Original text: "Tether Keeps Lending Tethers", compiled by Odaily Planet Daily jk.

Original author: Matt Levine is a Bloomberg Opinion columnist covering finance. He was an editor of Dealbreaker, an investment banker at Goldman Sachs, a mergers and acquisitions lawyer at Wachtell, Lipton, Rosen & Katz, and a clerk for the U.S. Court of Appeals for the Third Circuit.

Tether Starts Making USDT Loans

I know I say this a lot, but I just want to emphasize that Tether, the large stablecoin issuer, is doing extremely well. It is an unregulated bank that doesn't pay interest, interest rates are rising, and its depositor base is quite stable. As of the end of June, Tether reported assets of about $86.5 billion, mostly in U.S. Treasuries, backing about $83.2 billion of Tethers. That's up from the previous quarter: Tether briefly faced a run during last year's crypto winter, but it wasn't too bad and has recovered nicely; crypto investors still want to keep their money in Tether.

Anyway, if you are running Tether, you don't need to worry about a run. Tether invests mostly in short-term safe assets, and those short-term safe assets are paying very high interest rates. Just put Tether's money into overnight loans collateralized by U.S. Treasuries, at overnight financing rates, and you can earn about 5.3%, or about $4.6 billion a year, with no risk, almost no cost. If someone comes to you with Tethers and asks for dollars, you can just give them dollars; your investments are short-term and liquid. It's a great business.

This means that if you are in charge of Tether, someone comes to you with a smart investment that offers a higher return, even with a little bit of risk, you should plug your ears and shout "no," and then throw them out of your office. You can make tens of billions of dollars in pure profit without taking any risk! No credit risk (buying Treasuries), no term risk (buying very short-term Treasuries), no liquidity risk (if someone wants to withdraw, you can easily sell the Treasuries), no risk at all, 5% interest.

This question—what to do with the money—might be a live one for a real bank! We've talked before about how Silicon Valley Bank had to take investment risk to make enough money to run its business, so it put its money into long-term Treasuries, thinking they were safe, but then the bank faced a run and SVB collapsed. I feel bad for them; they had to take risks to make money. But Tether doesn't have to! Not at all, it would be a little unreasonable for Tether to lend $100 to Apple Inc.

However, the balance sheet that Tether publicly discloses is not entirely the safest thing you can imagine. In The Wall Street Journal, Jonathan Weil reports:

Tether Holdings has resumed lending its own stablecoins to customers, less than a year after saying it would stop the practice.

The cryptocurrency issuer said in its latest quarterly financial update that as of June 30, its assets included $5.5 billion in loans, up from $5.3 billion in the previous quarter. A company spokeswoman confirmed Tether had made new loans.

The company, registered in the British Virgin Islands, calls the loans secured loans and didn't disclose detailed information about the borrowers or the collateral received. The loans are made and denominated in the company's Tether tokens…

The resumption of lending contrasts with the situation in December 2022, when the company said it would reduce its secured loans to zero by 2023. “In the second quarter of 2023, we received requests for short-term loans from some of our clients with whom we have established long-term relationships, and we decided to accommodate these requests,” said Tether Holdings spokeswoman Alex Welch.

She said the loans will be eliminated by 2024. She said the company's goal is to “prevent a significant reduction in liquidity for our clients, or the need to sell their collateral at potentially unfavorable prices, resulting in losses.”

Welch declined to explain why the company's clients might need to sell their collateral at unfavorable prices, or whether Tether Holdings made new loans this year to help clients avoid defaults.

My point above is that Tether has no financial reason to need these loans. Everyone at Tether could be extremely rich and live easy lives just by putting all the money in Treasuries.

Tether's spokeswoman makes a similar point here: Tether is lending not because it wants to, or because it thinks it's a good financial decision for Tether. Tether is lending to support its borrowers. Someone—probably a cryptocurrency exchange or trading firm, etc.—has some collateral (probably very volatile cryptocurrencies) and wants to borrow dollars (in the form of Tethers), and Tether Holdings is the cheapest, most available lender they can find. Someone in the crypto world needs money to buy (or keep holding) their cryptocurrencies, and Tether will provide the money, collateralized by cryptocurrencies, not because it's a good trade for Tether, but because Tether is being a good citizen of the crypto ecosystem and supporting its counterparties.

Tether's borrowers are large cryptocurrency investors who want financing for their cryptocurrency collateral, and if they run out of liquidity, they will need “to sell their collateral at potentially unfavorable prices, resulting in losses.” If large cryptocurrency firms get margin calls and have to sell their assets, that will push down cryptocurrency prices. Lending to them is not only good for them, but good for the entire crypto ecosystem: it can prevent price declines from forced selling.

We've talked before about Tether's lending activities. A common form of conspiracy theory skepticism about cryptocurrencies in recent years has been: “Tether is a self-contained reserve bank for cryptocurrencies, it dynamically prints Tethers to maintain cryptocurrency prices. At the margin, cryptocurrencies are not bought by real people putting new dollars into the crypto system, but by crypto hedge funds using newly printed Tethers.” (Editor's note: From this perspective, large crypto hedge funds borrow Tether and use these loans to buy various cryptocurrencies, thereby boosting the overall market value. However, in this process, no new funds enter the market, making it a self-inflating bubble.)

Does the Tether spokeswoman's comments in some ways… prove that point?

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