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4th March 2023 > > USDT.


My boundless enthusiasm for the liberty and freedom occasioned by the crypto revolution does not mean we should not beware short-term risks to this long-term project.

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The last twenty-four hours has seen BTC trade in a tiny range of $180. Surely that must be some sort of record.

A challenge for the chartists out there if I may. Instead of wasting your time on voodoo technical analysis, can you do something useful instead, and confirm or deny that $180 is the minimum trading range for a whole day?

Curious Cryptos’ Commentary – Beware USDT (USD Tether)

USDT, issued by Tether, is the largest of the stablecoins with a market cap of over $71bn - more than 50% of the total market cap of all stablecoins. The last twenty-four hours has seen $20bn of trading volume compared to $13bn for BTC and $5bn for ETH.

USDT is critical to the functioning of all centralised cryptocurrency exchanges, and all DeFi (decentralised finance) platforms.

It is crucially important for the crypto world that USDT does what it says on the tin.

The CCC has frequently in the past levelled criticism at Tether for its lack of clarity, specifically about the collateral backing the issuance of USDT.

USD collateralised stablecoins – as opposed to algorithmic stablecoins such as the now-defunct UST (TerraUSD) which are all almost certainly destined to fail at some point – should have high-quality, cash-like dollar denominated collateral, which is documented, transparent, and equal to at least 102% of the liabilities, preferably more. Oh, and liquid enough that say 10% can be sold instantaneously with zero market impact.

In this scenario – short of fraud which can never be fully ruled out – the peg of the stablecoin should not come under any sustained pressure.

In April 2017, USDT reached a low of 92c, and in November 2018 a higher low of 97c. With those two exceptions, some earlier teething problems, and a couple of other minor breaches, the price has almost always been within tenths of a cent away from the peg.

Which is cheering.

Nonetheless, concerns have been raised about the quality of the collateral backing USDT. During the insanity of QE (quantitative easing), cash and cash-like collateral such as Treasury bills, could be trading with negative yields. Even some high quality corporate bonds could trade at negative yields, even out to two or three years, especially in the EU. Owning collateral with negative yields is not a long-term nor a viable business strategy.

Allegations were made that Tether, to compensate for negative yields, had some dodgy collateral to back USDT, perhaps even some loans made to crypto companies based in China, introducing correlation risk where it has no right to exist.

In the last eighteen months or so, the transparency behind USDT has improved dramatically, though not enough for my liking. I hope this journey to instil confidence in sceptics like me is not yet over.

But now for the bad news.

The WSJ (Wall Street Journal) has made allegations of dishonesty and fraud amongst the executives of Tether.

In 2017, Wells Fargo & Co. stopped processing transactions from some of Tether’s Taiwanese bank accounts. For most academics at Cambridge University, all employees of the London School of Economics, and executives at the World Health Organisation, please note the use of the description Taiwanese, not Chinese, but I digress.

WSJ claims to have documents showing that Tether attempted to bypass these restrictions with new accounts held in trust by separate companies in both Taiwan and Turkey.

Later, Signature Bank in the US closed accounts of Tether, and sister company Bitfinex, in 2018.

WSJ claims that aviation fuel broker AML Global opened an account at Signature bank and directed funds towards Tether. AML Global owner, Christopher Harbourne owns 12% of Tether, but under a different name, Chakrit Sakunkrit. Under this latter name, Signature Bank had blacklisted him for failure to adhere to AML (anti-money laundering) rules.

Where does this leave us?

In some respects this story has similarities to the Silvergate issues we saw earlier this week.

Both stories relate to the fiat-crypto on/off ramp. Crypto maximalists will always maintain that the existential threat to fiat by the mere existence of cryptos makes these issues irrelevant.

But they are wrong.

If – and this is a big if – USDT is properly backed by appropriate collateral, the dollar peg cannot be broken. Even if all the executives have behaved with as much moral, ethical, and legal impropriety as the executives at FTX, any potential fallout will be temporary and relatively minor. Dare I say it, yet another golden buying opportunity, though that is of course not even remotely close to being investment advice.

If, however, USDT is not backed by appropriate collateral, and the peg comes under pressure because of moral, ethical, and legal impropriety by the executives of Tether, I suspect the crypto winter of 2022 would be an amuse bouche compared to the price action following the collapse of USDT.

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