Friday, May 20, 2022

What to watch for in Tether's upcoming attestation report

[This is a repost of an article I wrote for CoinDesk earlier this week about what to expect from Tether's soon-to-be published quarterly attestation report. Tether's report was published the day after I wrote the article. My initial reaction to the new numbers is here, on Twitter. In brief, it's good to see Tether add more safe treasuries. The bad news is that Tether's murky "other investments" category hardly shrunk.]

What to Watch for in Tether's Upcoming Attestation Report

With the crypto bull market turning into a rout, speculators and investors have been cashing out of stablecoins in droves. Into this chaos, the world’s largest stablecoin issuer – Tether – is about to publish its most important reserve, or attestation, report ever. Here’s why Tether’s upcoming attestation is key and what investors are looking for.

It’s been a difficult few months for stablecoins. According to data from Coin Metrics available at The Block, the total value of the stablecoin market has fallen from $182 billion in April to $154 billion today, a quick 15% reduction.

Most stablecoins have hewed tightly to their peg through the Great Stablecoin Pullback of 2022, including second- and third-ranked USD coin (USDC) and BinanceUSD (BUSD), both U.S.-domiciled. The decline in the values of these stablecoins comes purely from a fall in quantity as people convert stablecoins into actual U.S. dollars. The pegs of large decentralized collateralized stablecoins like DAI and MIM have also held, as people redeem them for underlying collateral like ethereum and USDC.

This shrinking in the quantity of stablecoins is a healthy market reaction. Given that crypto activity has petered off over the last months, fewer stablecoins are needed to grease the rails of the crypto economy. It’s the task of stablecoin issuers to hoover up unwanted stablecoins in order to contract their supply and keep their price locked at $1.

Alas, other stablecoin pegs have completely broken down, most famously terraUSD, an undercollateralized “algorithmic” stablecoin that, at the time of writing, is trading at 9 cents. Several other uncollateralized stablecoins, including neutrino USD and Deus Finance's DEI, have also experienced large deviations from their peg. Kava Network’s USDX recently fell to 80 cents, reportedly due to its exposure to terraUSD backing.

Then there’s tether (USDT), the world's largest stablecoin. The price of tether on large exchanges like Coinbase, Binance, Uniswap and FTX temporarily plunged to 95 cents on March 12. It has since risen back towards $1.

But the price of tether has not quite clawed back to the exact same $1 watermark to which it adhered prior to March 12. It is trading at just under $1 on major centralized exchanges like FTX and Coinbase. On the decentralized stablecoin market Curve, $100,000 USDT can only be converted into $99,851 USDC, a small but notable discount. Also worrisome is the continued unbalancing of Curve’s 3pool, a major source of stablecoin liquidity, with tether now making up for 74% of value locked-in.

All this suggests that there's still too many tether stablecoins in the market, and that the only remedy is additional supply contractions.

Tether has already shrunk dramatically over the last week. After hitting a peak of 83.2 billion USDT in circulation just last week, redemptions have reduced this amount by 11% to 74.2 billion. To repeat, there is nothing unhealthy per se about a supply contraction. The demand for tethers is lower and supply must be reduced to adjust to this demand.

However, more redemptions will be necessary to return tether to its tight $1 peg across all trading venues. Add to this the possibility that the prices of bitcoin, ethereum and other coins may fall further, inducing additional contractions in stablecoins supply, and tether could have another few billion in shrinkage ahead of it.

Is that something tether can handle?

Unfortunately, the Great Stablecoin Pullback of 2022 comes at an inopportune time for tether users. Thanks to issuer Tether’s policy of only publishing reserve reports every 90 days, they face a shortage of timely information about the assets used to back USDT.

When a stablecoin issuer issues stablecoins into the market, it normally keeps a corresponding asset in reserve to secure, or back, the stablecoin’s peg. As redemptions requests arrive, these reserves get used up. Because a stablecoin’s reserves are key to guaranteeing stability, the big, centralized stablecoin issuers have adopted the practice of providing information about their assets. In regularly published attestation reports, an independent auditor is asked to offer assurance about the quantity and composition of reserves backing the stablecoin.

The people behind USDC and BinanceUSD publish monthly attestations. Alas, Tether has the slowest attestation schedule of the bunch, reporting on a quarterly basis. With Tether's March 31 attestation report still not published, investors find themselves having to fall back on Tether's Dec. 31, 2021, report. But that was an eon ago in cryptocurrency time.

There was plenty to like from Tether’s old report. As of Dec. 31, 44% of Tether's $79 billion in assets were held in safe U.S. government-issued Treasury bills. This constitutes a big improvement from previous quarters. For instance, when Tether first began to report its asset composition to the public in early 2021, only 2% of its assets had been placed in Treasury bills while a hefty 50% had been allocated to riskier commercial paper, the rating of this paper not being reported.

The amount of commercial paper Tether holds had been steadily reduced over time, reaching 31% on Dec. 31. And thanks to improved disclosure by Tether, we now know the rating of this paper: most was A-1 or A-2, which qualifies as investment grade.

Another $4.2 billion, or 5%, was invested in safe cash and bank deposits as of Dec. 31.

This combination of safe investments – cash, investment grade commercial paper and Treasury bills – will have been great fodder for meeting the first $9 billion or so in Tether redemptions. It will be invaluable for subsequent waves of redemptions requests, too.

These improvements are the result of an awkward and confrontational dance between Tether executives and so-called “Tether truthers.” To counter critics, the company has been forced to cough up ever more internal data, which has fueled better criticism, which pushed Tether to make follow-up changes like shifting into safer assets like Treasury bills. Tether now has a serviceable front-line defense against redemptions – thanks in no small part to its critics.

But there were problems with Tether’s Dec. 31 attestation, too. The most concerning part was the $5 billion in "other investments," which comprised 7% of Tether’s total assets.

What exactly are these investments? Did their value suffer in the generalized crypto price collapse of the last few months? Unfortunately, we don't know the answers to these questions because Tether doesn't disclose any information about its “other investments.”

Another less-than-stellar contribution to Tether’s Dec. 31 reserve report was the 10% invested in a combination of secured loans ($4.1 billion) and corporate bonds, funds and precious metals ($3.6 billion). Tether provides few details about the quality of these investments.

These are all questions a Tether owner will probably want more clarity on as they watch Tether meet the current round of redemptions. In its upcoming March 31 attestation report, which Tether should be publishing any day now, investors will be looking for some assurance on these issues.

So what would the perfect March 31 attestation report look like?

Ideally, between Dec. 31 and March 31, Tether will have shifted even more of its customers' funds into Treasury bills and cash. One hopes this movement into Treasury bills will have displaced riskier investments, particularly the murky "other investments" category. The safer Tether's assets were going into the Great Stablecoin Pullback of 2022, the more confidence investors can have that USDT’s peg will hold.

Investors will also want to know more about the quality of Tether’s more opaque investment categories. Without clarity, they could start to worry that Tether’s “other investments” or secured loans were impaired during the big drop in crypto prices. These worries, warranted or not, could ignite additional redemptions as Tether holders line up to get dibs on Tether's safest Treasury bill collateral.

In addition to the hoped-for improvements to Tether's investment quality, Tether needs to publish attestations on a more frequent basis in order to remove informational dry spells like the one investors currently find themselves in. Tether once boasted that it leads the industry on transparency. But it’s behind USDC on this front, which provides monthly reports.

Even better would be to copy competitor TrueUSD and go real-time. Can’t sleep on a Saturday night and want to see if your stablecoin is still well backed? TrueUSD provides 24/7 real-time attestations. Stablecoin owners shouldn't have to rely on information from 137 days ago to deal with breaking market conditions.

Let's hope that Tether's attestation comes out soon and dispels any worries. It remains the most important utility in the crypto economy. Everyone is watching.


  1. The attestation dispels worries… if you believe it. Credible people that have been thorough argue the attestations are full of lies:

    1. But the attestation doesn't dispel worries. As I wrote in my twitter thread, the category "other investments" has barely declined. And we still don't know what these investments are.

    2. It doesn't dispel your or my, or Patrick's, worries. But it also doesn't make people worry who didn't worry before.