In Terra's Wake Could Tether (USDT) Be Next?
Introduction
Long beleaguered by concerns regarding its cash reserves, in the wake of the Terra/UST crash, Tether faces more concerns. As Tether's peg with the United States Dollar is backed (supposedly) by cash, bonds, and Treasuries, each individual token is to be backed by $1 worth of liquid assets. Nonetheless, the secrecy surrounding Tether's asset backing and use of commercial paper heightens the scrutiny on this stablecoin, especially given the current state of the market.
So is Tether Destined to Fail in the Wake of Terra/UST?
The answer to this inquiry is not likely, however, certain current events call the situation surrounding Tether into question. Fallout from the Terra debacle of the past week may be seen in Tether as outflows from the stablecoin have reached an average of $1.1 billion per day over this past week.
Tether's market capitalization fell by approximately 7.8% to $76 billion during the past seven days as investors have cashed in $7.7 billion of the stablecoin. Tether first reported its cash reserves in December, 2021, wherein it reported holding merely $4.1 billion in cash. So the amount investors withdrew from Tether was nearly double the amount the company held in cash. Red flag? You decide.
At present Tether seems though to be avoiding a 'bank run' scenario like what struck Terra. A separate Assurance Opinion issued by the company and its Accountants, shows 6.36% of Tether’s assets are currently held in cash, 52.41% in Treasury Bills, and 36.68% in Commercial Paper and Certificates of Deposit (as well as 4.55% in Money Market funds) [Tether. Transparency. (Accessed May 17, 2022)]. So, if Tether's reserves closely match its market cap, the company is holding $4.8 in cash.
On Thursday, May 12, 2022, market fears caused the trading pair of USDT/USD to trade below $0.99 on most major exchanges. To assuage fears, Tether issued a statement whereby it guaranteed all redemptions would be honored at $1.00. On the same day, Tether reported that it had reduced its exposure to commercial paper as reserves and that a majority of said reserves are now in Treasuries.
A New Safe Haven? Maybe
The secrecy surrounding Tether's reserves fostered by the company coupled with the the short-lived depegging, has caused a rush to swap Tether for Circle's USDC stablecoin. Why you ask? These moves are based on the notion that the USDC reserves are held fully in United States cash and treasuries, and, that the USDC project is fully audited.
Jeremy Fox-Geen, Circle's CFO, reaffirmed:
The USDC reserve is held entirely in cash and short-dated U.S. government obligations, consisting of U.S. Treasuries with maturities of 3 months or less. As of 12:00pm EST Friday, May 13, 2022, the USDC reserve consisted of $11.6 billion cash (22.9%), $39.0 billion U.S. Treasuries (77.1%), for a total of $50.6 billion (100%), and there were 50.6 billion USDC in circulation. Since launch September 2018, we have published monthly attestations from a leading global accounting firm, that the USDC reserve is worth at least as much as the number of USDC in circulation, providing reputable third-party assurance of this fact to the USDC ecosystem.
[Geen, J. How to Be Stable — USDC Transparency and Trust. (Accessed May 17, 2022)].
The migration to USDC is verified by data obtained from CoinGecko [See, CoinGecko. USD Coin (USDC). (Accessed May 17, 2022)]. Starting May 3, 2022, there has been a 6.3% increase in the USDC market capitalization which translates into a $3.1 billion inflow since that time [see, e.g. Coghlan, J. Stablecoin supplies and cash reserves in question amid crypto exodus. (Accessed May 17, 2022)].
Final Thoughts
Yes, there is panic in the crypto markets as a result of the Terra fall from grace. Nonetheless, it appears that smart and savvy investors are finding safe alternatives to use to remain in the market pending recovery from the Terra/UST crash.
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