Stable coins are an essential part of crypto just like USD is to fiat markets. While USD is pegged to faith and not gold anymore, USDT is supposed to be pegged to USD and maintain a considerable amount of cash and cash equivalents.
This is where the problem starts. By definition, a commercial paper is an unsecured short-term promise issued by corporations and they are not FDIC-insured. It’s time to analyze the MHA Cayman Report on Tether’s $USDT.
What is backing the $USDT circulation supply of ~$78 billion?
Before we proceed, let’s explain something about ratings:
- A-1+: issued commitment to meet its obligation is very strong (10% of portfolio)
- A-1: issued commitment to meet its obligation is strong (52% of portfolio)
- A-2: issued is susceptible to adverse economic conditions, but its capacity to fulfill the financial payment is satisfactory (36% of portfolio)
- A-3: issued is susceptible to adverse economic conditions and its capacity to fulfill the financial payment is at risk (2% of portfolio)
Approximately 85% of the USDT’s peg is composed of $20bi of commercial papers and certificates of deposits along with $39bi of US T-Bills (short-term U.S. government debt obligation) that are highly sensitive to interest rates since this kind of investment is Mark to Market (MTM). This means that even though the default risk of T-Bills is almost null, the investor can have a negative return if decides to cash out before the full maturity.
In addition to that, MHA Cayman is a small company without proper international recognition. This is a different situation from $USDC, for example, which is closer to regulatory boards and audited by a Top5. Coincidently or not, $USDC has recently increased its circulation supply and maybe this can be related to some investors abandoning $USDT.
Every crypto investor should be asking himself some questions right now:
- Am I comfortable with these numbers?
- Is the peg of stable coins real, auditable and trustable?
- Can we keep moving forward without regulation?
When you think you know all the answers, a crypto winter comes and changes all the questions. Bear markets come and go. As an investor, your decisions during this winter will seal your destiny.