Tether’s mystery commercial paper exposure
Tweets from the stablecoin’s CTO are raising new questions about reserve quality
The public face of crypto’s biggest stablecoin, Tether chief technology officer Paolo Ardoino, laid down the gauntlet this week to hedge funds who are shorting the $66bn market cap token.
Over 12 tweets on Monday, he decried “FUD, troll armies, clowns etc” and said that Tether was “the only stablecoin that is proven with fire under extreme pressure”, referring to the $17bn in redemptions it has processed in May and June.
“Eventually these hedge funds, that borrowed and shorted billions of USDt will need to buy them back. What will happen then?,” he warned.
But in one message, Ardoino may have flagged something important about the reserves backing crypto’s most widely used and most controversial stablecoin.
Some background: Tether issues ‘USDT’ tokens that are used by crypto traders as a dollar substitute. Its $1 value is backed 1-to-1 by dollar assets held in Tether’s reserves.
Controversy about these reserves has raged for years. Tether in 2021 paid tens of millions to US regulators in settlements over its past disclosures.
Today, hedge funds including Fir Tree Partners and Viceroy Research have shorted USDT, the idea being that the assets currently backed Tether are worth less than the tokens in circulation. Tether has strenuously denied that claim.
One suggestion is that Tether may have suffered losses on its commercial paper holdings, which according to a Bloomberg report last year included Chinese commercial paper. Earlier this month, Tether put out a blog post:
Tether is aware of rumours being spread that its commercial paper portfolio is 85% backed by Chinese or Asian commercial papers and being traded at a 30% discount. These rumours are completely false and likely spread to induce further panic in order to generate additional profits from an already stressed market. Tether condemns such attempts which oftentimes see simple users take the biggest hit, while few co-ordinated funds increase their profits.
The post added that Tether’s “current portfolio of commercial paper has since been further reduced to 11bn (from 20bn at the end of Q1 2022), and will be 8.4bn by end June 2022”.
Ardoino this week made a similar comment in his Twitter thread:
So, here’s what one hedge fund that’s short Tether has been pointing out to clients on the back of Ardoino’s tweets.
Looking at the quarterly breakdown Tether has put out about its reserves, the commercial paper holdings should be far lower than $8.4bn if the company had been simply rolling them off into US treasury bills.
An attestation from Tether’s Cayman Island accountant on Tether’s reserves says that as of March 31, 2022, there was $20.1bn in commercial paper holdings and certificates of deposit.
Most of that was short duration. Specifically, $18.9bn was set to reach maturity within 90 days. If Tether was letting its commercial paper holdings roll off, in other words, then by the end of June there should have been just $1.2bn, not $8.4bn.
What explains that gap? Has Tether given payment extensions to someone? Was some commercial paper not fully repaid at maturity? We don’t know. We asked Tether, but have yet to hear back.