Bloomberg finds Chinese commercial paper in Tether’s reserves

The backing of the Tether (USDT) stablecoin includes short-term loans to major Chinese companies and loans to crypto-lending platforms such as Celsius Network, according to a Bloomberg investigation.

A Bloomberg investigation finds Tether holds some of its reserves in billions of dollars worth of Chinese commercial paper. https://t.co/LgQYs1Kj8V by @ZekeFaux pic.twitter.com/j1I6WNptK9

— Tracy Alloway (@tracyalloway) October 7, 2021

The report recalled long-standing industry concerns about USDT’s backing.

The growth of the stablecoin’s supply to $69 billion USDT, including $49 billion USDT this year, could place its issuer among the 50 largest banks in the United States, were it not an unregulated offshore company.

The growing scale and lack of transparency of the stablecoin’s reserves drew the attention of US financial authorities and intensified criticism of the organisation.

In January, a Medium article appeared. Its author pointed to a ‘significant’ discrepancy between the amount of Tether issued since the start of last year and the funds held at Deltec Bank.

According to Bloomberg, the company does not store all of its assets with a Bahamas-based bank. Its chairman, Jean Chalopin, said that it held only cash and bonds with very low risk. Recently, only about $15 billion remained with Deltec, with the remainder Tether had begun to place with other lending institutions, he said.

In September, CNBC’s Mad Money host Jim Cramer warned of the risks of a collapse of the entire crypto-economy if Tether Limited were to fail. He cited the possible inclusion of Chinese company commercial paper in its reserves, including the default by Evergrande. The issuer of USDT denied.

The growing scale and lack of transparency of the stablecoin’s reserves drew the attention of US financial authorities and intensified criticism of the organisation.

The spokesman for the company described such comments from one of its former partners, with whom the firm is still in litigation, as worthy of no attention.

André Hogner, representing the issuer, replied that the criticisms were misinformation and noted that there are no clients denied the right to convert to fiat.

In July, it emerged that the US Department of Justice investigation into possible banking fraud by Tether Limited executives had been initiated. Bloomberg reports that authorities were interested in the early stages of the firm’s activities.

In February 2021, the stablecoin issuer and its related crypto exchange Bitfinex resolved the conflict with the New York Attorney General’s office over the $850 million loss. Attorney General Letitia James called Tether’s claim that its digital asset was fully backed by US dollars a lie. But the company said the outcome validated its operations.

Bloomberg obtained a detailed reserve report for USDT. It showed allocations include short-term lending to Chinese corporates, contradicting the policy of money market funds. That occurred before the Evergrande saga.

Journalists also learned of Bitcoin-collateralised loans on crypto-lending platforms such as Celsius Network. According to Celsius founder Alex Mashinsky, he paid 5–6% annual interest on the $1 billion raised.

At the time, Hogner claimed that Tether was fully backed, and that issuers of commercial papers in its reserves carried an A-2 rating or higher.

Bloomberg drew parallels with the era of ‘wild banking’ in the 19th century. The journalists noted the risk of losing the 1:1 peg of USDT to the dollar if some loans were not repaid. Losses could exceed the profits from such investments and trigger a run on deposits, they concluded.

In response, Tether Limited called the Bloomberg article a compilation of old unverified conjectures aimed at discrediting a market leader, “whose track record of innovation, liquidity and success speaks for itself”.

The issuer characterised such comments from a former partner, with whom the firm is still in litigation, as unworthy of notice.

As reported in August, the parent company of the Bitcoin exchange Bitfinex and the stablecoin issuer Tether — iFinex — appealed to the New York Supreme Court to bar media and others from demanding data on the state and structure of USDT reserves over the last several years.

Earlier, the audit firm Moore Cayman published a report indicating that, as of 30 July 2021, USDT was 100% backed by reserves of Tether Holdings Limited. 

Moreover, 49% of the reserves consisted of commercial securities worth $30.8 billion. The share of cash and bank deposits which could be withdrawn within two days or less accounted for 10% — about $6.28 billion.

A significant portion of the reserves comprises U.S. Treasuries with maturities of less than 90 days. They accounted for more than 22.5% of total value or about $15.3 billion.

In October it emerged that the Biden administration was considering the possibility of bringing stablecoin issuers under the regulatory framework. They could be subject to the same requirements used to regulate the banking sector.

Earlier, the U.S. Treasury discussed with banking sector representatives the risks and benefits of stablecoins. In the same month there was talk of obliging stablecoin issuers to ensure their free conversion to fiat.

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