A contrarian look at Tether

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Digital tokens evoked by a child actor from the The mighty ducksmanaged by a former Italian plastic surgeonfiled in Bahamas from a bank owned by a co-creator of Inspector Gadget.

Tether (USDT-USD), one of the most rewarding subjects of financial journalism, he has been blessed with many good jokes like this one, written by FT, Bloomberg and many other reporters looking to untangle her bizarre past.

The central question of all these articles: why hasn’t there been a bank run yet? How do people send hundreds of millions of dollars every day to banker Inspector Gadget to mint Tethers to trade without knowing where their dollars are going? Why, on so many occasions of doubt (from court cases to CFTC fines, all relating to Tether reserves) have they not rushed to redeem their dollars all at once?

Bizarre as it is, Tether continues to stand upright. Not even the dramatic disappearance of Earth-Moon (LUNC-USD) (LUNA-USD) at a time of utmost distrust in any token representing real money could bring Tether down.

Tether as you know is a custodian stablecoin, which means it guarantees that for every $ 1 of Tether, it contains a $ 1 somewhere in safe and liquid form. The problem is, where? Nobody really knows.

Tether’s secrecy, its reluctance to disclose its reserves on a granular level has led to problems for the company, entertaining advertisements and million-dollar fines.

So, like, why is it so tough? OK, there are some explanations.

1.

Some argue that Tether is a bad bank. Because, come to think of it, that’s Tether, a bank. He takes deposits that he should keep safe and coins tokens.

Unlike a bank, it pays no interest to its depositors and, moreover, unlike a bank, its capital requirements are practically nil (0.2%). It could very well be, so the argument goes, that Tether doesn’t want to show what he’s doing with the reserves, actually, because he uses them to earn interest on risky things, which is pure profit for Tether, aka the former plastic surgeon and his crew.

2.

The other reason for Tether’s secrecy is the not-so-obvious fact (unless you’ve followed the path of a cryptocurrency founder) that when you create a cryptocurrency startup, you are turned away several times from different banks in different countries, simply by trying to open a bank account.

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You can imagine that it is not easy for Tether to put those billions in a safe and normal place. It could be the best normal counterparties will not do business with it, bank accounts are closed, prime brokers, which Tether could use to buy securities, will not do business with them.

For one, Bloomberg’s very funny piece on Tether seems to suggest that Tether does not use traditional financial binaries:

To verify this claim, some colleagues and I reached out to Wall Street traders to see if anyone had seen Tether buy anything. Nobody had. “It’s a small market with a lot of people who know each other,” said Deborah Cunningham, chief investment officer of global money markets at Federated Hermes, a Pittsburgh-based wealth management firm. “If there was a new competitor, it would usually be very obvious.”

Tether operates on the fringes of the financial sector, constantly having to reshuffle its portfolio to meet redemptions when needed, without revealing its counterparties. This may be because those counterparts are somewhat obscure (definitely not the branded finance companies of the traditional financial world), but it could also be a boon for Tether to keep things straight …

3.

… which brings me to the third point. It’s a bit esoteric, but please be patient. There is some magic in old world finance. Finance can convert a risky investment into a safe and very risky investment. The “safe” in safe investing it comes from the fact that if something goes wrong, that tranche is paid out first, leaving the very risky tranche with what is left over.

It could be said that the fractional reserve system itself – the system of creating money from the air – works in some way because it is opaque and because people are partly or completely agnostic about how it works.

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Or to put it in better words Matt Levine:

note this is magical: at one end of the process you have risky assets, at the other end of the process you have perfectly safe dollars. Again, this is partly due to insurance and deposit regulation and lenders of last resort, but is mainly due to the magic of composing senior credit over senior credit.

Does a little mystery help Tether? Hedge funds have been shorting Tether or setting put options on Tether for months now. Western hedge funds are reportedly borrowing Tether from Chinese counterparts in exchange for Bitcoin as collateral. They then sell the borrowed Tether in anticipation of its debacle at another time of Earth-Moon stablecoin catastrophe. Or hedge funds buy a put option on Tetherwhich simply means that someone (like Genesis Global Trading Inc.) sells (writes a put option) the right to resell Tether at a certain price.

But not seeing inside Tether, not knowing how, when and what Tether has to sell, move or transfer to accommodate ransoms, just gives them too large an area to attack, which is to short-circuit the same $ 65B token.

Just wild speculation, but let’s say they can see inside Tether. They could attack where it hurts the most at a critical time, such as mirroring the Tether trade and exposing the business that Tether must sell to meet the ransoms, thus disrupting Tether’s ability to make redemptions and triggering a bank run.

The rails for Cryptolandia

When Sam Bankman-Fried explained DeFi as a Ponzi black box Bloomberg, many thought this was the top. But the point he was making, and that many may have overlooked, was that the black box it can be valuable if it reaches a critical mass and stability over time.

Over time, some Magic the boxes become mature, their yields will decrease Magic but they will still offer a better passive rate than what a traditional financial system ever could because, you know, they are fully automated and without humans (no intermediary – no payroll). You can see how many more people will eventually start using them to earn passive day-to-day earnings and more. There is no reason why DeFi can’t overcome its speculative use case and become a financing tool for real-world needs. A world where people will do banking via DeFi boxes.

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Tether is not DeFi. It is a custodian stablecoin. But the broader point is that there is a vision (and yes, that vision is called into question during every cryptocurrency winter) that over time, cryptocurrencies will completely replace the traditional financial system. Technology is simply better. Free encryption vs. secular system that relies on expensive counterparty guarantees.

In this changing world, Tether plays an indispensable role. No matter its strange configuration, Tether seems to be working. In its dark, second-hand way, it always redeems funds and provides an essential product for crypto-land: instant unregulated funds transfers with no foreign exchange risk.

So?

What is the trade? In June Paolo Ardoino, the CTO of Tether got very angry with hedge funds Twitter to short-circuit Tether:

However, in the end these hedge funds, which have borrowed and shorted billions of USDT will have to buy them back. What will happen then? Tether is the only stablecoin tested with fire under extreme pressure.

Anything. It is a stable currency, so if hedge funds are wrong they will pay expensive interest for a short that fails and buy back the USDT for $ 1.

One thing to do is monitor USDT loan rates and consider it as a source of passive income. Higher rates can implicitly mean more interest in betting against USDT. Even during normal times when they’re not high (i.e. times when no funny Bloomberg articles are circulating around), they’re certainly interesting. If you are not convinced by my contrarian thesis, look carefully at the bad headlines before considering this exchange.

If you are going to take something out of this article, please do the loan directly from your cold wallet if possible and only through one of the decentralized lending platforms, such as Aave (AAVE-USD), or reputable exchanges, such as Coinbase (COIN).

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