Is Tether $USDT In BIG TROUBLE This Time?
Will The Stablecoin Survive The Massive Crypto Bank Run?
Centralized stablecoin Tether (USDT) has reported zero exposure to any failed crypto exchange, funds, and custodians.
According to Tether, the collapse of FTX, Genesis, Alameda, 3AC, and Celsius has no impact on the stablecoin. Meanwhile, Tether’s executives maintain an obscure rationale regarding the stablecoin's reserves.
The Tether team also seems to lack professional PR skills, as it often treats critics with contempt and responds with derogatory comments on social media, marking a huge red flag.
Since 2021, it resumed offering attestations regarding its one-day reserves once every three months as part of a transparency procedure.
FTX was the largest customer of Tether, with over 35 Billion USDT assigned to the Bahamas-based exchange. An exchange with ties to Tether’s main bank in the Bahamas, Deltec. Similarly to Tether, Deltec also claims no exposure to FTX.
How did Tether achieve no exposure to a collapse of that magnitude with its top trading partners, and how it plans to keep business as usual at the heights of a $60 billion market cap and a bear market?
As the pieces of the crypto domino keep crumbling, the bear market will expose the weakest structures in the field.
Tether's Rise to $80 Billion Market Cap
(Source: CoinGecko)
Tether is a $70 Billion crypto empire with just a handful of employees, a loose corporate structure, and limited financial accountability.
Its executives have already admitted the collateral was not covering the dollar peg 1:1 in the past. However, a lot has changed since that admission.
The stablecoin grew exponentially, reaching an $80 billion market cap in 2021. Since then, it has reduced the USDT in circulation to 66 billion tokens.
In the previous two years, the stablecoin deviated from its statement of supporting USDT with equal deposits in USD and declared that commercial paper backed USDT by $40 Billion! This statement effectively turned Tether into one of the largest commercial paper holders worldwide.
The commercial paper mention and the public criticism it attracted forced Tether to change its process, and within months it “managed” to liquidate $30 billion of commercial paper into US treasury bills, as Tether announced.
Tether Reserves Reports
No independent accounting firm has ever conducted a full Tether audit, yet Tether seeks investors’ trust in a market that suffers one custodian collapse after another.
Nevertheless, for "transparency" reasons, Tether delivers (since 2021) an attestation statement concerning the stablecoin reserves on the day of that report.
From Tether's website, we observe a gap in these reports between October 2018, and February 2021. By the beginning of 2021, Tether resumed its attestations, with the latest one dated September 30th.
The last attestation by BDO Italia:
(Source: BDO)
BDO Italia, the auditing firm, in the report's notes, mentions it can only attest regarding the selected day of the cash reserves (CRR) and not any other day before or after this time (30th September).
(Source: BDO)
BDO signed this paper on the 30th of September but did not perform a full audit of Tether and its reserves. This attestation is a draft document with the auditor just skimming through the numbers to present this opinion for the selected date and that date and time only.
However, such an attestation does not serve transparency regarding any other than the selected days. Manipulation can always apply on any other day.
This attestation means nothing. It is a paper for internal purposes only, at the demand of Tether. Promoting transparency demands a full audit from an independent auditor using generally accepted auditing standards.
Similarities With the FTX (non-existent) Accounting Models
Tether's inability to provide definite trusted financial data resembles the practices of FTX and Alameda.
Never in my career have I seen such a complete failure of corporate controls and such a complete absence of trustworthy financial information as occurred here" Ray said in the filing on Thursday, which was lodged with the District of Delaware bankruptcy court. (source)
John Ray further lambasted the FTX management, which is not considerably different from the rest of crypto exchanges and custodian practices:
“From compromised systems integrity and faulty regulatory oversight abroad, to the concentration of control in the hands of a very small group of inexperienced, unsophisticated and potentially compromised individuals, this situation is unprecedented” Ray added in the filing.
While Tether resumed reports in 2021, it still hasn’t presented a full audit. Any full audit will likely come with an adverse opinion by the auditor, indicating gross misstatements and deceptive accounting methods.
The Disaster Scenario
(Source: Twitter)
Tether maintained close relations with many of the recently collapsed crypto companies and processed transactions worth billions of dollars.
(Source: Twitter)
Tether's CTO mentioned that FTX was paying in dollars for the USDT he was receiving.
However, the complexity of tracking the FTX assets, the hacks, and the total loss of trust in the custodian sector of cryptocurrency suggest different arrangements might have occurred.
Paolo Ardoino didn't specify the 1:1 rate on the USD to USDT interaction, even though he received many questions about it.
"Alameda send USD and got USDT" - Paolo Ardoino
We again have to trust Tether if the USD to USDT transfers was 1:1.
(Source: Twitter)
FTX liquidators will soon ask Tether to redeem all USDT at FTX’s disposal. The liquidators will request the full redemption of FTX-owned USDT.
(Source: Twitter)
The exact USDT balance of FTX and Alameda is unknown.
Tether doesn’t report data concerning its clients, either.
However, we can resort to data analysis performed by independent researchers.
The following chart by Protos, published on November 2021, presents the crypto entities receiving most of the USDT.
(Source: Protos)
These amounts represent the USDT received by the mentioned funds but not the current balances. Also, the chart is not recent but covers the total incoming Tether for these financial institutions until November 2021.
Alameda seems to be at the top, with a significant difference from the second fund (Cumberland Global).
Alameda does not hold 36Billion USDT today. Redemptions and trades occurred, although this chart also points to the strength Alameda (the trading team of Sam Bankman-Fried) possessed.
Tether, Denies Risk With FTX Alameda - USDT Still Redeemable
Tether maintains the statement that it can cover redemptions.
What can Alameda do with their USDT? Their only option is to redeem any USDT they have for USD via Tether's redemption facility. This is the same as any other USDT holder around the world.
Tether (source)
This could be a real stress test for Tether, depending on the actual Tether reserves of FTX.
Suspicions arise in the possibility that FTX only paid a small amount to receive the $37 Billion USDT tokens.
Tether, in its latest announcement, takes the high road indicating how the market was malfunctioning for years, exposing the practices of reckless lending platforms:
We believe the approach of many lenders in this industry has been reckless, lending huge quantities of money, and accepting FTT (and other illiquid assets) and pinky swears as collateral.
Tether (source)
Interesting position by Tether, especially when the iFinex lawyer had already admitted it was missing collateral backing USDT.
In 2019, New York state Attorney General Letitia James said:
“Our investigation has determined that the operators of the ‘Bitfinex’ trading platform, who also control the ‘tether’ virtual currency, have engaged in a cover-up to hide the apparent loss of $850 million dollars of co-mingled [sic] client and corporate funds.”
Tether’s lawyer admitted that Tether was only 74 percent backed. -
Once again, we have to trust Tether that it backs its reserves for the rest of the 89 days besides that one day where each attestation audits Tether's reserves.
Where did trust lead us so far? Multiple trusted crypto custodians collapsed, with millions of customers losing their life savings.
In tough times like a bear market, many learn the hard way.
Does Tether promote any of the values of cryptocurrency?
Conclusion
Why should we trust any crypto company, and how did trust evolve as a priority in an ecosystem enabling trustless networks, permissionless transactions, and decentralized finance?
Unlike traditional cryptocurrency networks, Tether is just a token based on trust, centralized and permissioned. Tether is the antithesis of the core values of cryptocurrencies.
Yet Tether processed most of the trading volumes for years. It has succeeded in this purpose, although centralization is a massive threat to crypto userbase and traders.
The stablecoin has proven its endurance, having experienced difficulties. It improvised and survived disasters, although it never functioned as a regular business would, nor did Bitfinex.
The danger is always there with any centralized entity operating in the cryptocurrency domain.
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More info:
Tether Papers: This is exactly who acquired 70% of all USDT ever issued, 2021
‘Complete failure of corporate controls’ at FTX, says new CEO, Al Jazeera
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If that happens one day, even if it goes down just a little bit, the panic will be enormous. I don't think we can recover from that blow, it would be the end of everything in my opinion.