9th October 2021 > > US Tether.

tl;dr

The lack of disclosure about the collateral held by USDT is a cause for concern.

Market Snap

Market Wrap

Perp funding rates mostly back to a neutral stance, no long squeeze or short squeeze to exacerbate market moves for now. Phew.

Occasional Series – Binmen in Marseilles

The working week for a binman in Marseilles is just TWENTY-ONE HOURS PER WEEK with 5 weeks of annual holiday, an additional 4 weeks of “compensatory rest” to prevent exhaustion, and a full pension at 62.

The CCC is so well crafted, as I am sure you will agree, that it takes me TWENTY-ONE HOURS PER DAY to write it. With no holiday. No pay. No pension. But I like it that way. I am ok.

I am reliably informed that this is not an unusual arrangement for council employees in big cities like Paris and Marseilles.

If I was working in France and paying taxes in France, the binmen in Marseilles situation would be a touch annoying to me.

Curious Cryptos’ Commentary – Stablecoins (sorry another long one, but it is the weekend)

I must admit that when I first came across stablecoins, I did scratch my head a bit.

My mindset at the time was more of the “buy crypto and make myself rich” mentality. Now my mission to understand the crypto revolution and how it will affect our lives makes much more sense of this concept.

The basic idea for the largest of all stablecoins – Tether (USDT) – is that one USDT is always worth $1. If you look at the historical price graph, this isn’t actually true, but it is very close to being true most of the time.

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But what is the point of a stablecoin?

If you accept the premise that a USDT is always worth $1 then it clearly becomes a medium of exchange for goods and services without the inherent volatility of BTC or any other crypto.

It allows crypto traders to move in and out of cryptos via USDT without having to involve fiat, crucially avoiding crystallising a tax event.

Some Decentralised Finance (DeFi) platforms use a stablecoin as part of their infrastructure, one of the largest and most used of these being MakerDao which has both a stable native coin (DAI) and a freely floating native coin (MKR).

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For a stablecoin to be successful, it must be backed by hard assets.

In an ideal world, the assets for a USD stablecoin would be actual US dollars, deposited into a bank account in exchange for issuing the stablecoin.

In the real world with zero interest rates, this is not going to work – the organisation issuing the stablecoin must have income to pay the costs of administrating the issue and redemption of the stablecoin.

Though hard to find, there are some short-dated, high quality investments that provide a small positive yield.

However, anyone with a fleeting familiarity with the current world of investment returns knows that the investments required to support the infrastructure of a stablecoin will have to move out on the maturity curve, and lower on the credit curve.

Both these factors impact the reliability of the claim to be pegged firmly 1:1 to the dollar.

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Key to maintaining confidence in the dollar peg is a full disclosure of the assets backing any particular stablecoin.

This is so patently self-obvious that all issuers of stablecoins report quarterly the full details of the audited assets backing the stablecoin.

Er, actually no.

Not one of them does, and this is a major problem.

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Tether has provided some audited reports, the latest on August 11, 2021, from Moore Cayman, a provider of audit services based in, guess what, the Cayman Islands.

This is a strange choice of auditor.

I would assume that to gain as much credibility as possible, choosing a US based and US regulated auditor is the sensible option.

The report did confirm that the group’s consolidated assets exceed consolidated liabilities.

What the report did not do is to detail those consolidated assets, a major failing which Tether keeps promising to rectify but never actually does.

Paolo Ardoino, CTO at Tether, had this to say:

“As an industry leader, we understand the importance of transparency and accountability. Our most recent assurance opinion from Moore Cayman again confirms Tether is fully backed.

A healthy and conservative portfolio with an emphasis on liquidity continues to fuel our growth and confidence in our innovative offerings.”

This blatant lie by the CTO that they understand the importance of transparency and accountability concerns me.

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In the absence of detailed information about the collateral, rumours and speculation will run wild.

In a recent Bloomberg article, a claim was made that Tether’s reserves includes “billions of dollars of short-term loans to large Chinese companies”. Tether did not respond to this specific claim, merely stating that the Bloomberg article was using “snippets of old news”, hardly the most convincing refutation.

Tether itself has confirmed that some loans are crypto-backed introducing correlation risk in exactly the place where you do not want correlation risk.

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None of this should be taken to mean that one USDT is not worth one USD.

In some ways, if everyone continues to believe in the peg, the credit quality and the maturity of the underlying collateral is irrelevant.

But if market confidence in the peg started to come under pressure, full disclosure is the only means to restore that confidence.

I see no reason why that disclosure has not already happened.