Up until I recorded this episode, I didn’t really know what ‘Tether’ was. And then I spoke to Anmol Gandhi [the ultimate G when it comes to cryptocurrencies] and he told me that Tether is a ‘stablecoin’.
A stablecoin is different from other coins like Bitcoin, Ethereum etc. So, let’s first understand what stablecoins are & how they work - before we answer the question ‘Where is Tether keeping the $69B dollars that it’s supposed to keep as reserves?’
Stablecoins : What are they & what purpose do they serve?
A stablecoin - in the simplest terms, is a cryptocurrency. But, it doesn’t [and shouldn’t] fluctuate as much as other cryptos out there because it’s pegged to a stable reserve like the US$ or Gold. However some of them are pegged to other cryptocurrencies, so not all stablecoins are ‘stable’
For eg. Tether is pegged to the US $. And theoretically - 1 Tether = 1 USD
So why do we need a stablecoin? What purpose is it serving in the grand scheme of things?
Let’s say you want to buy Bitcoins worth INR 10K. You deposit money in one of the cryptocurrency exchanges (like CoinDCX) and you hit ‘Buy’. Boom - you got Bitcoins in your crypto wallet. Easy stuff.
What we don’t see is what happens in the background. Here’s an example:
You deposit real money with a crypto exchange
You enter into a transaction to buy Bitcoins worth X amount
Your real money first gets converted into stablecoins (like Tether or USDC). For eg. $100 gets converted into 100 Tether
The stablecoins are then used to buy the actual Bitcoin
X amount of Bitcoin appears in your crypto wallet
The same process repeats itself when you want to ‘sell’ a cryptocurrency. Alternatively, you can directly buy stablecoins first & then use them to buy other cryptos.
One reason why Tether gained popularity, is because banks didn’t want to deal with crypto-exchanges, leaving a void. And that’s where companies that issue stablecoins chipped in. People could convert their money into stablecoins & then use them to trade in several cryptos
Moral: Stablecoins are an integral part of the crypto eco-system and if something were to go wrong with these stablecoins - it could disrupt the entire ecosystem, which itself is quite bubble-ly
Which brings me to my next question & probably the most important question:
Where is Tether keeping it’s money?
Like I explained above, Tether is supposed to keep a 1:1 peg with the US$. So, if $69B dollars worth of Tethers are in circulation, the company which issues Tether (i.e. Tether Holdings Ltd.) should have $69B dollars in REAL MONEY locked away as reserves in their bank accounts or parked in other risk free liquid investments.
QQ. Do they?
Here is where things get interesting. And quite controversial.
This Bloomberg Report, talks about where exactly is Tether keeping it’s money. And mind you this money doesn’t belong to Tether. It belongs to the investors who are buying stablecoins/other cryptocurrencies.
Tether Holdings Ltd. works almost like a bank. They issue Tether to Crypto exchanges & get real money in return. Theoretically, they’re supposed to keep this real money in a secure location, like a liquid fund - earning a little yield, keeping a 1:1 peg. But when there’s so much money involved, people get greedy. And that’s what might have happened here.
The Bloomberg report highlights how Tether could be involved in making a series of risky bets & the very real possibility of non compliance with the 1:1 peg. It’s all rumors & we cannot comment how true the report is, but you see the problem right?
If the rumors are true - this could be one of the biggest scams of the decade. A company takes real money from you & gives you a digital token. It then uses that money to do whatever it wants to do with it & when you came back asking for your money to be returned - well, it’s too late. [Clue: Read about SQUID]
Anyways, I think I took a little detour there. Coming back to the question, do we know the breakup of Tether’s reserves? Let’s take a look.
As per an accounting firm based in the Bahamas - $30B of it’s holdings are invested in commercial papers [which are quite illiquid].
What about the rest? No one knows where it is. Or whether it still exists. Tether’s website doesn’t give a breakdown. And the accounting firm (yes, the one based in Bahamas) has given an attestation report claiming that Tether does maintain the reserves to back its coin.
Can we believe this attestation report? In which commercial papers are the $30B parked? Why has no one heard from the CEO/CFO of Tether Holdings? What happens if Tether doesn’t have the reserves to back it’s coin?
There are a lot of open questions. Extremely controversial. And the answer is - we don’t really know, because Tether Holdings Ltd. doesn’t disclose such information.
Tether Holdings reeks of red flags & below are some on the top of my head.
#RedFlag 1: Can we trust the attestation reports given by the accounting firm?
I don’t think so. One, it’s based in the Bahamas. Two, this attestation report can easily be fudged. Three, you’d expect the attestation report to contain a detailed breakdown of the reserves - well, it doesn’t. Looks very shady to begin with.
#RedFlag 2: $30B in Commercial Papers - where is this invested? How risky are they?
The debt market is a close knit community. Everyone knows who’s buying what. But surprisingly - no one knows about Tether. No one has done any business with them. But doesn’t the attestation report say they have $30B parked in CPs?
One theory, is that Tether has bought commercial papers issued by Chinese real estate players. There is a rumor floating that Tether might be connected in financing the debt laden Evergrande Group.
Chinese real estate is in a dump - with real estate bonds down by > 40%. If the rumors are true, the value of these commercial papers might be a helluva lot less. Plus, commercial papers in general are not very liquid. And, Tether might not be able to get the money back when it wants to.
#RedFlag3: Where’s the Goddamn CEO?
J.L. Van der Velde is the official CEO of Tether Holdings Ltd. But no one has ever heard him talk in an interview or at a crypto conference. He’s practically off the grid.
Giancarlo Devasini - the CFO is an Italian plastic surgeon who previously founded an electronic business. He too, stays away from the limelight.
If you check how many people work in the company, only a handful names pop out on LinkedIn. I mean, this is a company that holds $69B in real money, taken from actual people who want to buy Cryptos & it has only a dozen employees? Mindboggling.
#RedFlag4: Legal suit by NY Attorney General1
If the above red flags weren’t enough - there’s also a suit ongoing against the company, wherein the New York Attorney General has highlighted the fact that Tether has deceived it’s clients and the markets by overstating their reserves.
Tether has agreed to pay $18.5 million without admitting any wrongdoing. But the suit is evidence of what we’re trying to prove here.
What stops Tether Holdings from printing more Tether coins?
There’s no limit to the number of Tethers that can be issued. There’s no regulation which stops Tether Holdings Ltd from issuing new Tether coins. I mean, by this time next year, they could have $200B dollars worth of Tethers in circulation & no one would bat an eye.
When people want to cash out, Tether can issue more coins - accumulate more real money & keep inflating the bubble - as long as enough people believe in the ecosystem.
However, all bubbles burst. And when this one does, it will send shockwaves into the heart of the global financial markets. And, you should be ready with a bag of cash - to capitalize.