The Tether Ultimatum
Crypto's "Lehman Brothers" has survived the latest market turmoil, but it has yet to quell fears about its dubious backing
If you’re running a dubious financial scheme, the worse move you can make is to mock those who’ve asked seemingly routine questions about your operation. Taunting critics and detractors is a surefire signal to the hardened financial detectives, fraud hounds, and short-sellers of the world that you’re engaging in a spot of Ponzinomics.
So when Tether, the stablecoin tied to widescale manipulation of crypto markets, suddenly published a blog post comically entitled “Why Hedge Funds are Losing Money Shorting USDT,” (USDT being the ticker for Tether’s stablecoin) renewed skepticism emerged, even though Tether has already been shrouded in unhealthy levels of controversy for years.
Amusing headlines aside, Tether’s blog post itself was a hoot. After outlining the latest market turmoil, congratulating itself for a successful deleveraging, and mocking regular finance bros for “incorrectly” shorting its stablecoin, Tether repeated past untruths (Concoda’s emphasis added):
“The underlying thesis of this trade is incredibly misinformed and flat-out wrong,” Tether wrote. “It is further supported by a blind belief in what borders on outright conspiracy theories about Tether:”
What were these “outright conspiracy theories,” you say? That the enterprise behind Tether is under investigation for bank fraud by the U.S Department of Justice (DOJ)? That Tether lied to authorities repeatedly about the backing of its reserves? That Tether initially lost access to legitimate banking because “TradFi” detected foul play?
In bold, the last line read: “None of these theories are true.”
The truth, however, says otherwise.
For starters, the belief that “Tether is or was not backed 100% by conservative, liquid collateral” is not only a “belief” but a reality. On April 25th, 2019, the NYAG (New York Attorney General) released a report revealing how Bitfinex, the sister company of Tether, had lost access to $850 million it had deposited in Crypto Capital Corp, a shadow bank whose President, Ivan Manuel Molina Lee, was arrested “for being part of an international drug cartel” by allegedly using Bitfinex to foster its money-laundering operations. In response to losing its funds, Bitfinex apparently dipped into $700 million of Tether’s reserves, which should have been backing its stablecoin, to fix “withdrawal problems.”
Worse still, after the NYAG had released its bombshell, Tether’s lawyer Stuart Hoegner filed an affidavit in which he revealed Tether was only 74% backed. The media picked this up instantly, imprinting Tether’s version of The Big Lie on the interwebs forever.
But Tether’s faulty backing is not the only item on that list that has proven to be more than just a conspiracy theory. What about the “belief” that Tether’s commercial paper — short-term debt instruments issued mostly by corporates to fund daily operations .i.e payroll — consisted of obligations issued by Chinese firms, even including those of distressed property developer, Evergrande?
Rumors arose from a Bloomberg article written by journalist Zeke Faux, titled Anyone Seen Tether’s Billions? In it, he described how he acquired “a detailed account of Tether Holdings’ reserves,” containing “billions of dollars of short-term loans to large Chinese companies.” Tether, as usual, denied anything of the sort in an impromptu blog post: “[We’re] aware of rumors being spread that [our] commercial paper portfolio is 85% backed by Chinese or Asian commercial papers and being traded at a 30% discount,” adding that: “These rumors are completely false.”
Tether’s potential foul play regarding its commercial paper is not as clear cut as its unbacked status, so we’re presented with a choice: Trust a respected Bloomberg journalist or Tether — a wildcat banking operation that prints billions in counterfeit money. Usually, when the latter claims one thing, it’s the other, but we’ll let our readers decide for themselves. Though we will say putting faith in Tether didn’t work out well when forming a view on its ominous reserves, as one of our fans on Twitter illustrated:
We can’t say for sure if Tether was — or still is — using Chinese commercial paper (let alone Evergrande’s), but we can say that Tether’s past statements regarding its commercial paper holdings don’t hold water. In another recent blog post, Tether declared that its official commercial paper holdings had “been further reduced to 11bn” from “20bn at the end of Q1 2022”:
Yet, $18.9 billion of Tether’s commercial paper has been set to mature within 90 days. By then, the stablecoin issuer would have only $1.2 billion left, not “8.4bn by … June 2022”, as it said. Also spotting this mismatch was a hedge fund source of Concoda, who being short the stablecoin has become a keen observer of the ensuing fiasco. Family members even holler at Tether’s executives anytime they regretfully choose to appear on CNBC. “They yell at Paolo & Stu,” they said. “‘liar liar’.” After noticing Tether’s potential commercial paper mismatch, our source informed the Financial Times, who then reached out to Tether for comment. As anticipated, the British paper never heard anything back. The $7.2 billion shortfall remains a mystery to this day.
What is evident, however, is that Tether might not be “making unsecured loans to borrowers.” The contra is mere speculation. Last year, an investigation did discover Tether had loaned $1 billion to the troubled Celsius Network, but it had used Bitcoin to collateralize the loan. We’ll give Tether this one, at least.
Despite most of the theories that Tether listed instead being a reality — plus everything else that’s happened, it’s clear that at the expense of repeating fiction after fiction, Tether remains resilient to major market stresses. We know, of course, its stablecoin is not fully funded and has experienced a multi-billion dollar run in the past few months:
But as crypto exchange owner Konstantin Plavnik once remarked, “nobody actually cares if Tether is backed or not.” They just don’t care about the danger, until they have to.
That leaves the only other doom hypothesis: if market malfeasance can’t take Tether down, “sounder” rivals like Circle and its USDC stablecoin can outcompete Tether into redundancy. Coincidentally, Tether mentioned in its latest blog post how its market cap has narrowed in relation to its competitors:
“The difference between [Tether’s] 24hr trading volume and its competitors tells a clearer and more important story … 24hr trading volume remains roughly 10x that of its closest competitor. This points to the utility of Tether in daily trading and is the true measure of adoption.”
Translation: “Tether reminds you that it’s the best, damn wash trader in the business, and that relative market caps remain insignificant. If you want to wipe us out, wipe out our liquidity.”
That concludes that theory.
Subsequently, as Concoda has first speculated, if Tether ever meets its demise it will be through market forces, say, a further crash in crypto markets in the next quarter or so. As of now, we have a long way to go before the monetary excesses of the pandemic era wear off. And if Tether is to ever face its true “Lehman moment”, central banks must continue quantitative tightening and leave further rate hikes on the table. This will eventually inhibit the flow of fiat sufficiently enough for crypto prices to undergo a lethal plunge.
But for now, with Tether firing up its printer to the max once again, the fiat-crypto bridge has been re-established.
Financial power structures have yet to restrict enough access to an already scarce amount of dollars for the gateway between fiat and crypto to become “untethered.” Only then will Tether face its final reckoning.
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