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Tether's Controversial Loan Resumption

Tether Holdings has restarted its lending program, distributing its stablecoins to customers, in a notable reversal from its announcement last year to cease this practice.

The latest quarterly update from the cryptocurrency firm highlighted an increase in its assets from loans – $5.5 billion as of June 30, a rise from $5.3 billion from the previous quarter. This uptick was acknowledged by a company representative who confirmed new loans were made.

Tether Holdings, headquartered in the British Virgin Islands, describes these as secured loans but offers minimal details about the loan recipients or accepted collateral. These loans are provided and denominated in Tether tokens.

Stablecoins, including tether, serve as foundational elements in the cryptocurrency market. The central idea is that for every coin, the issuer ensures a redemption value of $1, striving to show they have the necessary reserves to honor this.

However, the lending operations of Tether Holdings raise concerns for the broader crypto community. While a significant portion of their listed assets are Treasury bills – easily convertible to dollars – the nature of loans introduces uncertainties. The company can't guarantee loan repayments, nor can it ensure the viability of selling the loans or the sufficiency of held collateral.

This renewed lending venture deviates from their December 2022 stance of aiming to wind down all secured loans in 2023. As explained by company spokeswoman Alex Welch, “In Q2 2023, upon receiving loan requests from trusted, long-term clients, we chose to fulfill them.” She further added that all loans would be phased out by 2024. Their goal is to shield clients from liquidity shortages and potential collateral sales at possible loss-making prices.

Welch did not delve into specifics about the reasons clients might need to offload collateral at suboptimal prices or if the company issued new loans to avert client defaults on existing ones. The lack of audited financial statements and a comprehensive balance sheet makes it challenging to gauge Tether's financial stability.

Interestingly, the tether token lending practice contradicts some company disclosures, which hinted at tether issuance only upon receiving currencies like the dollar.

As of September 2022, Tether Holdings had a modest capital buffer of $250 million, about 0.4% of assets, with loans constituting 9%. Twice in that year, the tether token price dipped below the $1 benchmark, indicating investor concerns about redemption capabilities during turbulent times.

By the current year, the company's capital buffer surged to $3.3 billion, or 3.8% of total assets. While the firm asserts that their secured loans are backed by liquid assets, they remain tight-lipped about the nature of these assets and if they encompass cryptocurrencies.

Given that Tether tokens are non-interest bearing, the company stands to gain by placing funds in secure, interest-yielding instruments like Treasurys. This makes lending, which generally attracts higher rates than Treasurys, a potentially lucrative venture.

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Posted: 2023-09-22
By: dwirch
Viewed: 311 times





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