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Did Tether see the cryptocrash coming? Stablecoin buys higher-quality Treasuries to defend dollar peg

May 20, 2022, 2:26 PM UTC

In defense of its dollar peg, stablecoin Tether is guarding itself against a speculative death spiral that already claimed a competitor this month. 

Addressing one of critics’ biggest concerns, the third most valuable cryptocurrency revealed plans on Thursday to further shrink reserves of corporate IOUs called commercial paper in favor of higher quality assets like short-term government debt.

Since the start of the second quarter, Tether slashed its riskier commercial paper holdings by 20%, which serve as hard collateral in the event of customer redemptions and help prop up the fixed 1-to-1 exchange rate to the U.S. dollar.

“It demonstrates a commitment by the company to reduce its commercial paper investments and in doing so, led to a rise in its holdings in U.S. Treasury Bills,” said Paolo Ardoino, chief technical officer of Tether Holding Limited, in a statement after its accounts were attested.

Once thought relatively unappealing because they do not float freely like Bitcoin or Ether, stablecoins have found themselves at ground zero of a cryptocrash following the collapse of an algorithmic stablecoin called TerraUSD, abbreviated as UST, earlier this month.

Unlike Tether, UST was not backed by actual fiat collateral that can be redeemed, but rather only by the full faith and credit of its own governance token called Luna.

Ever since, the market has been testing how resilient other stablecoins are when defending their peg, probing for weaknesses in the system — Tether was no exception.

Yet after dropping as far as five cents below the dollar at one point earlier this month, it rebounded after the company dismissed market fears with assurances it remained creditworthy and could continue to process trades. 

“Tether has maintained its stability through multiple black swan events,” wrote Ardoino on Thursday. “Even in its darkest days, Tether has never once failed to honor a redemption request.”

Stablecoins have faced intense scrutiny following the collapse of TerraUSD, because they underpin roughly 80%-85% of all trading and lending on crypto. Tether was even fined for falsely claiming it was fully backed by fiat currency.

Its role in facilitating liquidity has attracted the attention of the federal government, which views stablecoins as a potential systemic risk to the broader crypto market.

“The relationship can be depicted as an upside down pyramid, with $2 trillion worth of crypto resting on roughly $180 billion of stablecoins,” said Michael Hsu, Acting Comptroller of the Currency, early last month. “If there were to be a run on stablecoins, the entire crypto economy would likely be impacted.”

Attested, but not audited

Even a collateralized stablecoin like Tether has been under scrutiny since at least last July, after authorities became alarmed by the high amount of commercial paper held as reserves. 

These short-dated IOUs are an important source of funding for companies, but are deemed riskier than treasury bills that are considered practically as safe and virtually as liquid as the greenback itself.

As of the end of March, Tether said it had roughly $82.2 billion worth of tokens in circulation, according to its first quarter accounts attested—but not audited—by independent accountants MHA Cayman.

These liabilities were matched against assets on its balance sheet worth $82.4 billion, a sign of resilience.

Of that sum, roughly a quarter, or $20.1 billion, was held in the form of commercial paper while 46%, or $39.2 billion, were U.S. treasury notes serving as collateral.

This compares with 31% and 44%, respectively, at the end of December.

Tether said the average duration of its commercial paper and certificates of deposit is 44 days and the average rating is A-1, the second-highest possible. From a risk management perspective, both are an improvement over the corresponding 80 days and A-2 rating cited from the end of December.

“The Group’s consolidated reserves held for its digital assets issued exceeds the amount required to redeem the digital asset tokens issued,” wrote MHA Cayman in its attestation on Thursday.

As a result of the recent crash in crypto, only about $74 billion in Tether tokens are now in circulation, according to CoinGecko.

The next attestation report for Tether covering its second quarter will not likely be published until August.

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