The Historic Significance of Tether’s $16B ‘Bank Run’

What is Tether, really?

The stablecoin — which has booked billions of dollars in redemptions in recent weeks — is an unregulated money-market fund to some skeptics, one that doles out a churning supply of thinly-backed tokens in exchange for a risky, and arguably illiquid, IOU.

Other skeptics reckon to blame are wildcat bankers pushing the fringes of finance — printing far more pseudo-dollars than can possibly be redeemed for cash. Whatever the rationale, crypto industry leaders are fretting Tether could be the next stablecoin domino to fall, after Terra’s UST recently sent markets spiraling. 

But to major crypto exchanges, market makers and traders who move markets, Tether is more-or-less above board in servicing the digital asset industry with liquid, dollar-pegged tokens in lieu of regulated, traditional banking counterparties that could facilitate fiat liquidity. 

Sam Bankman-Fried, founder of investment firm Alameda Research and exchange FTX, has often played defense for Tether against probing journalists detailing the firm’s red flags. 

CMS Holdings Principal Dan Matuszewski — formerly Circle’s head of trading — has described witnessing billions of real US dollars sent to Tether sister organization Bitfinex in exchange for USDT, disproving — in Matuszewski’s view — claims of Tether printing unbacked crypto-dollars out of thin of air to pump the price of bitcoin.

For now, the duality dividing Tether supporters and naysayers is far from reconciliation. Some pundits still don’t totally trust the leading stablecoin issuer, despite it redeeming $16.3 billion in USDT since the start of May, tokens it burned to reduce the supply by 20%.

It marks the largest dollar-denominated burn in Tether’s checkered history. The stablecoin issuer would not have burned the tokens — but would rather use them for liquidity for new purchasers — if ample demand was there from incoming buyers, industry observers said. 

The demise of algorithmic stablecoin Terra’s triggered the “run” on Tether. Skittish whales and other order book greasers sought shelter in rival Circle’s USDC, whose circulating supply surged 15% — representing more than $7.6 billion.

Every USDT redemption involved Tether handing $1 to its redeemer, a Tether spokesperson told Blockworks in an email. The assertion matches reassurances made by Chief Technology Officer Paolo Ardoino as USDT’s peg to the US dollar wobbled throughout Terra’s collapse, reaching as low as $0.97 on May 12.

Tether engages in “constant risk-management and stress-test scenarios,” the spokesperson said, to ensure a “liquid portfolio of assets to manage redemptions, even in a bank-run scenario.” They added recent redemptions and “the ongoing stability of USDT” serves as a “battle-tested affirmation of the strength, stability and liquidity of USDT.”

Only Tether truly knows what backs Tether

But it’s precisely Tether’s purported liquid asset portfolio that attracts detractors. The firm issues quarterly disclosures of the general makeup of the reserves which back USDT — a result of the New York attorney general’s $18.5 million settlement over alleged financial mismanagement in February 2021.

Following November 2018, the attorney general found USDT wasn’t backed 1-to-1 with the dollar, as Tether had claimed, after the firm obfuscated $850 million of losses after raids on then-payment provider Crypto Capital in Poland. 

The disclosures are far from granular, providing only surface-level details, such as the weight of cash and equivalents, loans, corporate bonds, digital assets and the ever-curious commercial paper. 

Tether says it’s transitioning away from commercial paper in favor of US Treasurys, which are far more stable and liquid. Tether was backed by nearly 48% US Treasury notes as of March 31, according to a Cayman Islands-based accounting firm. (Parent Tether Holdings is incorporated in the British Virgin Islands.)

At the time, Tether’s disclosed Treasury stash would’ve been worth some $39 billion. Considering the average daily trading of Treasury markets exceeds $668 billion, Tether would have had no problem liquidating at the drop of a hat.

In a statement provided to Blockworks today, Tether noted that its commercial paper portfolio had shrunk to $8.4 billion — less than 13% of its current market value — of which $5 billion will expire on July 31. 

After that, Tether’s commercial paper assets will hit $3.5 billion; the goal is to bring that figure down to zero, the company said, increasing the weight of US Treasurys in its reserves and limiting exposure on individual issuers and assets.

For a private firm — tied to a web of affiliates and shell companies hailing from a motley assortment of tax havens — to service more than $16 billion in dollar redemptions in eight weeks indicates, to be sure, the end is not nigh.

A real Tether bank run would be much worse

The Tether “run” might not perfectly represent an old-school bank run, when customers panic and withdraw cash with haste. 

A recent example: nearly $10 billion in foreign exchanges processed by Russia-based banks as rolling Western sanctions struck Moscow following its invasion of Ukraine.

Tether, on the other hand, only allows redemptions from verified entities that want to service at least $100,000 worth of USDT. 

“I’ve always thought of Tether as like a private sector central bank,” Frances Coppola, a financial commentator and vehement Tether critic, told Blockworks. 

Added Coppola: “In a Tether bank run, you would see people dumping USDT alongside the euro and yuan equivalents, probably for USD, or maybe USDC, and we have seen that. So, there has been a bit of a run on Tether, that’s why it depegged, but it played out through the exchanges.”

At best — it was only a small run, according to Coppola. A significant run would’ve seen USDT trade even further below its peg, alongside severe liquidity strains on exchanges.

Bank run or not, Tether redemptions are notable 

Indeed, bank runs are more immediate than Tether’s recent redemption wave, Lawrence White, an economics professor at George Mason University who studies crypto, told Blockworks.

They also usually result in 100% of deposits being withdrawn, according to White. The Tether run constituted only 20% over two months.

White noted Tether being compelled to redeem one-fifth of its liabilities is “pretty big.”

“I mean, banks traditionally hold less than 20% reserves, so to redeem that much requires selling off some secondary reserves,” he said.

It’s unclear, exactly, which assets Tether had to liquidate. The firm hasn’t yet responded to a request for comment. 

Tether’s next disclosure is due June 30 but probably won’t come for another six weeks. White said Tether likely sold the most liquid assets.

Crypto exchanges processed roughly $63 billion in USDT trades over the past 24 hours — nearly five times the collective volumes of every other stablecoin, per CoinGecko.

A verifiable stablecoin giant in a world decrying its place in crypto.

---

Get the news in your inbox. Explore Blockworks newsletters:

• Blockworks Daily: Unpacking crypto and the markets.
• Empire: Crypto news and analysis to start your day.
• Forward Guidance: The intersection of crypto, macro and policy.
• 0xResearch: Alpha directly in your inbox.
• Lightspeed: All things Solana.
• The Drop: Apps, games, memes and more.
• Supply Shock: Bitcoin, bitcoin, bitcoin.