The company behind the tether stablecoin is increasingly lending its own coins to customers rather than selling them upfront for hard currency. The shift adds to the risks that the company may not have enough liquid assets to pay redemptions in a crisis.
Tether Holdings Ltd. says it lends only to eligible customers and requires lenders to post lots of “extremely liquid” collateral, which can be sold for dollars if borrowers default.
These loans have appeared for several quarters in the financial reports that Tether shows on its website. In the most recent report, they reached $6.1 billion as of September 30, or 9% of the company’s total assets. They were $4.1 billion, or 5% of total assets, at the end of 2021.
Tether calls them “secured loans” and reveals little about the borrowers or the collateral accepted. Alex Welch, a Tether spokesperson, confirmed that all of the secured loans listed in the reports have been issued and denominated. The company said the loans were short-term and that Tether held the collateral.
Incorporated in the British Virgin Islands, Tether does not publish audited financial statements or a full balance sheet, leaving outsiders with an incomplete picture of the company’s financial health. “Tether’s disclosures are limited to the information contained in the said reports,” Ms. Welch said.
The rise in Tether’s borrowing represents a broad risk to the crypto world. Stablecoins like tether are anchors in the system. They are essential for trading many cryptocurrencies and are widely held by traders. The premise of tether and other stablecoins is that the issuer will always release one coin for $1. Issuers take pains to demonstrate that they have sufficient funds available to do so.
The company’s reports show only US dollar amounts for the loans and do not say the loans were made in bonds. The reports also say the loans are “fully collateralized by liquid assets.”
“I was very skeptical and in disbelief that they could get away with the lack of disclosure and with the limited transparency,” said Peter Crane, president of Crane Data, which tracks money market funds. “If you do have reserves, why wouldn’t you show them?” Both money market funds and stablecoins like tether are supposed to maintain a value of $1.
The vast majority of assets listed in Tether’s reports are in cash, treasury bonds and other safe instruments that are easily converted into dollars. Loans are different. Tether cannot be sure that the loans will be repaid, that it can sell the loans to a buyer for dollars in a pinch, or that the security it holds will be sufficient.
In times of financial stress, that uncertainty can lead investors to rush to release their bond, knowing that the last to do so may not be paid immediately. This is a version of a run on the bench.
“Eligible customers borrow USDT,” Ms. Welch said, short for tether. “Loans are too heavily collateralized by extremely liquid assets that Tether’s prudent risk management recognizes as collateral.”
Tether tokens do not pay interest, so Tether can easily profit by investing in safe, low-yielding securities such as Treasurys. Typically, lenders charge borrowers higher rates than the Treasury pays, potentially making lending more profitable. Tether does not disclose the terms of its loans.
Lending tether tokens conflicts with some of the company’s other disclosures. Its website suggests it only issues vouchers when buyers hand over a currency like the dollar. “Tether only issues new tether tokens when requested and purchased by customers,” the site says. It also says that all tokens are backed 100% by Tether’s reserves.
Tether took the unusual step of disclosing a borrower’s identity when cryptobank Celsius Network LLC collapsed in July. At the time, Tether said its “Celsius position was liquidated without any losses to Tether.”
Although the statement was intended to calm investors, it also highlights the risk of Tether’s loans. Tether said in a separate news release on Nov. 17 that it “was able to liquidate Celsius’ collateral with such precision that Tether was even able to return some of the collateral.” Because Tether does not disclose the collateral in its reports, it is impossible for investors to know details of what was sold and under what circumstances.
Tether discloses the loans’ amortized cost, a financial term that includes an allowance for credit losses. Amortized cost can be higher than the loans’ market value – that’s the amount Tether can get for the loans in a sale.
The big falls in crypto markets, exacerbated by the recent bankruptcy filing of cryptocurrency exchange FTX, means that some collateral held by Tether could be worth less than it was when the loans were made. Celsius used bitcoin as collateral for its loan to Tether, according to Tether’s statement at the time. Bitcoin has fallen 63% this year. Tether does not say what the loans’ market value is, or whether the collateral includes cryptocurrencies.
Tether’s Ms. Welch said the loans’ market value “was not assessed materially different from the amortized cost.” She declined to say whether the collateral includes cryptocurrencies. “Tether does not and has never disclosed this information to the public,” she said.
Tether also left it unclear whether any of its loans are to related parties, which could be a red flag for investors. Tether’s reports earlier said that none of the loans were to affiliated entities. However, it dropped that language starting in its second-quarter 2022 report. Ms. Welch declined to say why Tether dropped the language and declined to say how much, if any, of Tether’s loans to related parties were from September 30.
Like a bank or a money market fund, Tether promises safety: The company says it will always give holders $1 per coin if they release it. But banks must keep large capital cushions to absorb losses in case their assets fall sharply in value. Money market funds should hold short-term assets with minimal credit risk. None of the $5 trillion in assets held by U.S. taxable money market funds were loans as of Oct. 31, according to Crane Data.
Tether’s latest reserves report, released on November 10, showed total assets of $68.06 billion and total liabilities of $67.81 billion as of September 30. million, or 0.2% of assets, as at 31 December. Most of the assets appeared to be highly liquid and were shown at fair market values.
Because Tether’s loans are denominated in bonds, their market value fluctuates with the price of bonds – and therefore also the market value of the company’s reserves. “If the bond goes down, and they have loans that can be repaid in the bond, then by definition it’s not backed by a dollar,” said William VanDenburgh, an accounting professor at College of Charleston in South Carolina, who Tether wrote and followed. it carefully.
This may not be a problem as long as the bond trades very close to its $1 peg. But on November 10, one unit of bond fell as low as 97.7 cents. On May 12, it fell as low as 95.6 cents. It is now at $1.
A 4% reduction in the value of Tether’s loans would have wiped out the company’s $250 million capital cushion. A market value haircut of that size would not be unusual. Lately, it has become the norm for banks’ loans to trade at a discount to book value.
Among publicly traded U.S. banks listed on major exchanges, 36% of them reported that the market value of their loans was more than 4% lower than their balance sheet amount as of Sept. 30, according to data provided by S&P Global Market Intelligence.
In addition to loans, Tether’s report showed $2.6 billion in “other investments” as of Sept. 30, which it reported with no accompanying market value disclosure. In its Dec. 31 report, Tether showed $5 billion in “other investments (including digital tokens)” without providing a breakdown.
“They should give the fair value on all the underlying assets,” said Mr. VanDenburgh said. “We don’t know if they could pay off dollar-for-dollar based on all their claims against them if they had a big run on the funds.”
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