Here’s what I think about USDT, and it’s based on independent research and conversations with the biggest users of Tether, as well as prominent attorneys with a good overview of the regulatory situation. I’m not going to dox anyone, but it doesn’t take a genius to figure out who I mean.
For this particular proposal, there are 3 USDT risks to consider:
- USDT onchain liquidity
- Redemption of the underlying assets
USDT onchain liquidity
Tether is without doubt one of the most liquid assets onchain. The 3pool on Curve is one of the most liquid DeFi pools and contains circa 260mil of USDT:
There is another 200mil of USDT on Uniswap as well:
The more prominent risk is (2)
Redemption of the underlying assets
This is what the FUD is about. Does Tether hold enough high-quality assets to back redemptions?
First of all, what are redemptions and why are they important?
For USDT to be trading at 1:1 to USD dollar, one needs to be able to redeem 1 USDT for 1 USD at any time.
For eg, if you see USDT at $0.99 on Bitfinex, you would buy 1 million USDT at $0.99, call Tether, and ask to convert 1 million USDT into 1 million USD. Tether would either give you the cash from their reserves, or sell cash-like assets (short-term US government debt) into cash and hand you $1 million.
Since you bought $990,000 worth of USDT and redeemed it for $1,000,000, you’ve just made a risk-free $10,000. Pretty neat. But imagine you could lever up and buy billions of $ worth of USDT and make even more money! This is exactly what funds such as the one proposing this would do. It’s an extremely lucrative strategy, and it relies on the ability of Tether to meet these redemptions. Because of that, USDT can maintain the peg as it’s always profitable to buy it to redeem.
The FUD is essentially that in the event of a USDT selloff, either (1) the assets won’t be there or (2) they are not high-quality assets and can’t be immediately sold for cash.
And this is what these 2 important settlements with CFTC and NY Attorney are about:
Basically, the NY attorney and CFTC accused Tether of not having enough funds to cover all the redemptions for a few reasons:
- The money designated for redemptions is unavailable because it’s loaned out to Bitfinex (who has same owners as Tether) or it’s operationally inaccessible ($850 million was supposedly lost to Crypto Capital, a payment processor company).
- Tether funds were not ring-fenced from Bitfinex funds.
Another fear is that Tether holds too much commercial paper (short-term loans to companies) that cannot be sold easily to meet liquidations.
So why do I think these risks are overblown?
Tether needs to submit detailed reports to NY Attorney on the composition of USDT reserves, proof of ring-fencing and what payment processors they use (Section 57) according to the settlement:
Tether has also commissioned a proof-of-reserves from BDO (top 5 auditing firm) and it was released at the end of August 2022:
Here’s the breakdown:
Commercial paper is a decent chunk, but in the footnotes we see that: The average
duration of items in this category is 27 days and the average rating is A-1. A-1 is the highest rating CP can get according to S&P.
Basically, it would be insane now for Tether to lie about their reserves because they’d be in BIG trouble with the authorities, as they’d be submitting false reports. I don’t think anyone in their right mind would do that.
What about the redemption mechanism?
If you talk to the big boiz using Tether to buy USDT and redeem it from Tether for profit, everyone is extremely happy. They praise USDT’s redemption mechanism for its reliability even during turbulent times.
The only complaint I’ve heard is that the Bahamas-based bank handling the redemptions on Tether’s behalf is constrained by market hours at times, leading to delays in redemptions during odd hours. So for eg if you bought 500 mil USDT at 0.99 and want to redeem it at $1 during Asian trading hours, you might have to wait a few hours till the Bahamas bank staff are online.
Nevertheless, it only leads to volatility for a few hours before arbitrage is possible again, meaning it does not pose significant systemic risk as there is a USDT:USD price at which everyone will definitely bid even if there’s a redemption delay.
All in all I agree with this proposal. Liquidity is great, the redemption mechanism and transparency around it has improved greatly. USDT should imo be collateral on Euler Finance.