plummet by two-thirds since its November high of $3 trillion.
Tether has warned that short sellers are threatening the entire industry.
“The spreading of false information is the biggest threat to the cryptocurrency industry that currently exists,” the company said in a statement last week.
TerraUSD’s collapse is case in point, according to Paolo Ardoino, Tether’s chief technology officer. TerraUSD was different from mainstream stablecoins because it relied on a computer algorithm that was supposed to keep its price in lockstep with $1 worth of its sister-token Luna. Short sellers knew that creating panic would trigger a fire sale in which investors would cut their losses and run, he told POLITICO in Amsterdam in early June.
“Certain funds borrowed Luna, [sold] it short, to cause it to crumble,” the Italian said. “They tried to do the same thing with Tether.”
It’s still unclear who prompted the sell-off of Luna and whether it was the short-sellers’ goal to decimate TerraUSD as a result. Some crypto analysts have even pointed to Celsius as one of the chief culprits.
Whatever the reason, Tether’s recovery after breaking the buck should serve as an example to users that they’ll always get their money back, Ardoino said.
“In 48 hours we redeemed $7 billion,” he said. “That’s more than any other institution has done and it was 10 percent of our assets.”
Open the books
Ardoino’s success story didn’t translate to short sellers.
Short positions skyrocketed against Tether after the stablecoin-issuer broke the buck, according to market data provider Coinalyze. Those positions have decreased somewhat in recent weeks, but Perring has remained undeterred. He has been so confident, in fact, that he had placed his bet way before the market turmoil in May.
“This is how we know we’re on to a great thing,” he told POLITICO. “We’ve been short before all the drama.”
Perring’s certainty stems from two big issues within Tether’s business: Transparency and market exposure.
In regard to transparency, Tether has been disclosing what it holds in its reserves on a quarterly basis through an auditor in the Cayman Islands since early 2021, as part of a settlement that its parent company iFinex reached with the New York attorney general’s office.
iFinex paid the attorney general’s office $18.5 million as part of the agreement, following a nearly two-year investigation into its corporate practices. Among the probe’s findings was that Tether had misled the market in 2017 on what was in its reserves, which the crypto company says is made up of cash, cash equivalents, short-term U.S. Treasury bonds and top-rated commercial debt.
Separately, the Commodity Futures Trading Commission fined Tether $41 million in October 2021 “for making untrue or misleading statements” about its stablecoin reserves.
To the day, Tether’s disclosures generally outline what it has in its reserves but stop short of detailing what commercial papers it holds.
Ardoino counters that it’s unfair to ask Tether to disclose what brokers it works with but not demand the same of other issuers. Ultimately, Tether wants to protect its brokers from the public eye and notorious trolls that reside in the crypto market.
A banker handling Tether’s finances told POLITICO, speaking on the condition of anonymity, painted a darker picture. He and the company’s business partners fear that exposing their identities would lead to threats on their life, he explained.
Tether is looking to get a bigger auditor to scrutinize its books. But the reputational damage associated with Tether is so large that it’s difficult to entice household names like Deloitte, PwC, KPMG and EY. That’s why Tether uses an auditor from the Caymans, the banker said.
“We’ve already stated on record that the Big Four have been reluctant to take on the risk of defining the rules of a stablecoin audit and have been waiting for clarity from global regulators,”Ardoino said in a follow-up email this week, when asked if Tether could provide the refusal letters from the big auditors.
Short sellers aren’t buying any of those reasons. They’re convinced the company has deliberately avoided the “big four” auditors to cover up losses made from bond purchases from real estate developers in China, such as Evergrande, which is struggling to pay back investors.
Tether repeatedly denies that it holds any real estate bonds out of China and says it will drain its reserves of all commercial paper by early November to allay any market concerns.
The second problem is Tether’s exposure to crypto’s bear market.
Fir Tree and Viceroy are convinced that Tether lent money to multiple crypto companies, some of which have collapsed or are struggling to keep afloat in the market downturn. Chief among them is Celsius.
“We know, from people we’ve interviewed, that Celsius impacted Tether to the degree that we estimate by half a billion,” said Perring, who isn’t shorting any other stablecoins. “Amazingly, Tether has managed to weave through all these crypto bankruptcies, without any impact whatsoever, despite being the prima donna of stablecoins. How is that?”
Ardoino maintains that Tether’s lending activity has always been overcollateralized and has no impact on its reserves used to back USD₮. Its investments follow strict metrics to protect corporate operations and are handled with accrued equity and not funds from within the reserves, he said in his follow-up email.
Tether has publically reassured its users that the collateral it held against its loan to Celsius has been liquidated with no losses under the terms agreed between the two entities. These terms were reconfirmed in writing before liquidation started and validated step by step during the process, Ardoino continued.
Lawyers are trying to decipher whether Tether had properly established its claim over the collateral in Bitcoin, which allowed it to recoup its $840 million loan. Returning that money would put a serious dent in any company’s books.
“While we will engage with any necessary parties to resolve any disputes over the loan, we are confident we have followed our terms of agreement and have worked to minimize the impact to the markets and to protect Tether users,” Ardoino wrote, reiterating that its reserve is fully protected. The assets backing the reserve also exceed the liabilities, he added.
Deliberations in court could take some time. But that’s of no concern to Perring, as his gamble against Tether comes with very little risk given USD₮’s design to match $1 — not higher.
Such a bet is unheard of in the stock market, where the price of a borrowed share can go up. If that happens, short sellers must use their own funds to buy back the more expensive share before handing it back to the original investor.
“As a short seller, good Jesus, it’s gold dust,” chuckled Perring. “Every scumbag on the planet joined the crypto space when it was all positive and the people who believed the scumbags are [now] being carried out.”
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