The Breakdown - Tether’s Reserve Attestations: Commercial Paper Down, Treasurys Up

Starting point is 00:00:04 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. The breakdown is sponsored by nexus.io, near NFTX, and produced and distributed by CoinDesk. What's going on, guys? It is Thursday, May 19th, and today we are talking about Tethers' latest reserve attestations. Will they be enough to quell discussion of Tether's viability? Post-UST. Before we get into that, a quick administrative note. There are two ways to listen to the Breakdown podcast. You can find it on the CoinDesk podcast network feed, which features the breakdown as well as some other great shows from CoinDesk, or you can get it on the Breakdown-only feed. The Coin-Dest

Starting point is 00:00:53 feed comes out in the afternoon, and the breakdown-only feed comes out in the evening. Wherever you are listening to it, I hope you'll take a moment to give it a rating and a review. It really helps out the show. Lastly, a disclosure as always, in addition to them being a sponsor of the show, I also work with FTX. So let's wade into a field of landmines and talk about tether, shall we? On yesterday's show, I talked about how much focus there has been on tether in the wake of the U.S.T implosion. A part of that, of course, is that so many critics assumed that it would be tether to be the stable coin that would have a catastrophic event. The discussion has been around the $9 billion or so of redemptions in the last few days. Some have pointed to that as proof of

Starting point is 00:01:35 tether's weakness, while others pointed out that being able to quickly redeem billions might be a sign of strength. Either way, this morning we got a Bloomberg piece called Barclays warns even fully collateralized stable coins, may be prone to downward spiral. Here is the very confusing argument from a Barclays analyst. Tethers investors can either redeem their holdings directly from Tether like a money fund redemption, assuming they meet the minimum redemption size, or they can sell them in the secondary market. We think that willingness to absorb losses, even though U.S.DT is fully collateralized and has an overnight liquidity buffer that exceeds most prime funds, suggest the token might be prone to preemptive runs. We suspect that the liquidity in

Starting point is 00:02:13 tokens such as tether is directionally sensitive. When crypto asset prices rise, it's easy to sell stable coins, as there are plenty of eager buyers ready to acquire the token at par. But this liquidity quickly dries up when other crypto asset prices fall, such as on March 17, 2020, or last week. Even modest selling causes prices to gap lower and transaction sizes to shrink as buyers disappear. In Tether's case, the pressure to sell is intensified by the inability of most investors to redeem directly, as well as the inherent first mover advantage, to sell the token quickly before its price falls even further. So effectively, the entire article amounts to a long-winded way of saying that if confidence fell dramatically and everyone raced for the exit, it would be bad.

Starting point is 00:02:53 Which is sort of like, yeah, bank runs are bad. That's why we don't. try to avoid them. Now, to give the authors their due, I think that the point that they're trying to get at is that the specific mechanism of redemption, or the fact that Tether has minimum redemption sizes, means that there might be more pressure on market selling if people are trying to exit their positions than there would be otherwise. In any case, I just thought it was notable that now we're moving to the FUD phase, where we're not just worried about algorithmic stable coins, but actively saying that, yes, even though it's collateralized, that may not be enough. However, let's leave the realm of rampant speculation and get into the actual news from Tether, which is about their reserve attestations

Starting point is 00:03:35 for Q1. The big banner headline here is that Tether has significantly decreased its commercial paper holdings. For context, since Tether started sharing how its reserves were held last year, the biggest questions have been around this category of commercial debt. People have worried whether it was investment grade and with which specific companies it was held. Remember, as the ever grand crisis was happening in China, people were wondering if Tether held any of their debt, even though there was nothing to suggest that they did. In quarter one of this year, Tether decreased its commercial paper holdings by about 17%. They made up about 24.2 billion of the reserves previously and 20.1 billion at the date of this report. Now, Tether has also said that they've done a further

Starting point is 00:04:19 20% reduction of commercial paper since April 1st, which will be shown on the quarter two report. On the flip side, their holdings of U.S. Treasury bills, widely seen as their safest reserve asset, have gone up about 13% from $34.5 billion to $39.2 billion. They also note that secured loans have gone down by about $1 billion, and that the average rating of their commercial paper has gone from A2 to A1, both of which are considered investment grade and low risk. Paulo Arduino used the occasion of the report to reinforce the company's messaging around Tether's sustainability. He said, this past week is a clear example of the strength and resilience of Tether.

Starting point is 00:04:57 Tether has maintained its stability through multiple Black Swan events and highly volatile market conditions and even in its darkest days, Tether has never once failed to honor a redemption request from any of its verified customers. Looking for ways to step up your crypto game? Then go with NXO. For starters, you get free crypto for each purchase or swap. How about earning guaranteed yields? Up to 17% paid out daily. Ideal for you hardcore hodlers.

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Starting point is 00:05:56 neir empowers millions to invent and explore new experiences business creativity and community are being reimagined for a more sustainable and inclusive future reimagined your world today at neer the breakdown is sponsored by ftx us ftx us is the safe regulated way to buy and sell bitcoin and other digital assets with up to 85% lower fees than competitors. There are no fixed minimum fees, no ACH transaction fees, and no withdrawal fees. One of the largest exchanges in the U.S. FDX US is also the only leading exchange that supports both Ethereum and Solana NFTs. When you trade NFTs on FTCX, you pay no gas fees. Download the FTCX app today and use Referral Code Breakdown to support the show. What does the market think of this? Well, let's hold aside either of the two

Starting point is 00:06:53 extreme positions, and look at a mini thread from John Paul Coning. He had previously written what to watch for in Tether's upcoming attestation report, and is, I think, as close to a moderate on Tether as you can find. He writes, Tethers' allocation to U.S. Treasury bills and cash and deposits rose from 49% to 52.5%. That's good. Heading into the current crypto bloodbath, Tether had more safe collateral available for redemptions. Tether's commercial paper portfolio fell from 30.7% to 24.4% of assets. Counterbalancing this, its exposure to money market funds, which, as Tether indicates, may invest in commercial paper, rose from 3.8% to 8.2%. I see this as a wash. Maybe safer, maybe not. Tether's commercial paper portfolio now has more exposure to safer A1+, and A1 paper, less to A2,

Starting point is 00:07:40 A3, and other. That's good. Tether's opaker assets include A, secured loans, B, corporate bonds, and precious metals, and C, other investments. Tether's opaker assets, including secured loans, corporate bonds, funds, funds, and precious metals, and other investments fell a bit, from 16.3% to 14.4% of assets. Would have been nice to see this contract more, especially the other category, which went from 6.4% to 6%. Still no clarity on what Tether's other investments are, the nature of its secured loans, or the rating of the corporate bonds and funds it holds. Gotta do more work on this bit, Tether. Hold and disclose, or sell them so far. folks don't have to guess. Lastly, Tether's March 31st report provides a snapshot in time. We don't know

Starting point is 00:08:23 where it was positioned at the end of April when the crypto market turned cold. This is why Tether should copy TrueUSD and provide real-time 24-7 attestation reports. I think that this last part is super salient. Tether does these reserve attestations quarterly. U.S.D.C. does them monthly. Binance U.S.D does them monthly. And as J.P. points out, TrueU.S.D. has real-time reporting. I think that one of the most common sense and obvious parts of any stablecoin legislation in the U.S. is going to be stricter rules around reserve attestations, auditing processes, et cetera. And I don't think there's anyone in the crypto industry who would not be for that. So where does this leave us in terms of debates around Tether?

Starting point is 00:09:02 Frankly, unlikely to change anything. But if you're inclined to think that they're an important part of market infrastructure, you have to think it's good news that we're seeing a shift to more liquid assets like treasuries. Speaking of regulation, the agencies are sizing up. In testimony, SEC Chair Gary Gensler said that, quote, were really out-personed, end quote, by the crypto industry, basically meaning that they don't have enough people to deal with the crypto industry as a whole. They're planning to add 20 investigators and litigators to the crypto and cybersecurity enforcement unit, something that Commissioner Hester Purse has pushed back on as another example of what some have called the SEC's regulation by enforcement approach. The CFTC is also, however, increasing its crypto enforcement. The agency chief said headlines about the loss of tens of millions of dollars in digital assets due to protocol exploits, fishing attacks, preying on vulnerable people and other fraudulent and manipulative schemes have become far too common. He also said that in the past fiscal year, the agency had filed 23 crypto-related cases, which is about half the total number

Starting point is 00:10:01 of enforcement actions it's taken around digital assets since 2015. Even here in New York, they're talking about similar things. New York Department of Financial Services Superintendent Adrian Harris said that the agency is planning on tripling the size of its virtual currency unit by the end of this year. She said, virtual assets are the first type of assets we've seen that are shape-shifting. As we watch federal regulators engage in the space, crypto doesn't necessarily fit neatly into the commodities bucket or the securities bucket or the currency bucket. So how do you tackle a digital asset whose definition changes based on use case? I think that's going to require regulators to have a more 21st century framework for thinking about these things.

Starting point is 00:10:37 For those of us who are hoping for some relief around New York's Bit License, Harris also said that improving their process management systems is a key priority. She said, It's no secret that the licensing and business approvals have taken too long. So we're doing a lot of work on process management to make sure that everything we do is much more efficient, faster, but without sacrificing the regulatory rigor that we need. So my take on all of this might be a little bit different than many. And that's really that, of course, these agencies need to staff up.

Starting point is 00:11:07 Crypto is a major growth industry. In fact, I want these agencies to have tons of resources to engage with us. More resources, more people, more time to build actual expertise, more time for conversations with the industry, more space to differentiate good and bad actors. All of this would be good for us. Indeed, I want these agencies to be so unbelievably flush with resources that they can pay insanely high wages to people who are excited to be a part of this space and constructively build towards a future, rather than just looking at it as a problem to be solved.

Starting point is 00:11:37 Whether that's likely is an entirely different question. One more other small bit of regulatory news. CoinDesk published a piece yesterday called Biden administration wants crypto exchanges to separate customer and corporate funds. And basically, this is a follow-up to the recent news from Coinbase about the fact that customers crypto might be vulnerable in the case that the company had to declare bankruptcy. The reporting around this has been just terrible. Coinbase wasn't saying it was likely that it was going into bankruptcy or anything.

Starting point is 00:12:07 anything like that. But it got a huge amount of news. Clearly it caught the attention of the administration. Now apparently they are putting pressure on Congress to fix the problem, although the way that they're going about it, not everyone thinks is correct. Gus Koldabella, a partner at True Ventures, writes, it's not practical or wise for Coinbase or any other exchange to separate customer accounts from each other in this way. Instead, exchanges keep all of their customers Bitcoin, ETH, and other tokens in a limited number of wallets. It would be impractical to spin up a separate wallet for each. So it's not Coinbase failing to, quote, firewallets customer funds from its own, as the article suggests. It's the bankruptcy law's treatment of exchange wallets that hold many

Starting point is 00:12:44 customers' assets. For this reason, a legislative fix that forces cryptocurrency exchanges to keep their customers' money separate from their own corporate funds is no fix at all. It's not the source of the problem and it doesn't solve the legal issue. Instead, Congress updating the law to make sure customer assets at a crypto exchange are not considered part of the bankruptcy estate, that would be a real fix. To me, this gets at the point that I was just making about resourcing and time on task for regulators when it comes to the crypto industry. The impulse that they have in this case, that customer funds should be protected in the case of a bankruptcy, that that is their crypto that is being

Starting point is 00:13:21 custodied, managed, held by Coinbase, not property that can be divvied up as a part of a bankruptcy settlement, is the right impulse. It's just that the first approach that they're suggesting is likely not the right one and doesn't really have anything to do with the core issue. If there is time to actually rationally sit down and figure out what the rights solve for the problem is, it's likely that the changes made can actually improve things. If, on the other hand, there is political pressure and things are rushed and we're basing our legislative thinking on headlines and fears, well then we're a lot more likely to get something that doesn't actually solve the problem at all. For now, I want to say thanks again to my sponsors, nexo.io, near and FTX. And thanks to you guys

Starting point is 00:14:00 for listening. Until tomorrow, be safe and take care of each other. Peace. Hey, breakdown listeners, come join CoinDesk's Consensus 2020, the festival for the decentralized world this June 9th through the 12th in Austin, Texas. This is the only festival showcasing and celebrating all sides of blockchain, crypto ecosystems, Web 3, and the Metaverse, and is designed for crypto-newbies, investors, entrepreneurs, developers, and creators. Don't miss speakers like Kathy Wood, SBF, C-Z, Punk 6529, and Joe Lubin to name just a few. Use code breakdown to get 15% off your pass at coindesk.com

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The Breakdown - Tether’s Reserve Attestations: Commercial Paper Down, Treasurys Up

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