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Tether’s Commercial Paper Claims Continue to Dog Stablecoin

  • Tether, the company that issues the supposedly backed dollar-based stablecoin USDT, claims that it had reduced the amount of commercial paper in the reserve backing its USD$74 billion token.
  • Although the cryptocurrency markets aren’t likely to take down the financial markets with it, if a run on Tether was to be initiated, the forced selling of Tether’s commercial paper could cause a collapse and contagion into already embattled financial markets.

If you thought the TerraUSD collapse was bad, just imagine that a stablecoin as systemically important to the financial and cryptocurrency ecosystem such as Tether were to collapse.

Tether, the company that issues the supposedly backed dollar-based stablecoin USDT, claims that it had reduced the amount of commercial paper in the reserve backing its USD$74 billion token.

In a week that has seen over US$7 billion worth of USDT redemptions to USD, Tether has recently revealed that as of March 31 this year, it held US$82.4 billion in assets versus US$82.2 billion in liabilities, according to “assurances” from its Cayman Islands-based accountant MHA Cayman.

The main issue of course is that the value of commercial paper isn’t static and also depends heavily on its quality, duration and current credit market conditions.

With interest rates rising, yields have been soaring (the difference between the face value of the bond with its coupon rate and how much an investor is willing to pay for it).

Alarmingly, the spread between high yield bonds (the riskiest) and investment-grade, has been steadily growing, reversing a multiyear convergence due to loose credit conditions.

Unlike TerraUSD, Tether relies on a reserve of actual dollars and dollar-equivalent assets to maintain its 1-to-1 peg with the actual greenback.

The actual quality of Tether’s reserves has long been the subject of much debate and their liquidity even more suspect, with investors deciding not to take any chances last week in the wake of the TerraUSD collapse.

Nevertheless, Tether, in a statement yesterday, noted a 17% decrease in commercial paper holdings to US$20.1 billion compared with the previous quarter, and added that it had completed a further 20% reduction on that amount since April 1.

Although the cryptocurrency markets aren’t likely to take down the financial markets with it, if a run on Tether was to be initiated, the forced selling of Tether’s commercial paper could cause a collapse and contagion into already embattled financial markets.

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