The Breakdown - Does Anyone Care About Tether's Chinese Paper?

Episode Date: June 19, 2023

On today's episode, NLW looks at the (non) reaction of the crypto community to news that Tether held Chinese bank debt in 2021. The show also covers reactions to the Binance-SEC hearing last week.  Enjoying this content? SUBSCRIBE to the Podcast: https://pod.link/1438693620 Watch on YouTube: https://www.youtube.com/nathanielwhittemorecrypto Subscribeto the newsletter: https://breakdown.beehiiv.com/ Join the discussion: https://discord.gg/VrKRrfKCz8 Follow on Twitter: NLW: https://twitter.com/nlw Breakdown: https://twitter.com/BreakdownNLW

Welcome back to The Breakdown with me, NLW. It's a daily podcast on macro, Bitcoin, and the big picture power shifts remaking our world. What's going on, guys? It is Monday, June 19th, and today we are discussing Tethers' purchase of Chinese commercial paper as well as Binance's settlement with the SEC. Before we get into that, however, if you're enjoying the breakdown, please go subscribe to it, give it a rating, give it a review, or if you want to dive deeper into the conversation, come join us on the Breakers Discord. You can find a link in the show notes or go to bit.ly slash breakdown pod. All right. Well, between BlackRock and Prometheum to end last week on such a crazy note, there were some pretty important stories that we really didn't have much of a chance to get into. Today we're going to catch up on a couple of those stories, and we're going to start with Tether.

We had a scoop from Ian Allison, which after his reporting around FTX and the Alameda balance sheet, should certainly be enough to get us paying attention. Last Thursday, Tether's balance sheet from March 2021 was released to the media. The release came as part of a settlement with the New York Attorney General's Office. Tether had provided financial records as part of the lawsuit, which were later requested via a Freedom of Information law filing by multiple media outlets. In the lead-up to the release, Tether had sold off sharply, unbalancing the curve-3 pool. Tether spiked to represent over 70% of the liquidity pool, and the stable coin was

transacting at half a cent off its dollar peg. Now, Tether front ran the reporting with a blogger. post on Thursday. They claim that, quote, Tether has nothing to hide, and we hold utmost confidence in the accuracy of our financial figures. Their take on the financial disclosure was that it would show, quote, the legitimacy of Tether's business and the existence of its reserves. However, hedging their bets, they also noted that, quote, the materials are outdated and do not accurately reflect the present state of our reserves. With tensions heightened going into Friday, Tether truthers were on the edge of their seats. Would this be the reporting that finally blew the lid off?

Well, what we got was financial documents that didn't appear to show much other than what was widely already rumored. The major headline was that Tether was once partly backed by Chinese securities. In 2021, Tether held billions of dollars of short-term bonds issued by Chinese corporations, as well as a sizable loan to now bankrupt crypto lender Celsius. In October 2021, Tether had claimed not to have any exposure to collapsing Chinese real estate giant Evergrand, but refused to comment on other Chinese corporate paper backing the stable coin reserves. The March 21 balance sheet shows that Tether held paper issued by major state-owned enterprises, including the Industrial and Commercial Bank of China, the China Construction Bank, and the Agricultural Bank of China. Following that period

of stress in Chinese bonds, Tether committed to removing all corporate paper from their reserves, switching to a mix of sovereign bonds and hard assets. If current attestations are to be believed, Tether now holds less than half a percent point of their reserves in corporate bonds. Tether responded to the reporting in a blog post stating, quote, Tether's exposure to Chinese commercial paper was predominantly in the banking sector, but all Chinese paper held was liquid and issued by large and well-known issuers in the international commercial paper market. All of these issuers were stable, and much of this paper was and is held by some of the world's largest investment managers within conservative portfolios.

The Chinese banking-related commercial paper at issue was rated A1 or better, end quote. Tether also claims to have sustained no losses on commercial paper to date. Now, in addition to Chinese corporate paper, Tether also held securities issued by major international financial firms, including Deutsche Bank, Barclays, and also held securities issued by the Qatar National Bank and the Emirates NBD Bank. Now, the documents also showed a number of Tether's banking relationships. According to the documents, Tether maintained bank accounts with Deltech Bank and Trust, Ansbacher, Bahamas, Capital Union Bank, and Far Eastern International Bank. They also held funds with Bradbury Investment and Mettus Global Partners, as well as having some U.S. dollars in Bitcoin on deposit with affiliated crypto exchange Bitfinex. Interming League of funds was addressed in the documents, with Tether's lawyer attesting that corporate funds were held with

Deltick and Far Eastern International Bank in separate accounts. They claim that only Tether's chief financial officer and chief investment officer had the authorization to move corporate funds and that they never used reserve funds for operational purposes. One interesting tidbit from the documents was that Tether were a major lender in the industry, with 5.1 billion loaned out across fewer than 30 borrowers. All loans were secured with digital assets or securities. For comparison, Genesis, which was then one of the largest lenders, maintained a loan book of around $9 billion back in March 21. The documents also disclosed details of the previously reported loan to Bitfinex. Tether had loaned $600 million in 2018, with the loan repaid in full by

January 2021. The loan was first made public in April 2019 when the New York Attorney General's office alleged that Bitfinex had lost $850 million in customer and corporate funds to pay and processor Crypto Capital Corp. The takeaway from the documents is probably the extent to which at one point, Tether's reserves were reliant on corporate paper. Over the past few years, a picture of Tether's reserves had slowly developed via investigative reporting and disclosures from the firm. It had previously been clear that Tether were partially backing their stable coin with commercial paper, but the asset mix was never fully disclosed until recently. These documents do not provide a full breakdown of the reserve mix in March 21, but corporate paper holdings

appear to be substantial. The majority of reserve assets were held with Deltech Bank at the time, with more than 60% of holdings with that institution being invested in corporate paper. Including the $5.1 billion in lending to the crypto industry, Tether appears to have held full reserves in March 21, with $40.6 billion in assets, roughly matching the $40.8 billion in issuance. Tether's response to the reporting asserted that, quote, Tether's transparency regarding its lending program and the most recent attestation is crystal clear. There is absolutely nothing new to unveil, as we have consistently upheld our commitment to openness. Tether has never and will never put the integrity of its reserves at risk.

This has been proven time and time again, not only by its unwavering ability to fulfill redemptions without hesitation, but also through the utmost transparency of its reserves. Now, over the weekend, the defy sell-off appeared to come to a close. Curve has slowly rebalanced and is now back to around 50% of the liquidity pool being held in Tether. Now, if you've been around this space for some time, this will surprise you not at all, but people's takes on all this news is almost completely dictated by their priors. The BitFinext account said, I told you, print Tether out of thin air, trade to CNY, buy Chinese paper.

No USD backing just reserves trapped in China that can't be taken out of the country. Meanwhile, on the other end of the spectrum is Jibis 9-11, who says, In 2050, the only companies left in the world will be Tether and Taco Bell, and people will still think Tether is a scam. Investor Adam Cochran tried to hit a nuanced middle line. He wrote, So what we know, as of 2021, Tether had exposure to private loan collateral for Bitcoin and ETH, covering up to 20% of U.S.,

USDT rather than just one-to-one. It had high exposure to Chinese commercial paper during shaky times. It worked with third-rate banks I'd never deposit at. Has it cleaned up its act? Maybe. I think it's decreased its exposure to commercial paper and crypto assets. But do I think it's perfectly safe one-to-one and reliable assets? Less likely. And I doubt their banking partnerships have improved. If USDT has cleaned up its act to the point of being pristine, they should simply release this level of reporting details from last month as a side-by-side comparison for consumers to make their own assessment. I can understand why they wanted this suppressed. It's not the absolute zero dollar that Tether truthers wanted, but it certainly shows the kind of risks you are exposed to with Tether.

I'll add that Occam's Razor here is not that Tether set out to buy shitty stuff for profit, but that managing $20 billion to $80 billion is a hard problem that most teams can't handle and need to grow into. If that's the case, they should be able to prove that improvement. It's really hard from where I'm sitting to see how this changes much at all when it comes to what people think about Tether. It confirms that they did have exposure to Chinese debt, but it doesn't at any point suggest that there was any sort of under collateralization. It shows that Tether works with less than stellar banks, but one, who doesn't at this point in the crypto industry? It's not like great banks are lining up to service us. And two,

it's probably worth noting that the Sablecoin that got screwed up by its banking relationships wasn't Tether. It was USDC, and that bank was Silicon Valley Bank. Ultimately, it doesn't really matter what the squawkers on Twitter or the podcasters think. The market is, voting with its dollars. And to look at stable coins in 2023, it's pretty clear that crypto markets view compliance with U.S. regulatory regimes as a bigger risk than whatever the hell tether has going on. Make of that what you will. Our second story is an update in the Binance suit. After failing to convince a judge to urgently freeze the assets of Binance U.S. at a hearing last Tuesday, the SEC was forced back to the negotiation table. On Friday, a deal was announced

on a more limited set of orders that would allow Binance U.S. to continue operating. Under the deal, customer assets for the U.S. platform can only be accessed by onshore staff. Fresh wallets will be created to ensure that access is limited to domestic staff, and international finance staff will also be restricted from having route access to cloud services for the exchange. Finance U.S. will be allowed to continue to pay regular operating expenses, a contentious point of the hearing. The exchange will provide detailed information about these expenses for approval in the coming weeks. The key SEC concern addressed in the hearing was that customer assets were being held offshore and thus vulnerable to misappropriation. The judge hearing

the case appeared to push back on the SEC's argument, however, finding them unable to back this allegation up with solid evidence that any misuse of funds had occurred. At the conclusion of the hearing, the judge noted that drafting orders would take at least two weeks, given the some 4,000 pages of documents filed by the SEC. Instead, it was suggested that a compromise could be reached between parties on a faster timeline, given that they were not particularly far apart. The judge signed off on the consent orders on Saturday morning and ordered parties to begin proposing timelines for the broader lawsuit. Binance U.S. has agreed to provide full accounting on an expedited time frame, so the discovery process is expected to move quickly. SEC Enforcement Division

Director Gerbier-Grawal said in a statement, given that CZ and Binance have control of the platform's customers' assets and have been able to co-mingle customer assets or divert customer assets as they please, as we have alleged, these prohibitions are essential to protecting investor assets. Further, we ensured that U.S. customers will be able to withdraw their assets from the platform while we work to resolve the alleged underlying misconduct and hold CZ and Binance entities accountable for their alleged securities law violations. For his part, CZ tweeted, although we maintain that the SEC's request for emergency relief was entirely unwarranted, we are pleased that the disagreement over this request was resolved on mutually acceptable terms.

User funds have been and always will be safe and secure on all Binance-affiliated platforms. Now, again, just like in the case of Tether, how, everyone read this was by and large determined by the priors that you are bringing to the conversation. For example, Gary Gensler's Twitter twin John Reed Stark said, once approved by Judge Jackson, this consent order will be one of the most burdensome, awkward, inconvenient, and far-reaching crypto-related orders in SEC history. The stark reality is that the SEC has been given a role akin to a Binance independent consultant, a remedy often granted to the SEC after the SEC prevails in an enforcement action. Should any finance defendant violate any provision of this order,

U.S. DOJ could step in and file obstruction-related charges. So fail not at your peril, Binance. Meanwhile, Fox Business Journalist Eleanor Territ says, News from an industry insider in response to the judge's Binance SEC TRO ruling. Her source said, quote, Binance put out of restraint public response to the TRO ruling out of respect for the judge, but they are celebrating what is a crushing defeat for the SEC. Rarely are government agencies denied a TRO by the courts. Judge Berman holding the SEC's feet to the fire on not having the evidence to suggest funds have been

misused, sends a clear message to regulators across the globe, that the SEC doesn't have the goods to substantiate their most damaging allegations. And then, of course, there's the folks in the middle who basically say some version of this could have been worse. James Murphy at Meta Lawman writes, I would put this in the win column for the Binance defendants. The consent order is very close to what Binance offered to the SEC at the outset. The important thing is, this is a consent degree and not a temporary restraining order. This means the judge will not make an early determination that the SEC has a, quote, substantial likelihood of success on the merits if the case were to proceed to trial. Good job by the Binance legal team. Adam Cochran, however, didn't agree,

saying, in taking the SEC settlement on this term, you are admitting that Binance U.S. funds were indeed commingled on other platforms and in non-Binance funds. User assets were not kept one-to-one on the exchange where users expected. Still, James responded to that, saying, if the parties had not come to an agreement, there was real risk the judge could enter a far worse order for Binance. For Binance, however, this was not the only issue they were facing last week. In France, Binance's French business unit is under investigation, for example, by the local authorities. Paris public prosecutors told CoinDesk that the exchange is being investigated for illegal provision of digital asset services and, quote, acts of aggravated money laundering. Part of the investigation relates to

the exchange operating in Europe prior to receiving the appropriate approvals in May of last year, but the more concerning part of the investigation relates to, quote, aggravated money laundering by taking part in investment operations, concealment and conversion, the last being carried out by perpetrators of offenses having generated profits. A Binance spokesperson said, we continue to work closely with regulators and law enforcement agencies on all ongoing compliance requirements to uphold high standards. CZ tweeted, four, fud. In France, surprise, no advance notice on-site inspections of regulated businesses are the norm for banks and now crypto two. The surprise visit for Binance France happened a couple weeks ago. It's not quote-unquote news. Binance France

cooperated fully. Binance isn't the only crypto business inspected. This happens to other well-known crypto businesses in Paris too. Binance France continues to be our flagship center in Europe. Ikeye Funds Travis Kling is not buying it, though, saying you are straight up not telling the truth here. Meanwhile, in the Netherlands on Friday, Binance closed its doors to Dutch customers after failing to obtain a license to operate. Binance didn't elaborate on why they were unable to receive approval from the domestic regulator, but whatever the reason, no new users will be accepted and existing customers will be unable to buy, trade, or deposit additional funds. A finance spokesperson said the firm is, quote, committed to working collaboratively with regulators

around the world and are additionally focused on getting our business ready to be fully Mika compliant. You got to think that there is going to be a lot more jostling as Mika comes online and European authorities get prepared along those lines. For now, however, that is the wrap up for today. Ultimately, this is one big Rorschach test for how you feel about these companies and the industry as a whole. But to the extent that you're looking for something positive, I think this is a necessary

part of the process we have to go through, so let's just try to go through it as fast as we possibly can. Until next time, guys, be safe and take care of each other. Peace.