Tether Holdings: Profitable Crypto Banking

While trading Bitcoin could be lucrative, it’s also risky. Tether Holdings, the issuer of the largest and most widely used “stablecoin” on the market, has found a better way to earn $6 billion a year in the crypto world: by acting like a bank.

Stablecoins, which hold a $1 price typically backed 1-to-1 by reserves, function like crypto cash. Tether dominates the market, boasting deposits of $83 billion.

As Bitcoin and crypto values plummet due to rising rates, Tether has become one of the most profitable digital assets. In Q1 2021, Tether’s excess reserves hit an all-time high of $2.44 billion, with a $1.48 billion net profit. Most of Tether’s reserves are in U.S. Treasury bills, whose yields have surged to around 5%.

The company’s profits could fall if asset prices decline, but at its current rate, Tether is expected to pull in nearly $6 billion this year. Its success has made it a financial giant, surpassing even big names like BlackRock and Comerica.

However, it seems that Tether’s triumph is only feasible in the opaque and alternative universe of digital assets. While companies may try to follow traditional finance rules, attempting to mimic Tether’s success may result in losing out in the crypto world.

The Rise and Fall of Stablecoins: Tether vs USDC

For a time, Tether and USDC were engaged in a heated battle for supremacy in the stablecoin market. USDC, issued by Circle Internet Financial, positioned itself as the more transparent and reliable option, while Tether, operating offshore, had a reputation for being opaque about its reserves and corporate structure. However, the crypto crash served to bolster Tether’s position.

Last year, major algorithmic stablecoins like Terra failed, leaving Tether as the dominant player in the market. Meanwhile, USDC’s coin issuance dropped from $44 billion in March to $28 billion today; it was forced to halt redemptions temporarily when banks that held some of its reserves failed.

Despite its efforts to portray itself as a model crypto citizen with strong ties to U.S. banks and financial firms, USDC’s reputation for stability remains tarnished. Circle’s application to go public was rejected by the Securities and Exchange Commission, and the recent regulatory actions against Coinbase and Binance demonstrate the risks of being tied to the U.S. market.

In the end, Tether emerged victorious due to its resilience and ability to weather storms. This serves as a cautionary tale for stablecoin issuers to prioritize transparency and prudence in their operations. Tether: A Stablecoin Giant

Stablecoins are the backbone of cryptocurrency activity and allow traders to access dollar liquidity on and off of exchanges and use them as collateral for loans. Tether is now a critical part of the crypto ecosystem and is the third-largest digital asset by market capitalization, after Bitcoin and Ether. Its daily trading volume often doubles or triples that of Bitcoin.

Tether’s $83 billion asset base was built through a combination of factors. Firstly, Tether was the first major stablecoin to hit the market in 2014, and it has remained closely associated with Bitcoin since. FRNT Financial CEO, Stephane Ouellette, asserts that Tether “basically invented stablecoins and they’re the default option for liquidity.” The coin is used for lending in smart contracts and buying Bitcoin on margin with Tether as the collateral. Additionally, it trades against every major token on exchanges.

Tether’s reputation for survival is another reason for its continued popularity. The coin has occasionally broken its peg slightly on exchanges during periods of extreme volatility. However, as cryptocurrencies like Bitcoin and other tokens crashed, Tether remained resilient when several big crypto players, such as FTX, collapsed.

Tether’s international popularity has surged especially as the US continues to exhibit growing hostility towards cryptocurrencies. According to Ouellette, Tether enjoys significant global trust. “In this climate,” he says, “being a US entity isn’t seen as something that will be safe.”

The Peculiarities of Tether

Tether is a decentralized cryptocurrency that relies on trading firms, particularly market makers, to maintain its token’s peg. The advantage of this system is that these firms can directly redeem the coins with the company, and arbitrage price discrepancies when it drops below a dollar on exchanges.

Dexterity Capital is one of these firms. It is a proprietary trading firm specializing in high-frequency, market-neutral strategies. Co-founder Michael Safai shares that they aren’t best buddies with Tether, but they do engage in minting and redeeming when necessary. They swing into action in a Tether arbitrage trade about three to four times a year.

Despite objections, Tether refuses to open up its books and be more transparent. With corporate entities situated in Hong Kong and the British Virgin Islands, it is nothing like a regulated U.S. bank or publicly traded company. The ownership structure remains a distortion of obscure offshore subsidiaries. Furthermore, it has overlapping ownership with the Bitfinex exchange, an offshore crypto brokerage managed by Tether’s CEO, Jean-Louis van der Velde, and other key executives. Both Bitfinex and Tether are owned and operated by iFinex, a British Virgin Islands-based corporation.

Tether has had several encounters with regulators. In 2021, it resolved charges with the New York state attorney general regarding an undisclosed loan to Bitfinex and settled for a payment to the Commodity Futures Trading Commission. The allegations involve breaking U.S. laws over reserves and disclosure practices. Tether did not acknowledge any wrongdoing in the case filed by the New York attorney general and stated that the CFTC discovered no proof that its coins were not entirely backed at all times.

Tether: The Quest for Transparency

Tether, the cryptocurrency that claims to be backed 1:1 by the US dollar, has been in the spotlight for its lack of transparency. However, recent episodes have pushed the company to improve its disclosure standards.

After settling with New York state, Tether agreed to release quarterly “assurance” reports from accounting firm BDO Italia, revealing more information about its reserves. While Tether claims to be a leader in crypto transparency, financial experts argue that its disclosures fall short of those of public companies.

Despite Tether’s efforts to become more transparent, concerns linger about its ability to handle a run on its coins, as it still keeps approximately 15% of its assets in noncash holdings like Bitcoin and precious metals. Tether’s spokesperson maintains that it has a reserve surplus of $2.4 billion, with a robust and liquid portfolio to safeguard its reserves.

Circle, another cryptocurrency, has taken a different approach by working within the US banking and regulatory system. The Boston-based company is regulated by states as a licensed money transmitter, with independent auditor Deloitte vouching for its reserves. Circle has even earned “partner” company status at the World Economic Forum in Davos.

In an industry that values transparency, Tether must continue to prioritize disclosure to regain trust from investors.

The Battle for Stablecoin Dominance: Circle vs Tether

Despite Tether’s dominance as a trading pair with Bitcoin on centralized exchanges, Circle maintains that it isn’t in competition with the stablecoin giant. According to insiders, inflows to Tether represent “crypto serving crypto.” However, Circle’s ties to U.S. banks and regulators may be holding it back as traders turn to stablecoins that have kept their distance from the U.S. “It is an unfortunate paradox that U.S. regulators’ hostility toward stablecoins has ended up hurting the one stablecoin that seems more willing to play by the rules, and benefited the stablecoin that has chosen to ignore them,” says Prasad.

Despite criticism of Tether’s lack of transparency and offshore entities, crypto participants remain confident in its stability. Tether’s perceived weaknesses in traditional finance have actually made it a strong player within the crypto space.

While Tether remains unchallenged in terms of market dominance, regulation remains a threat. The European Union passed legislation this year limiting the use of non-euro backed stablecoins among other measures. In the U.S., the Biden Administration’s push for stablecoin regulation has resulted in draft legislation in the House of Representatives that would regulate stablecoin issuers like banks.

Circle is not the only player attempting to challenge Tether, with industry group, the Stablecoin Standard, offering a “quality badge” to coin issuers that meet minimum standards for transparency and reserves. Currently, only about $2 billion worth of coins meet these standards, less than 2% of the total market.

Tether, one of the leading stablecoin issuers in the cryptocurrency industry, is currently facing legal issues in the United Kingdom. Poundtoken, the issuer of a token with the same name as Tether’s potential new project, GBPT, filed a lawsuit claiming intellectual property infringement. Tether responded with a countersuit. However, neither party has made any comments about the ongoing case.

Despite these legal battles, Tether continues to grow and expand its services beyond stablecoins. The company recently announced plans to allocate up to 15% of its net operating profit to purchase Bitcoin. With $1.5 billion already invested in Bitcoin, Tether is on track to become one of the industry’s largest investors. The company has also moved into Bitcoin mining, investing in facilities in Uruguay.

Although Tether remains profitable and expands its services, it still has detractors who doubt its longevity. Some traders have even attacked Tether in an effort to capitalize on short positions or a broader downturn in the crypto industry that Tether’s collapse could trigger. These attacks caused Tether to dip below $0.999 last week, but it quickly rebounded within hours. Tether’s CTO, Paolo Ardoino, acknowledged that attackers can easily seize opportunities in an edgy market and issued a challenge: “Let them come. We’re ready to redeem any amount.”

Despite various controversies surrounding Tether, the company seems determined to continue providing innovative solutions to the crypto community.

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