Tether increases its reserves or it just appeases critics and investors, Here’s what you need to know.
“The dog’s bark, but the caravan moves on,” goes an adage in Arabic. It can be a summary of Tether (USDT), the biggest stablecoin in the world, history. Tether has spent a large portion of its brief history mired in legal and financial disputes. Tether was accused of lying about its reserves by the New York State attorney general, which resulted in fines of $18.5 million for the company in 2021. This year, US Treasury Secretary Janet Yellen questioned whether USDT could continue to retain its peg to the US dollar. But despite everything, Tether has continued to advance, much like the proverbial caravan. The company’s announcement on July 1 that it had significantly decreased the amount of commercial paper in its reserves has been a source of contention with detractors for some time.
Embracing U.S. Treasury reserves
By the end of July, it is anticipated that Tether commercial paper reserves, which stood at $24.2 billion at the end of 2021, will have fallen to a new low of $3.5 billion. The business continued by saying that its “aim is to reduce the figure to zero.” Like the U.S. dollar, many stablecoins, like Tether, are meant to be backed 1:1 by liquid assets like cash and U.S. Treasury bills. However, previously up to 50% of USDT’s reserves were held in commercial paper, which is regarded as less reliable and less liquid than Treasury securities. Consequently, the statement in the commercial paper could be significant.
It also prompts inquiries. Does this indicate that Tether has matured and is taking a more proactive stance in support of “greater openness for the stablecoin sector,” as the firm claimed in its announcement Or, considering that Tether continues to opt for a less thorough, intrusive, and limited audit in favor of a more limited “attestation” concerning the firm’s reserves, is this only another diversion and obfuscation as some suspect. Is it also significant that Tether uses a small Cayman Islands-based accounting firm rather than a Big Four audit firm to produce its “independent accountant reports”?
Why commercial paper matters
The market’s fear with Tether’s commercial paper is that Tether would not reveal what paper they were holding. Commercial paper’s creditworthiness is subject to wide changes. This may be more of a problem now since, according to some short-sellers, most of Tether’s commercial-paper holdings are backed by indebted Chinese real estate developers, according to a Wall Street Journal investigation. Tether has vehemently refuted this claim.
Because of this, the company’s most recent declaration that commercial paper and certificates of deposit will now make up an even bigger part of Tether’s reserves may be reassuring to investors. On the other side, the ongoing decline in the cryptocurrency industry may be causing Tether’s stablecoin circulation to decline. If that holds, there will be less Tether in circulation and therefore fewer reserves needed as a result of the decline in value and volume of Bitcoin and other cryptocurrency transactions.
Changes to the reserve composition have no impact on how Tether operates. It is still an unregulated organization that is comparable to a bank or a money market fund from an economic perspective. Whether or not the activity is tied to cryptocurrency, regulators should aim to regulate it on the same terms as other economically analogous activities.
Kudos for surviving the drawdown
The company has kept its stability despite many black swan occurrences and highly unpredictable market conditions and has never once failed to honor a redemption request from any of its verified consumers. Tether has reduced its supply by approximately $15 billion in response to the crisis in digital assets. They seem to be attempting to increase the liquidity of their collateral. Both are sensible actions to do in an emergency.
Tether’s closest rival, USD Coin (USDC), has been gaining ground on it elsewhere, and it was recently stated that USDC may be on track to dethrone Tether USDT as the dominant stablecoin in 2022. Since May, the market capitalization of USDC has climbed by 8.27 percent while that of USDT has decreased by more than 19 percent.
Even if it often seems as though the entire establishment is working against Tether, stablecoin is still widely used throughout the world, including Asia, especially among individuals without access to banks or USD. The unique identification number given to stocks and registered bonds by the Committee on Uniform Securities Identification Procedures (CUSIP) would provide specific information on the reserves supporting the stablecoin backed by the USDT. In the unfortunate event that Tether does implode as some critics anticipate, but which is mere speculation at this point what would that mean for the larger crypto and blockchain industry?