What's Inside Tether's Digital Vault?

crypto ecosystem. Unlike some of its volatile counterparts, or shall we say more volatile counterproducts, Tether comes with two promises. First that each tether has a stable value, and that value is one dollar. And second, that each of these tokens or tethers is back by a real asset like the dollar, or a similarly liquid and reliable financial product

like a bond issued by the US government. But those promises haven't always been kept, and that's something that keeps Tether in the cross hairs of regulatory scrutiny and investors speculation. Bloomboog reporter Emily Nicole joins me now for the latest on Tether and its asset reserves. It's that murky gray area of what happens the token while it's out in the crypto ether that regulates are concerned about Emily. Before

we dive into tether, let's let's step back. Let's ignore recent history with regulation and algorithmic stable coin collapses, and let's just start from a place of what is a plane vanilla stable coin? Why are these digital assets important

in the crypto market? At present, Tether is around of all state ball coins in the market, and that entire sector is about one hundred and fifty billion dollars UM and it's mostly used by traders to kind of act as either a store of wealth if they're trying to get out of volatile prices elsewhere, so they can keep their money in crypto without having to be exposed to

the downsides of crypto um. But they're also often used as well as a means of for example, if you wanted to pay someone some cash and not be exposed to volatility that side um And if you are listening to this podcast, you'll know that we've spoken about bridges before, which are platforms that help crypto traders move a token from one blockchain to another when those different blockchains obviously can't you know interact with each other as easily, and

so stable coins can be away around that. Right, You could, for example, usual bitcoin by a ton of tether or usdt um and have that dollar value of your crypto state solid while you're then trying to put that back into another cryptotope and like ethereum got it. So let's actually talk about Tether, like why are the biggest currently? Where did the where did they come from, and where

they're going. So Tether is one of the oldest stable coins around, and that is one of the reasons why I think it is one of the most popular still today. It has kind of been around since I think about tween in in large amounts anyway, UM, and has been

progressively getting bigger ever since. So even if we think about just the last year alone, at the start of one Tether's entire market cap was about twenty billion, in a in a sector of stable coins that was twenty eight billions, so its dominance was even bigger then, And now it's got a stable market capitalization of about sixty six billion. That's about three times bigger than it was at the start of last year UM. And that growth is largely because at the same time as Tether has

been going so has all of crypto. Right, people have become more familiar with how to use crypto, they've become more aware of tokens other than bitcoin and so and particularly as well. Actually, as the market sentiment has changed around crypto, we've gone from a bear market to a

ball market to a bear market again. All of these things mean that as traders are getting more comfortable with making riskier bets or wanting to cash out of the market when it's becoming more volatile, stable coins are a source of safety in that so you would expect to see a direct correlation between volatilty and other parts of the crypto markets and sort of investors are speculators piling

into stable coins like tether. Yeah, So if you look at the total market cap of all stable coins over the last year, you would see a pretty steady incline going up over the last year or so, because as even as crypto became more volatile and bitcoin came down from its peak last November, people were still moving into stable coins. So those those numbers were still going up, even if if steadily. Um, but that's not to say that they're you know, impervious, and they do have their

own market events. So in May you'd see that line actually go off a bit of a steep cliff because one of the biggest experiments in how stable coins maintain their dollar value a stable coin called terror USD. It collapsed in on itself and it's now worth next to nothing. Everybody lost a bit of confidence in the stable coin

market and it hasn't actually really recovered since. Now stable coins like tether have to have reserves of assets that are themselves reliably gonna be worth sort of a one to one value of the number of tethers in circulation. So if there's a hundred and eighty billion stable coins in circulation, or whatever the number might be, then there's got to be somewhere in hopefully not suitcases or mattresses, but like you know, in fairly legitimate custodial arrangements, a

hundred and eighty billion dollars worth of assets. Is that correct? Yeah, So for the collateralized stable coins anyways, I called them earlier,

So that's tether, that's circles, U, s dc UM. They rely on reserves of of assets to keep that peg, and that's usually cash cash equivalence, but not always are those assets, you know, the kind of highly liquid assets that you know you'd see in a bank, which is why they are different from banks, right, they're not actually banks because of that um or at least not all

of them anyway. UM. And when we look at these reserves, that's how we can tell, you know, for example, if if I was want somebody who wanted to buy some U s d T or some U s dc UM, I could then look at the reserves and see, okay, when I know that they had, you know, this much in cash, this much in US Treasury bills, this much in commercial paper in the reserve, and you can kind of make a bit of an educated guess about you whether or not you'd think it'd be safe to put

a certain amount of money to that company and get their tokens back and hopefully at some point in the future then be able to do the reverse and get your cash back at the end of it. So what's been the problem with Teather's reserves? So at present, Tether files at the stations on its reserves. Quarterly they come from an accountancy partner that it has set up in That accounty partner has changed over time. Originally, back when

these documents first start to come out. They'd kind of come out on an ad hoc basis around twenty eighteen. But in February one tell their incident into assessment with the New York Attorney General alongside its sister crypto exchange bit for nex because the New York Attorney General had accused Tether of lying about its reserves, and the two

settled on those charges. And I want to read from that settlement agreement, or at least, you know, from at least the New York Attorney General side, because it was pretty it was pretty aggressive from from New York. It said, and this is a statement from New York Attorney General the teacher James bid for x and Tether recklessly and unlawfully covered up massive financial losses to keep their scheme

going and protect their bottom lines. Tethers claim that its virtual currency was fully backed by U S dollars at all times was a lie. In response to that statement from the New York Attorney General, you know, Tether said that they share a goal of transparency, of they share the Attorney General's goal of increasing transparency. But they also said, and I quote, contrary to online speculation, after two and a half years. There was no finding that Tether ever

issued tethers without backing or to manipulate crypto prices. When we say they accused them of lying, they straight up did accused them of lying. Tether, of course came back and what did you know, what did they do in response? In response to those accusations, Tethers now side to file those at a stations quarterly, and they've been coming from

accountancy firms kind of around the world. The first partner was a company called more Um, and then they started using a Cayman Island's accountancy firm called m h A Cayman for two stations, and then most recently in July, they said they'd switched to using another firm called Video specifically it's Italian subsidiary UM. And each time these accounting firms have gotten, you know, slightly bigger in size. Video

is the fifth largest accounting network in the world. But ultimately, all these ATTA stations are are an agreement by an accountants. You found to say, you know, Tether's accountants presented us with these figures. They presented us with a set of their accounting policies that are set by Tether Management, and we agree that these figures roughly meet the accounting policies that Tether says it meets. It doesn't actually, you know,

take a look at the data underneath the numbers. They don't go into someone's bank account and poke around and say, yeah, that's that looks about right. Um. And that's the difference between an at a station and a full audit, which Tether has yet to have, but some of its rivals do have. Circle has been having annual audits now for for a while, you know. I think it was maybe in June that Circle's CFO, Jeremy fox Gen, put out a statement that Circle's financial statements were being audited annually

and that they have those monthly at a stations. Okay, so great. So it sounds like all of these stable

coin folks have now said, hey, here's our stuff. Why are people still worried about the assets that these firms say they are backed by if there's all of this paperwork floating around, I think one of the biggest concents that these are still pretty much unregulated markets from a crypto perspective, right be once you, for example, if you if you give a dollar to tether, and Tether then gives you one U s DT in return, it will have some kind of track record of that purchase happening.

But once the U s DT is out in the open, it stops paying attention. So where those tokens then go that's less of a of a clear market. And the problem is is that these tokens, even after they've passed beyond the realm of being controllable or um having any kind of scrutiny over them by the issues themselves, they can be used for whatever and then brought back to an issue and be exchanged again for a dollar and

you get your dollar back. And so it's that murky gray area of what happens to the token while it's

out in the crypto ether that regulates are concerned about. So, particularly after the crash of terror USC early this year as well, where around forty billion dollars in stable coin collateral was lost, regulators have in moving faster on putting in place rules and regulations for what stable coin issuers need to do in order to assure customers that they do have that money and assure regulators too, right um, and they'll also have to hold only certain types of

assets in the reserves, so you know, you can't be holding anything too risky. It needs to be stuff that's relatively liquid, so that if there was any kind of bank run on your token, you could meet redemptions quickly, easily and at a dollar. We'll be right back with more from Bloomberg's Emily Nicole about Tether's reserves and what ties,

if any, it had to China. So in terms of things that are perceived as risky, you know, there's been this like persistent drum beat for years that Tether holes Chinese commercial paper and specifically lower quality, higher risk Chinese commercial paper as part of its reserves. Tether came out recently and flat out said we don't have any of that. Just you know, what's what's been going on there? Where

did that speculation come from? Well, it should be interesting to note that when they said that recently, they said we don't hold any commercial paper right now, So they never said, you know, we don't hold any We never have um. But so this kind of speculation had been around up where as you said, a few years and then our colleague seek Fox did an investigation into Tether's

commercial paper paper trail. I guess you'd call that. He wanted to find out you know, exactly where the money would lead, and it did lead in his findings to China. There was some paper in there that was of Chinese origins. The reason why this is concerning is because at the time Tether was purportedly backing its dollar pegged token with commercial paper from a region where they were not using dollars.

So if you were running wondering about you know, if there was a bank run on Tether and it was going you know, people were piling into Tether's website and saying, I want my dollars back, and it was going to have to cash out of some of these positions, particularly with the state of the market at that time in China, where some of the people who might have owned that commercial paper were in distressed positions. They wouldn't have been

able to give Tether's money back immediately. That could have then culminated in a situation where Tether wasn't able to redeem the amount of dollars coming in. We also saw at the start of twenty during the pandemic, the commercial paper market itself melted town and so that appropriate added more fuel to the fire of you know, whether a commercial paper should be considered an asset that is liquid

enough to support something like a stable coin. So in the US stable Coin Bill, there is expected to be requirements around what kind of assets these stable coin providers can hold, and commercial paper is like it to be singled out as one that is is not permitted absolutely And in that same blockburst, where as you note they say they hold no Chinese commercial paper and as of today they're reducing their exposure overall, they also say that

they plan to reduce their exposure to commercial paper to zero by the end of October early November. Regulators have been paying a lot of attention to stable coins, and it you know, it really strikes me that so much of what folks have been talking about, folks have been talking about for a long time, right, Like, it's not that we woke up in March of two when everything was going down with with Luna, etcetera, and we're like, wow, this this seems like an area of concern. Is that

people have been concerned for ages. What about the events of this year in particular, do you think have finally started to accelerate that conversation In the UK? For instance, So in the UK, it's kind of as you put it, those stable coin conversations have been happening for a while. They want to make sure that stable coin issuers that

could present bankruptcy risks are given certain provisions. So in May, when Lunas started to fall apart and terra USD collapsed, UM, the UK started thinking about things like bespokensolvency arrangements so that if a stable coin were to get big enough that it was to present a systemic risk to the UK economy, they could step in and help keep that stable coin not afloat but still exchangeable in in payments companies.

You know, if if I was going into a shop and I wanted to buy an orange for a pound, but using whatever stable coin it was that was crashing, I could still do that even if the stable coin

itself was going through bankruptcy proceedings. At present, though, the bankomng AND has said there are no stable point in that are big enough to meet that, not even tether and I think that's that's an important point, right, which is a lot of the regulatory framework is in response to the actual fact of the collapse of an algorithmic stable coin, which is different from the collateralized table coins that we're talking about, and the perceived risk in the

future of one of these collateralized stable coins really you know,

sort of bad things happening to them. But at the time that we're talking, we don't have a current example of a stable coin, like you know, Tether itself is not on a downward trajectory that is specifically worrying regulators right now because for example, when so when Nina crashed, Tether lost about twenty billion of its market cap, but it's it's slowly going back towards that um And even now if we think about like these is, as you said,

these rules were created for a company the size of Matter, so they were created for a token to be as systemic because you know the fact that everybody has a Facebook product on their mobile phone, and we have yet to have crypto or stable points reached that level. So in certain places anyway, the rules are a little bit further out of reach of the market at present, perhaps for the good. So well, thank you so much Emily for joining us. Really appreciate you taking the time, Thanks

for having me. You can find more of Emily Nichol's reporting on the Bloomberg terminal on Bloomberg dot com or follow her on Twitter at Emily J. Nicole. That's n I c O L L E. On the next episode of Bloomberg Crypto, black Rock, the world's largest asset manager, teamed up with the crypto exchange coin Base, in a move that both Wall Streets and cryptotypes are watching pretty closely, not least because of the challenges the coin bases faced recently.

We'll dive into the latest on the partnership and what this all might mean for both Wall Street and cryptom. This is Bloomberg Crypto, a daily podcast from Bloomberg and I Heart Radio. For more shows from I Heart Radio, visit the I Heart Radio app, Apple Podcasts, or wherever you get your podcast. Send us your comments, questions, or suggestions for the show to Crypto at Bloomberg dot net or find us on Twitter. We're at Crypto. The supervising

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