What's wrong with Tether - USDT reserves?
Doubts about the sufficiency of Tether reserves to ensure the circulation of USDT have been expressed for a long time. After the May collapse of the UST algorithmic stablecoin, these concerns multiplied many times, which led to an unprecedented decrease in the capitalization of the largest stable coin pegged to the US dollar. Over the past less than two months from the day when UST began to lose its peg to the US dollar, the capitalization of USDT decreased by 20% from 83 billion US dollars to 66 billion US dollars.
What is USDT
USDT is a traditional stable coin pegged 1 to 1 to the US dollar, the issue of which is backed by reserves in US dollars. The issuer of this stablecoin is Tether, a Hong Kong company.
According to the Tether whitepaper, the process of issuing and handling USDT consists of five steps.
The first step.Institutional investors deposit an amount in US dollars to Tether's bank account to secure USDT issue reserves.
The second step. Tether transfers the amount in USDT to investors' cryptocurrency wallets in a ratio of 1 to 1 to the amount of deposited reserves in US dollars. USDT are minted.
The third step. Issued USDT are traded between users and exchanges.
The fourth step. Institutional investors can return USDT to the Tether cryptocurrency wallet to receive US dollars previously deposited in reserves. The deposited USDT is burned.
The fifth step. Investors receive US dollars in return for the USDT deposited at the fourth step.
At first glance, the system is simple and viable. Tether earns on commissions that are charged on transactions involving USDT. Reserves ensure the stability and reliability of the entire system. Arbitrageurs equalize the exchange rate and maintain a peg to the US dollar.
It is unprofitable to keep multibillion-dollar reserves in the form of balances on a dollar account. It is much more profitable to invest them in securities - bonds and stocks, and place them on bank deposits.
According to the information posted on the Tether website, part of the reserves (28.47%) is placed in commercial securities, and more than half in US debt instruments.
Over the past six months, the value of both US government bonds and commercial securities (stocks and bonds) has decreased. It is not disclosed which securities Tether reserves were invested in and what losses may be. In addition, the largest dealers servicing the US government debt declare with one voice that they have never worked with Tether. There are also doubts about the reliability and stability of the Hong Kong bank, which holds Tether reserves.
In addition to all of the above, investors are distrusted by the fact that Tether has never conducted an independent audit of its reserves. A three-page report of an independent accounting company is published on the Tether website once a quarter, which confirms that there are enough reserves to ensure a stable coin. At the same time, the report does not disclose in which instruments reserves are placed.
The presence of many unanswered questions, as well as the growing concerns of investors, led to the outflow of USDT from circulation. Institutional investors began presenting their USDT for repayment and taking reserves in US dollars.
Thus, the share of “bad” reserves on Tether's balance sheet continues to grow, as liquid funds placed in risk-free assets - on accounts and deposits - are used for payments. This causes even more concern, as the remaining investors realize that there are fewer and fewer “good” assets. This provokes an even greater desire for outflow and the spiral twists.
Tether position
According to media reports, Tether's stablecoin is becoming a target for hedge funds seeking to get rid of USDT. It is claimed that this process has been going on for at least a year. And after the collapse of UST, it took on large-scale dimensions.
CTO Tether Paolo Ardoino confirmed that a group of hedge funds tried to untie USDT from the US dollar amid the panic around LUNA/UST. According to him, the attackers used perpetual futures, sold USDT on the spot and disrupted the balance in DeFi pools. Ardonio claims that the Tether stablecoin is secured by more than 100%, and in 48 hours of the attack, Tether exchanged USDT for $7 billion (10% of assets), while in a month they exchanged USDT for $16 billion (19% of assets), proving the reliability of a stable coin. Also, a representative of Tether said that Tether plans to completely abandon corporate securities in its portfolio and switch to government debt.
Paolo Ardoino added:
"From the very beginning, it really seemed like a coordinated attack, with a new wave of FUD (negativity), troll armies, etc."
The lack of transparency regarding reserves, as well as the lack of audit, continue to put pressure on USDT. In the world of cryptocurrencies, a lot depends on the trust of users. If trust is lost, then there may not be enough time and opportunities to return it.
While Tether is losing its positions, its closest competitor USDC is increasing them. And although the USDC also does not disclose the composition of its reserves, this stablecoin enjoys much greater investor confidence, since the companies that issued it, Circle and Coinbase, are registered in the United States. It is believed that they are under the financial control of the Fed regulator, and not vkuen to place their reserves in questionable assets.
Since the beginning of May, the capitalization of USDC has grown by $7 billion, reducing the gap with USDT from $35 billion to $11 billion in two months.
Author: Elvir, analyst Сoin-signal.com Club Crypto News
https://coin-signal.com/cryptonews/whats-wrong-with-tether-usdt-reserves/
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