Inside the Great Pie Chart giving Tether its dollar value

This is a story about the Great Tether Pie Chart, which interpretting it feels like you're walking through a maze.

Tether has given more insight into what gives its dollar-pegged stablecoin (USDT) value. Turns out, USDT is only 3% backed with real currency and a mixture of complicated assets makes up the rest.

In a blog post, Tether showed a snapshot of its reserves at March 31 with two pie charts.

The first layer of Tether’s pie chart shows every USDT is backed by 76% cash, cash equivalents, other short term deposits, and something called commercial paper.

Tether’s wording alludes to the bulk of that 76% being actual cash — but less than 4% of it is dollars in a bank.

Back-of-the-napkin math: 

  • $40.7 billion worth of USDT in circulation at Pie Chart Genesis (PCG).
  • 2.9% of it was backed by fiat currency (3.85% * 76% = 2.9%).
  • $1.18 billion backed USDT — the rest is assets other than fiat.

Tether’s remaining quarter consists of secured loans (12.6%), corporate bonds, funds, precious metals (10%), and other investments — including digital tokens (1.6%).

So, when Tether’s lawyer revealed in 2019 that Tether was just 74% backed, they were really referring to assets with cash-like properties and not strictly dollars.

On the surface, this seems uncouth. But Tether’s pie chart resembles what many corporate balance sheets would look like today.

Pie charts have layers

After cash-type assets, the next largest category backing USDT is secured loans — specifically secured loans not lent to affiliated entities (Bitfinex and other subsidiaries of Tether parent Digfinex).

Out of Tether’s $41 billion in assets, secured loans would account for 12.6%, over $5 billion.

  • Loans come in two types: unsecured and secured.
  • Secured loans are backed by collateral, unsecured are not.
  • We don’t know who Tether loaned assets to or what collateral was used.

The third largest category is a bit of mishmash. About 10% of Tether’s reserves ($4 billion) consists of corporate bonds, funds, and precious metals.

At PCG, Tether’s gold assets (a gold-backed token) would only account for $150 million of this slice — a minor portion under 4% — which implies the rest is corporate bonds and funds.

Tether’s final category is “other investments.” The pie chart says other investments make up 1.6% of USDT’s balance sheet ($670 million). This includes digital currencies.

According to Crunchbase, Tether has invested in Exordium and Celsius Network, but it could also hold positions in Bitcoin, Ethereum, and other crypto. The pie chart isn’t especially granular.

What does cash really mean, anyway?

Let’s return to the largest category: cash, cash equivalents, short-term deposits, and commercial paper. This range is what gives Tether 76% of its dollar-value ($30.9 billion at PCG).

The easiest classification to parse is cash. Raw dollars make up about 3% of Tether’s reserves, equal to nearly $1.2 billion.

Treasury bills are also straight-forward. Analysts generally accept them as a safe, low-interest way to hold cash equivalents. 

Tether kept under a billion dollars in Treasury bills at PCG (2.2% of total reserves).

The Department of Justice asked, too.

[Read more: Here’s what Tether and Bitfinex must submit to NYAG this month]

Reverse repo notes are a little more complex. Reverse repos are short-term loans usually collateralized with Treasury bills, and companies can hold them as cash equivalents.

Tether held just over a billion in reverse repos (2.73%) at PCG. It’s unclear with whom Tether maintained those loans with.

Cash, Treasury bills, and reverse repos together make up a little over 10% of Tether’s largest balance sheet category.

The other two cash-related segments — fiduciary deposits and commercial paper — are much larger and way dicier.

Fiduciary deposits, on the surface level, are nice to see on a stablecoin’s balance sheet.

[Read more: China’s crypto king pleads guilty to laundering $480M for online casinos, report]

But as financial commentator Frances Coppola pointed out, it’s likely they really amount to “deposits that Deltec Bank [Tether’s bank] … placed with American banks on Tether’s behalf.”

And so, Tether’s fiduciary deposits — which make up 18% Tether’s backing ($7.45 billion) at PCG — are not likely very liquid as Tether’s bank Deltec would need time to access those funds.

This could pose problems for Tether if there’s a large outflow from USDT into fiat, noted crypto researcher JP Koning. In fact, it’s tough to even consider these assets cash equivalent at all.

“If they have a three or four-day waiting period before they can be called, then fiduciary assets are not really cash,” tweeted Koning.

Commercial paper printer goes brrr

The most controversial (and least revealing) of the disclosure: commercial paper.

Similar to loans, commercial paper comes in two types: secured and unsecured. 

Secured commercial paper is often graded — and even vetted by the SEC — but the unsecured kind has far fewer requirements.

  • Commercial paper is essentially short-term debt issued by corporations. 
  • Some are considered good as gold — or at least as the blue chip stock backing it.
  • But unsecured paper isn’t the most desirable (or reliable) cash equivalent.

“Best case scenario, these are legitimate bonds from established issuers,” said a veteran fixed-income manager to Protos. 

“Those would be as good as cash, and it would mean that Tether indeed had the dollars to buy them, and bought them as a way to manage their portfolio.” 

The thing is, crypto exchanges like Binance and FTX — or even a sister org like Bitfinex — can issue commercial paper and use it to buy USDT.

In that case, they explained, the commercial paper would end up in Tether’s reserves without any cash ever existing at all.

Commercial paper makes up almost half of Tether’s total reserves. This equaled $20 billion at PCG.

Industry insiders react to Tether’s pie chart.

Elephant in the room

The existence of commercial paper is ringing alarm bells for some auditors familiar with the stablecoin landscape.

“Those providing attestations for competing stablecoins should certainly be considering possible exposure to the 50% of uncollateralized promissory notes in Tether’s reserves,” said Kara Haas, CPA.

However, none of these concerns may matter. Coppola told Protos: “I don’t think Tether has to service any outflows.” 

It’s true. USDT’s terms of service: “Tether reserves the right to delay the redemption or withdrawal of Tether Tokens… [due to] illiquidity or unavailability or loss of any Reserves held by Tether…”

Indeed, the elephant in the room is growing obnoxious.

[Read more: Brexit’s top donor outed as Bitfinex, Tether parent shareholder]

If the crypto market loses confidence and demands Tether exchange the USDT in circulation for US dollars, can the company remain solvent and successfully process those outflows?

According to Tether’s terms of service, it simply doesn’t matter.

Update 20:14 UTC, May 17: Tether and Bitfinex lawyer Stuart Hoegner has shared more details about the company’s commercial paper and other assets in a blog post.

Hoegner said Tether’s commercial paper — which makes up almost half of its reserves — is “vast majority… A-2 and above rated” and doesn’t include “commercial paper issued by crypto exchanges.”

Hoegner claimed the lion’s share of corporate bonds were “investment grade as rated by S&P, Moody’s, or Fitch” and were not issued by “any Tether affiliates.”

This, Tether execs believe, should put the issue to bed.

In a dueling blog entry, Coppola retorted: “the mystery is why Tether is so reluctant to publish full details of its asset composition.”

“Surely, the best way to prevent the par peg breaking is to provide solid evidence that the asset base is safe and liquid?”

Edit 20:26 UTC, May 14: Corrected cash & equivalents dollar value at paragraph 17, phrasing in bulletpoints at paragraph 12.

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