Bloomberg has peaked up Tether’s skirts and glimpsed some very ugly junk:
- Essentially is a stablecoin that will take your money in exchange for itself so you can trade crypto. It’s a made-up central bank that then invests your money in US dollar securities one-to-one.
- Made up, that is, by a former child actor who starred in The Mighty Ducks and a disgraced Italian plastic surgeon previous fined for selling counterfeit software.
- In short, Tether has a huge embedded liquidity risk. If there is a run by BTC loons wanting their money back or the value of Tether collateral falls, or both simultaneously, then the entire crypto universe will implode.
- A former Tether banker says it is not a stablecoin, it is an offshore hedge fund with its owner’s gambling punters’ dollars on very high-risk securities while pretending that it is AAA-rated. Nobody even knows if the reserves even exist.
- Nobody running this shit show has a license or any regulation.
- Half of Tether reserves are in short-term commercial paper but nobody has ever seen it buy anything.
- Management is as dodgy as hell.
In short, Tether is a digital ponzi-scheme that will either fall over by itself sooner or later or if regulated. Here is the money shot:
After I returned to the U.S., I obtained a document showing a detailed account of Tether Holdings’ reserves. It said they include billions of dollars of short-term loans to large Chinese companies—something money-market funds avoid. And that was before one of the country’s largest property developers, China Evergrande Group, started to collapse. I also learned that Tether had made loans worth billions of dollars to other crypto companies, with Bitcoin as collateral. One of them is Celsius Network Ltd., a giant quasi-bank for cryptocurrency investors, its founder Alex Mashinsky told me. He said he pays an interest rate of 5% to 6% on loans of about 1 billion Tethers. Tether has denied holding any Evergrande debt, but Hoegner, Tether’s lawyer, declined to say whether Tether had other Chinese commercial paper. He said the vast majority of its commercial paper has high grades from credit ratings firms, and that its secured loans are low-risk, because borrowers have to put up Bitcoin that’s worth more than what they borrow. “All Tether tokens are fully backed, as we have consistently demonstrated,” the company said in a statement posted on its website after the story was published.
Tether’s Chinese investments and crypto-backed loans are potentially significant. If Devasini is taking enough risk to earn even a 1% return on Tether’s entire reserves, that would give him and his partners a $690 million annual profit. But if those loans fail, even a small percentage of them, one Tether would become worth less than $1. Any investors holding Tethers would then have an incentive to redeem them; if others did it first, the money could dry up. The bank run would be on.
The officials who gathered in July at the Treasury Department are discussing regulating Tether like a bank, which would force Devasini to finally show where the money is, or even undermining it by issuing an official U.S. stablecoin. The strange thing is that, at least for now, most participants in the crypto market, including some very large and sophisticated operators, don’t seem to care about any of the risks. Just last month, traders bought $3 billion in new Tethers, presumably sending billions of perfectly good U.S. dollars to the Inspector Gadget co-creator’s Bahamian bank in exchange for digital tokens conjured by the Mighty Ducks guy and run by executives who are targets of a U.S. criminal investigation.
Tether’s HY Chinese debt very likely includes property developers given they make up the lion’s share of China’s $600bn dollar debt market. The same property developers currently defaulting left, right and centre. No wonder Bejing is happy to let foreign creditors carry the bag. This is the lowest form of hot money on earth.
That Tether and its many crypto spawn are being sold to punters as hard currency or digital gold is so bizarre that one can only look on in complete wonder and astonishment.
