Tether still won’t let an auditor inspect the reserves allegedly backing its $85 billion in stablecoins, while rival Circle appears to be taking steps to minimize its USDC stablecoin serving as Tether customers’ exit liquidity.
Tether released its Q3 reserves attestation on Halloween, a suitably scary date for exposing the phantasmagorical horrors of its balance sheet. BDO Italia, which prepared this in-no-way-adequate-substitute-for-a-professional-third-party-audit, emphasized that its report was the fiscal reality that Tether ‘asserted’ on September 30, with no assurances whatsoever for any reality that may have existed before or after that date.
Assuming you believe in ghosts, goblins, and The Great Pumpkin, Tether closed out the three months ending September 30 with assets of just under $86.4 billion, around $5.2 billion more than the $83.15 billion in USDT circulating as of that date. The Q3 assets are slightly below the $86.5 billion Tether reported in Q2, and, as always, the devil’s in the details.
Tether trumpeted the “notable milestone” of the ‘cash & equivalents’ segment of its reserves, hitting 85.7% of the total, “the highest percentage ever recorded.” This includes $56.6 billion in U.S. Treasury bills, up from $55.8 billion in Q2.
Tether’s ‘total exposure’ to T-bills—including overnight reverse repo agreements, term reverse repurchase agreements, money market funds, etc.—is $72.6 billion, only around $100 million higher than in Q2. Mind you, Tether is still refusing to provide CUSIP numbers
for these T-bills, meaning there is as much hard evidence for the existence of Tether’s T-bill mountain as there is for Donald Trump’s self-reported weight of 215 pounds.
Then there’s Tether’s actual cash on hand, which reversed its multi-quarter decline by raising over $200 million to $292.6 million in Q3. That’s still around $5 billion below what Tether claimed to have in the bank at the end of last year.
Meanwhile, Tether is still having difficulty collecting on its ‘secured loans,’ despite its previous promise to purge these items from its balance sheet. After raising $150 million to $5.5 billion at the end of Q2, Tether closed Q3 with $5.17 billion in loans on its books.
Tether put a hard spin on this minor loan reduction, claiming that since its ‘excess reserves’ are $3.2 billion, the loans actually represent only $2 billion of its USDT reserves. Moreover, since Tether’s excess reserves allegedly rose by another $1 billion as of October 31, Tether chooses to believe that there’s actually less than a billion in loans left on its books.
But given that Tether promised last December to reduce these loans “to zero” by the end of 2023, it’s running out of time to fulfill that promise. Then again, since it’s been 27 months since Tether promised a proper third-party audit was “months, not years” away from completion, no one really expects Tether to honor any of its public pledges.
Now, with 240% more terror funding!
Tether’s timing could be better, as its Q3 attestation came just days after U.S. senators demanded “swift action” against both Tether and the Binance exchange. The pair were targeted for their lengthy history of facilitating transactions on behalf of illicit actors, including terror groups and sanctions dodgers. Tether has been trying hard to change the subject, but the hits keep coming.
On Tuesday, the Financial Action Task Force (FATF) intergovernmental agency issued a report on Crowdfunding for Terrorism Financing. The report referenced TRM Labs’s recent Illicit Crypto Ecosystem Report, which noted the increasing popularity of USDT among terror groups, particularly on Justin Sun’s Tron blockchain, where most USDT resides.
Among the terror groups tracked by TRM in 2022, there was a 240% year-on-year increase in the use of USDT compared with a comparatively modest 78% rise in BTC use. Tron also accounted for nearly 40% of the total incoming volume of active investment fraud schemes in 2022, “mostly via USDT.”
Also on Tuesday, Taiwanese media reported on the disruption of a USDT-based money laundering ring that assisted overseas criminals involved in fraud and online gambling. The Taiwan Criminal Bureau’s Electronics Investigation Team said the action resulted in the largest seizure to date from a single money laundering group.
Still on Tuesday, Chinese media reported that a court in Tongliang sentenced a total of 21 defendants to prison terms ranging from one year to six years and three months for ‘concealing the proceeds of crime.’ The defendants were part of a ring that helped criminals involved in fraud and online gambling convert RMB 2.25 billion (US$308 million) in USDT into cash that was then smuggled out of the country.
For consumer accounts, there’s no ‘U’ in USDC
Tether’s reserves have previously been likened to a ‘black box’ while the minting process for its USDT stablecoin has always been the stuff of cloaks and daggers. Tether refuses to redeem USDT in amounts lower than US$100,000, and since U.S. banks want nothing to do with Tether, rank-and-file USDT holders must find someone else willing to take USDT off their hands.
Because USDC issuer Circle does have U.S. banking access, an increasingly popular trading pattern has emerged in which USDT is traded for USDC—often with trades for other tokens like BTC in between—and then redeemed for cash. A similar pattern involves the conversion of Justin Sun’s unbacked/unbanked TUSD stablecoin for USDC.
This has led to an inverse relationship between the two biggest stablecoins’ market caps: USDT has grown while USDC has shrunk. And Circle appears to have finally grown weary of serving as Tether’s exit liquidity.
On Tuesday, word spread that Circle was contacting customers to inform them that “as part of Circle’s strategic review, consumer-only Circle Accounts will no longer be supported.” As of November 30, Circle will “discontinue wiring and minting functionalities” for these non-business/non-institutional accounts, after which the consumer accounts will be permanently closed.
As online chatter grew, Circle CEO Jeremy Allaire was compelled to tweet about the “lots of noise” surrounding these changes. Allaire claimed that Circle “haven’t allowed individuals to open Circle accounts in years and have been institution only for years as well.” Allaire insisted the only change was that Circle would no longer support the “few thousand individual user accounts that were still open with us.”
Those individual accounts may have been utilized as funnels through which large amounts of USDC were redeemed on a piecemeal basis (much as methamphetamine cookers used to employ scores of individual ‘smurfs’ to buy restricted supplies of pseudoephedrine from pharmacies).
USDC’s market cap shed another couple hundred million following Tuesday’s news and is currently struggling to stay above $24.7 billion, down from its mid-2022 peak of over $56 billion.
Others who noticed Circle’s email to consumer account holders honed in on Circle’s mention of a ‘strategic review,’ a reference that generally signifies (a) the recognition that what you’re doing now isn’t working and (b) the need to batten down the fiscal hatches before a bad situation gets even worse.
The reduction in the amount of circulating USDC means a reduction in Circle’s ability to generate income by investing USDC’s reserves in things like T-bills, which are currently paying high-interest rates not seen in decades.
This ever-shrinking revenue base contributed to the recent breakup of Centre, the so-called industry ‘consortium’ that was never more than a partnership of Circle and the Coinbase
(NASDAQ: COIN) exchange. Circle and Coinbase rejigged their relationship in August, eliminating Coinbase’s ability to issue new USDC and revising their revenue split based on “the amount of USDC held on each of our platforms.”
Coinbase will issue its Q3 earnings report on Thursday, and while the change didn’t occur until midway through the quarter, the report will offer a preview of the full impact of its revised USDC partnership. Coinbase’s Q2 report showed a double-digit reduction of its ‘interest income’ as USDC’s market cap shrunk this spring, and that cap shrunk another 8% during Q3.
Honestly, who knew stablecoins could be so destabilizing?
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