For the first time since the launch of the USDT in 2014, Tether has revealed the composition of its reserves. This new transparency report is part of the compliance efforts implemented by Tether following the agreement reached with the Attorney General of New York on the suspicion of concealment of 800 million losses. Bitfinex and Tether paid a fine of $ 18.5 million and agreed to provide quarterly breakdowns of their reserves as part of the settlement.
Sufficient reserves from an accounting point of view, but fundamentally worrying
The breakdown shows that the majority of Tether’s reserves are made up of “Cash & Cash Equivalents”. This notion of US accounting – US GAAP standards – covers all reserves of money and financial instruments considered to be liquid. To be considered liquid, an instrument must be able to be sold within a month at a value very close to its book value. The rest of the reserves are 12.55% secured loans, 9.96% corporate bonds and precious metals, and 1.64% other investments, including digital assets.
By studying these two diagrams, two elements appear to be potentially problematic. On the one hand, of the 40 billion in assets just under 160 million dollars are cash. The 3.87% of Cash is the only asset class of Tether’s reserves whose value can be guaranteed.
On the other hand, the vast majority of the USDT issuer’s assets are debt. In a context of economic recovery and massive money printing, it is very easy for companies to issue debt, but the second market conditions change, the value of these debts can be reduced by three. It is in particular this phenomenon which caused the bankruptcy of the bank Lehman Brothers in 2008. The bank held a monumental quantity of debts without market value, that is to say debts that the debtors absolutely could not repay.
Cash equivalents, which are not equivalent to reserves
As the notion of “Cash & Cash Equivalents” covers many assets, it has also been broken down, and it is this graph that really interests us. This part of the reserves is therefore made up of 65.39% of commercial paper, 24.2% of fiduciary deposits, 3.87% of cash, 3.6% of reverse repo notes and 2.94% of bonds. Treasure.
This is where things get tricky for Tether. Commercial papers are medium-term negotiable debt securities. Basically, when a company needs cash it can issue these securities which will be bought by other companies which will receive monthly interest for a year before receiving the principal repayment. For example, a company needs $ 2 million to buy mining equipment, issues commercial paper for that amount and then sells them to Tether. Tether will receive the interest each month and record $ 2 million in its “Cash & Cash Equivalents” account.
Usually, these securities are bought by financial institutions and put together in bundles with close ratings and maturities before being sold to companies. Once the securities are gathered in bundles, it can be particularly difficult to determine the quality of the debts constituting them. Indeed, all commercial paper is not of the same quality. If the company that issued the security is in financial difficulty, it is highly likely that the debt will not be paid off in full. The real value of the debt would therefore be much lower than the book value recorded at the time of the purchase. In our example, it could be that Tether only recovers a million dollars after a year because the mining operations have not been profitable enough.
Therefore, all commercial papers are not equal and Tether has not disclosed the issuers or the rating of these debts. It is therefore possible that the market value of these securities is significantly lower than their book value.
The second large mass of Tether’s “Cash & Cash Equivalents” is made up of fiduciary deposits. In an escrow, a financial institution, the “trustee,” places your money in a second financial institution on your behalf. This allows sophisticated investors to place funds in banks that they would not otherwise have access to due to citizenship or residency restrictions, for example to take advantage of higher interest rates. This type of deposit is one of the techniques used by banks to conceal funds, especially during the Panama Papers affair.
We can assume that the fact that Tether is based in the British Virgin Islands closes its doors to certain jurisdictions and institutions. Thanks to this type of deposit made on behalf of others, it is possible to circumvent the laws and conceal questionable assets.
You will understand, the alleged transparency of Tether is not likely to reassure us. Tether has been playing this dangerous game for several years now. The USDT issuer tirelessly tries to prove the existence of sufficient reserves without actually opening its accounts.