In today’s Money Morning … Tether could be a useful fiction, just like Fiat … DeFi may need to find a new stablecoin to really advance … but go fast, the new game has already started … and more …
Have you heard of Tether or USDT?
It is a stable coin, which means that it is pegged to a fiat currency.
In theory, you can redeem tether for greenbacks.
Yes, the same currency that Jerome Powell presides over.
But how redeemable is tether?
That question is worth answering, and the DeFi scenery is quite a rabbit hole, I have to admit.
Let’s start with some broad brush strokes.
Tether could be useful fiction, just like Fiat
The first thing I don’t like about Tether is that it comes from a central entity called iFinex.
It’s a complex web, but a British Virgin Islands company – iFinex – is the parent company that operates both Bitfinex (a huge exchange) and Tether.
iFinex recently faced a rather gnarled lawsuit in New York.
You can read all about it and go through their attorney’s affidavit in this CoinDesk article.
iFinex eventually settled on a complicated and opaque loan agreement between the two companies they control for $ 18.5 million to cover a potentially risky arrangement with a Panamanian company called Crypto Capital.
Which in a way brings the problem to bed.
That being said, one of the main findings of Tether’s New York investigation was that they needed to release a breakdown of their reserves.
What you can see below:
As you can see, just over 65% of that initial 75.85% is “cash” in “commercial paper”.
What on earth is that, you might ask?
Well, according to Investopedia, commercial paper is:
A commonly used type of unsecured short-term debt issued by companies that are typically used to fund payrolls, liabilities, and inventories, as well as other short-term liabilities. The maturities on commercial paper usually last several days and are seldom longer than 270 days. “
But as a scientist quoted by CoinDesk states:
‘Due to the creditworthiness of different companies, not all commercial papers are created equal. Even some of the multinationals that used to be flawless are no longer like that. ‘
For some, this could mean that Tether’s “reserves” breakdown smells a bit like repackaging of potentially dubious debt à la GFC.
But let’s focus on the money – that’s 3.87% of that 75.85%.
That is significantly less than all of the 10.5% required by the Aussie Big Four for Common Equity Tier 1 (CET1).
I won’t go into that. Suffice it to say that it is a bit more expansive than cash.
However, there is a relevant question to be asked. Could there be a run on the DeFi ecosystem, similar to a bank?
It is worth noting that it is difficult to redeem your tether for “True Blue” USD. Tether requires a minimum of $ 100,000 per transaction and creates a 0.1% clip for the transaction.
That doesn’t sound good, and it implies that just like Fiat, Tether is a useful fiction.
That is why this AIMultiple article is headed, “Tether USDT May Be a Scam, but it May Remain Valuable”.
A valuable scam you say …
The minimum transaction amount of 100,000 would reduce the incentive to repay, but what if the USD goes crazy again as it did in March 2020?
The USD looks precariously placed as you can see below:
It is conceivable that another market crash could trigger the foreseeable tide in the USD and in turn trigger redemptions by tether whales or large-scale owners.
Then part of the DeFi system could dissolve.
How much does DeFi rely on Tether?
DeFi may need to find a new stablecoin to really advance
There is a great recap of the DeFi landscape published by GlassNode that is well worth reading.
This graphic shows you the dominance of Tether (USDT):
As you can see, USDT outperforms the competition USD Coins (USDC) and DAI many times over.
For my money, based on what I’ve seen from Tether, I’d prefer either of these.
In this regard, things can change over time.
Take USDC, for example, which is more transparent about its support (via CoinDesk):
Jeremy Allaire, Chief Executive Officer of Circle, part of the CENTER consortium (with Coinbase) that manages USD coins (USDC (-0.04%)), says that cryptocurrency market traders need stable coins to keep up with the constant flow rapidly moving rising prices for digital assets.
“If you are active in the markets, you will be keeping your money in a stable coin because it is radically faster, cheaper and better than the old banking system.”
‘Allaire’s USDC is, in many ways, the kind of transparent stable corporate coin it promises to be. The top 20 crypto asset has a market capitalization of nearly $ 5 billion and a daily trading volume of $ 2.7 billion at press time. The CENTER consortium publishes certificates from the accounting firm Grant Thornton LLP each month to demonstrate that the USDC amount in circulation matches the dollar amount declared in a bank account, which means that the asset is fully backed by dollars. In accounting, certificates differ from exams. Auditing is defined as an independent review of data, while attestations evaluate and verify how true data is. “
DAI may be more complex to wrap your head around as well.
Here’s the key to success: DeFi may no longer have to rely on Tether to build the trust it needs for the big institutions.
Ultimately, that’s what it is about.
I would hate to see a run on DeFi triggered by a lack of it.
I’ll admit today’s play is more of a devil’s advocate than a cheerleader.
But that’s the necessary dose of skepticism you need to evaluate your options in what Greg Canavan and Ryan Dinse refer to as the “new game”.
Finally, a quote from Sun Tzu that I recently rediscovered:
“Weigh the situation and then move.”
Sun Tzu, The Art of War
Move quickly, the new game has already started.
For money tomorrow
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