As the crypto bull market has turned into a rout, speculators and investors have been exiting stablecoins in droves. Amidst this chaos, the world's largest stablecoin issuer - Tether - is about to release its most important reserves report or attestation yet. Below, learn why Tether's upcoming attestation is crucial and what investors are likely to look out for.
It's been a difficult few months for stablecoins. According to Coin Metrics data available at The Block, the total value of the stablecoin market has fallen from $182 million in April to $154 billion today, a rapid 15% decline.
J.P. Koning, a CoinDesk columnist, worked as an equity researcher at a Canadian brokerage firm and as a financial editor at a major Canadian bank. He runs the popular blog Moneyness.
Most stablecoins held firm to their pegs during the Great Stablecoin Pullback of 2022, including the second- and third-place USD Coin (USDC) and BinanceUSD (BUSD), both based in the United States. The decline in value of these stablecoins is entirely due to a decline in volume as people exchange stablecoins for real U.S. dollars. The value of large decentralized collateralized stablecoins like DAI and MIM has also held up as people redeem them for underlying collateral like Ethereum (ETH) and USDC.
This shrinking of the amount of stablecoins is a healthy market reaction. As crypto activity has died down in recent months, fewer stablecoins are needed to keep the crypto economy going. It is up to stablecoin issuers to scoop up unwanted stablecoins to reduce their supply and keep their price at $1.
Unfortunately, other stablecoin bonds have collapsed completely, most famously terraUSD (UST), an under-collateralized "algorithmic" stablecoin trading at 9 cents at the time of writing. Several other unsecured stablecoins, including Neutrino USD (USDN) and DEI from Deus Finance, also saw large deviations from their peg. Kava Network's USDX recently fell to 80 cents, reportedly due to its exposure to terraUSD support.
And then there's Tether (USDT), the largest stablecoin in the world. The price of Tether on major exchanges such as Coinbase (COIN), Binance, Uniswap and FTX temporarily crashed to 95 cents on March 12. Since then, it has rebounded toward $1.
However, the tether price has not quite fought its way back to the $1 level it was holding on to before March 12. On major central exchanges such as FTX and Coinbase, Tether is trading at just under $1. On the decentralized stablecoin market Curve, 100,000 USDT can only be converted into 99,851 USDC, a small but notable discount. Also of concern is the continued imbalance of Curve's 3pool, a major source of stablecoin liquidity, as Tether now accounts for 74% of the value included.
All of this suggests that there are still too many Tether stablecoins on the market and that the only solution is to further limit supply.
Tether has already shrunk drastically in the last week. After peaking at 83.2 billion USDT in circulation just last week, redemptions have reduced that amount by 11% to 74.2 billion. To reiterate, a reduction in supply is not inherently unhealthy. There is less demand for Tethers and supply will need to be reduced to meet that demand.
However, more redemptions will be needed to bring the tether price back to the tight $1 mark on all trading venues. Add to that the possibility that the prices of Bitcoin, Ethereum, and other coins will continue to fall, and the supply of stablecoins could shrink further.
Is this something Tether can handle?
Unfortunately, the big stablecoin pullback of 2022 comes at an inopportune time for Tether users. Thanks to Tether issuer's policy of only releasing reserve reports every 90 days, they have a lack of timely information about the assets used to back USDT.
When a stablecoin issuer releases stablecoins to the market, it typically holds a corresponding asset in reserve to secure or back the commitment of the stablecoin. When redemption requests are received, these reserves are depleted. Because a stablecoin's reserves are key to ensuring stability, the large, centralized stablecoin issuers have moved to provide information about their assets. Periodically published attestation reports ask an independent auditor to confirm the amount and composition of the reserves backing the stablecoin.
USDC and BinanceUSD officials publish monthly certifications. Unfortunately, Tether has the slowest attestation schedule of all, with quarterly reports. Since Tether's March 31 report still hasn't been released, investors will have to rely on Tether's December 31, 2021 report. But that was ages ago in the cryptocurrency era.
Tether's old report had a lot of good things to offer. As of Dec. 31, 44% of Tether's $79 billion in assets were held in secure Treasury securities issued by the U.S. government. This is a big improvement over previous quarters. When Tether began disclosing the composition of its assets to the public in early 2021, only 2% of its assets were in Treasury bills, while a whopping 50% had gone into riskier commercial securities whose ratings were not disclosed.
The percentage of commercial paper held by Tether has been steadily reduced over time, reaching 31% on December 31. And thanks to Tether's improved disclosure, we now know the rating of these papers: most were A-1 or A-2, which is considered investment grade.
Another $4.2 billion, or 5%, was invested in safe cash and bank deposits as of December 31.
This combination of safe investments - cash, investment-grade commercial paper, and Treasury bills - was excellent fodder for the first tether redemptions of about $9 billion. It will also be invaluable for subsequent redemption requests.
These improvements are the result of an awkward and confrontational dance between Tether executives and so-called "Tether truthers." To counter the critics, the company was forced to release more and more internal data, which fueled the criticism even more, prompting Tether to make follow-up changes such as shifting into safer assets like Treasury bills. Tether now has a viable front-line defense against redemptions - thanks in no small part to its critics.
But there were also problems with Tether's Dec. 31 certification. The most troubling part was the $5 billion in "other investments," which represented 7% of Tether's total assets.
What exactly are these investments? Has their value suffered from the general collapse of crypto prices in recent months? Unfortunately, we don't know the answers to these questions, as Tether doesn't disclose information about its "other investments."
Another less than stellar contribution to Tether's December 31 reserve report was the 10% invested in a combination of collateralized loans ($4.1 billion) and corporate bonds, funds, and precious metals ($3.6 billion). Tether provides little information about the quality of these investments.
These are all questions that Tether owners will likely want more clarity on as they watch how Tether handles the current round of redemptions. In the upcoming March 31 certification report, which Tether should release in the next few days, investors will be looking for some certainty on these issues.
So what would the perfect March 31 attestation report look like?
Ideally, Tether will have shifted even more of its customers' funds into Treasury bills and cash between Dec. 31 and March 31. The hope is that this shift into T-bills will have crowded out riskier investments, particularly the opaque "other investments" category. The safer Tether assets were before the big stablecoin pullback in 2022, the more investors can be confident that USDT's peg will hold.
Investors will also want to know more about the quality of Tether's more opaque asset classes. Without clarity, they may begin to worry that Tether's "other investments" or secured loans were impacted during the big collapse in crypto prices. These concerns, whether justified or not, could trigger additional redemptions as Tether holders line up to secure Tether's safest collateral.
In addition to the hoped-for improvements in Tether's investment quality, Tether needs to publish more frequent certifications to fill information gaps like the one investors currently face. Tether once boasted that it leads the industry in transparency. But on that score, it lags behind USDC, which publishes monthly reports.
It would be even better to copy its competitor TrueUSD and trade in real time. Can't sleep on Saturday nights and want to see if your stablecoin is still well hedged? TrueUSD offers 24/7 real-time confirmations. Stablecoin owners shouldn't have to rely on information from 137 days ago when market conditions collapse.
Let's hope that Tether's attestation will come out soon and dispel all worries. Tether is still the most important tool in the crypto economy. Everyone is watching it.