Well, that turned out to be an anticlimax.
A bunch of publications – CoinDesk, Bloomberg, and The Block – yesterday published a makeup of controversial stablecoin Tether’s reserves in May 2021, after it had paid a penalty and settled with the New York Attorney General (NYAG) for commingling its reserve funds with those for sister company BitFinex.
The revelation came after a portentous loss of peg for Tether in a stablecoin liquidity and was expected to set off fireworks in its price. But the published pieces hardly revealed anything new and did not ‘prove or disprove‘ Tether’s claim that its circulating supply was fully backed by an equal amount of real world assets at all times.
Instead, they engineered a predictable set of circumstances.
Tether briefly lost its peg and fell below its intended price target of $1. Bitcoin price had already jumped in anticipation earlier that day. And there must have been a round of profit taking and ‘redemptions‘ for investors holding the stablecoin. Yesterday’s price movements for bitcoin and Tether = one goes up while the other goes down – are characteristic of an algorithmic stablecoin’s workings.
Nothing To See Here
As a refresher, Tether settled with the NYAG’s office in Feb 2021 and ceased operating in New York because it had misrepresented claims that it was fully backed at all times. CoinDesk and Bloomberg filed a Freedom of Information (FOIA) request asking for documents related to Tether’s reserves. NYAG handed them to the publications earlier this week.
According to the documents, Tether held commercial paper of troubled Chinese companies in its reserves during that period. The stablecoin’s chief technology officer Paolo Ardoino had denied it on Twitter. The stablecoin had banking relationships with four institutions – Deltec Bank, Capital Union Bank, Ansbacher Bank, and Far Eastern International Bank – at that time. These details are already known and have been reported earlier.
CoinDesk reported that some of the documents attesting to Tether’s reserves at these entities were left unsigned. That is characteristic of crypto attestations and workings.
Perhaps, the biggest problem is that the reserves composition is an attestation prepared on August 4,2021 – more than two months after CoinDesk filed its request. This means that Tether and its cohorts had plenty of time to tote up numbers and cook their books.
An Algorithmic Stablecoin’s Reserves
Tether’s mysteries remain unresolved after yesterday’s reports.
No one knows how the stablecoin had managed to build up a massive holding of treasuries without causing a ripple in the securities market. Its banking relationships – one of which is reported to intersect with that of bankrupt exchange FTX – are also unclear. How the company generated profits or, for that matter, redeems investors is also a conundrum.
Those questions remain unanswered only if you consider Tether to be a fiat-backed stablecoin, one whose peg is supposedly backed by an equal amount of real world assets. A change of perspective – from a fiat-backed stablecoin to an algorithmic one – dramatically changes the situation.
In this avatar, the stablecoin’s peg depends not on real world assets but on bitcoin price and supply. It does not need a colorful cast of characters to craft a bogus story about reserves; instead, it uses the price of bitcoin to bolster its peg. The cryptocurrency absorbs reverberations emanating from the stablecoin’s loss of peg.
Manipulating Bitcoin Price and Crypto Markets
Cultivating a market in bitcoin and ensuring its price is necessary to maintain Tether’s peg. Among the items published yesterday, one was especially interesting. The Block reported that Tether handed out $11.6 billion of collateralized loans between June 2019 and May 2021.
Eighty nine percent of the total loan amount was collateralized using bitcoin, meaning Tether was encouraging borrowers to load up on the cryptocurrency and use it as collateral. For most investors, the prospect of bitcoin – a risky asset with volatile price swings – as collateral is suicide.
But it is not a problem for Tether because the stablecoin can manipulate bitcoin price by flooding its tokens or sucking them out of the crypto ecosystem.
In fact, the latest price jump in bitcoin price has occurred just days after Tether announced that it had minted a fresh supply of tokens on Ethereum and sent most of it to Binance – an exchange that is home to its biggest trading volumes.
Between June 2019 and May 2021, the price of Bitcoin skyrocketed by a very rough estimation of 526% and the circulating supply of Tether rose from $2 billion to $63.6 billion.