Doing the best "bank + central bank" business in the world, also bears a different kind of risk.

By Matt Levine, Bloomberg Opinion Columnist

Translated by jk, Odaily Star Daily

Tether starts issuing USDT loans

I know I say this often, but I just want to emphasize that Tether, a major stablecoin issuer, is doing extremely well. It is an unregulated bank that does not pay interest, and interest rates are rising, with a fairly stable depositor base. As of the end of June, Tether reported assets of about $86.5 billion, most of which are U.S. Treasury bonds, supporting about $83.2 billion of Tether. This represents an increase compared to the previous quarter: during last year's cryptocurrency winter, Tether briefly faced a run, but it was not too serious and has since recovered well; cryptocurrency investors still want to keep their funds in Tether.

Anyway, if you are running Tether, you don't need to worry about a run. Tether mainly invests in short-term safe assets, which are currently paying high interest. By investing Tether's funds in overnight loans secured by U.S. Treasury bonds, at the overnight financing rate, you can achieve a return of about 5.3%, or about $4.6 billion per year, with no risk and almost no cost. If someone comes with Tether to exchange for dollars, you can give them dollars directly; your investments are short-term and highly liquid. It's a fantastic business.

This means that if you are in charge of Tether, and someone comes to propose a smart investment that could bring higher returns, even with a little risk, you should just say "no" and kick them out of your office. You can earn billions of dollars in pure profit without taking any risk! No credit risk (buying Treasury bonds), no term risk (buying very short-term Treasury bonds), no liquidity risk (easy to sell Treasury bonds if someone requests a withdrawal), no risk at all, just 5% interest.

This question - how to deploy capital - might be a real problem for a true bank! We have discussed before that in order to make enough money to operate its business, Silicon Valley Bank needed to take investment risks, so it invested in long-term Treasury bonds, thinking they were safe, but later the bank faced a run and SVB collapsed. I feel sorry for them; they had to take risks to make money. But Tether doesn't need to! Not at all, it would seem a bit unreasonable for Tether to lend $100 to Apple Inc.

However, the balance sheet publicly disclosed by Tether is not the safest thing you can imagine. In The Wall Street Journal, Jonathan Weil reported:

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

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 that Tether had made new loans.

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

Resuming lending is different from 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 clients with whom we have established long-term relationships, and we decided to meet 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 default.

My point above is that Tether has no financial reason to need these loans. Everyone at Tether could become very wealthy and live an easy life by simply putting all the money in Treasury bonds.

Tether's spokeswoman also expressed the same view here: Tether is lending not because it wants to, or because it thinks it's a good financial decision for Tether, but to support its borrowers. Someone - perhaps a cryptocurrency exchange or trading firm, etc. - has some collateral (possibly highly volatile cryptocurrencies) and wants to borrow dollars (in the form of Tether), and Tether Holdings is the cheapest and most accessible lender they can find. Someone in the crypto space needs funds to buy (or continue holding) their cryptocurrencies, and Tether will provide funds, secured by cryptocurrencies, not because it's a good deal for Tether, but because Tether is becoming 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 their liquidity runs out, they will need to "sell their collateral at potentially unfavorable prices, resulting in losses." If large cryptocurrency companies receive margin call notices and have to sell their assets, it will cause the price of cryptocurrencies to fall. Lending to them is not only beneficial to them, but also to the entire crypto ecosystem: it can prevent price declines caused by selling.

We have discussed Tether's lending activities before. In recent years, a common form of conspiracy theory skeptical of cryptocurrencies is this: "Tether is a self-sufficient reserve bank for cryptocurrencies, dynamically printing Tethers to maintain cryptocurrency prices. From the margin, cryptocurrencies are not purchased by real people investing new dollars into the crypto system, but by cryptocurrency hedge funds using newly printed Tethers." (Editor's note: From this perspective, large cryptocurrency hedge funds borrow Tether and use these loans to purchase various cryptocurrencies, thereby boosting the market's valuation. However, in this process, no new funds enter the market, making it a self-inflating bubble.)

Does the statement from Tether's spokesperson in some ways… prove this point?

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