Author: Matt Levine, Bloomberg

Translation: jk, Odaily Planet Daily

Tether Starts Issuing USDT Loans

I know I say this often, but I just want to emphasize that Tether, this large stablecoin issuer, is doing extremely well. It is an unregulated bank, does not 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, most of which are U.S. Treasuries, used to support about $83.2 billion of Tether. This has increased compared to the previous quarter: during last year's cryptocurrency winter, Tether briefly faced a run, but it was not too serious and has 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 the risk of a run. Tether mainly invests in short-term safe assets, and these short-term safe assets are paying very high interest. By investing Tether's funds in overnight loans secured by U.S. Treasuries, at the overnight financing rate, you can achieve a yield of about 5.3%, which is about $4.6 billion per year, completely risk-free, with 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. This is 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 plug your ears and shout "no," and then kick them out of your office. You can earn billions of dollars in pure profit without taking any risks! No credit risk (buying U.S. Treasuries), no term risk (buying very short-term U.S. Treasuries), no liquidity risk (if someone requests a withdrawal, you can easily sell the U.S. Treasuries), no risk at all, with 5% interest.

This question—how to deploy capital—might be a real problem for actual banks! We have discussed before that in order to earn enough money to operate their business, Silicon Valley Bank had to take investment risks, so it put its funds into long-term Treasuries, 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 if Tether were to lend $100 to Apple Inc.

However, the balance sheet publicly disclosed by Tether is not entirely 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 spokesperson confirmed that Tether had made new loans.

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

The resumption of 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 spokesperson Alex Welch.

She said the loans will be eliminated by 2024. She said the company's goal is to "prevent a significant reduction in the liquidity of 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.

The point I mentioned 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 U.S. Treasuries.

The spokesperson for Tether 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. There are people—possibly cryptocurrency exchanges or trading firms, etc.—who have some collateral (possibly highly volatile cryptocurrencies) and want 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 to finance 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, and it dynamically prints Tethers to maintain the price of cryptocurrencies. From a marginal perspective, cryptocurrencies are not bought by real people with new dollars entering 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 market value of the entire market. 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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