Following reports from WSJ that revealed the company was issuing loans in USDT tokens to institutional clients, the company has now promised to end the business altogether. Tether heeded to investors’ concern that it will face liquidity issues during a financial crisis if the borrowers defaulted.
Tether, issuers of USDT – the world’s largest US dollar backed stablecoin, has vowed to remove all secured loans from its reserves in 2023. This comes after news outlet Wall Street Journal (WSJ) reported that the company was lending out its own tokens to users rather than selling them for hard currency upfront, risking a situation where the stablecoin issuer will not have enough liquidity to pay off loans in the event of a crisis.
In its report, WSJ said that Tether Holdings Ltd. lends out USDT only to eligible customers and requires those borrowers to promise “extremely liquid” collateral, which the company will be able to sell for dollars in case the borrower defaults. Tether’s quarterly financial reports have shown these loans reaching $6.1 billion, or 9% of the company’s total assets, as of September 30. Last year, the loans accounted for $4.1 billion, or 5% of the Tether’s assets.
Tether confirmed that all the “secured loans” listed in its financial statements are issued and denominated in USDT, and were short-term loans where the company holds the collateral. However, Tether revealed very little information on the borrowers or how much was accepted as collateral. According to WSJ, Tether’s growing lending rates possessed a greater risk to the crypto sector where stablecoins are “anchors of the system”, as these tokens are vital for trading crypto assets such as Bitcoin (BTC), Ether (ETH) and Cardano (ADA).
In the case of loans, Tether can’t be certain that it will be paid back by borrowers. While this will be manageable by the company under normal circumstances, but in times of financial stress that uncertainty can lead to investors panicking and making a bank run to redeem their USDT investments. One of Tether’s borrowers was crypto banking platform Celsius Network, which collapsed in July and filed for bankruptcy after facing liquidity crunch. At the time Tether said that its loan position with Celsius had been “liquidated with no losses” to the company.
The main aspect of stablecoins like USDT is that the issuer will always redeem one token for $1, and they are always supposed to maintain dollar parity.
WSJ revealed that the company’s statements only show US dollar amounts for the secured loans and don’t say whether they were issued in USDT. The crypto giant’s third quarter reserves report, released on November 10, showed consolidated total assets of $68.06 billion and total liabilities of $67.81 billion.
Tether says the majority of its assets are held in cash, treasury bonds, commercial paper and other safe instruments that can be easily converted to liquid cash. Earlier this year, financial regulators also criticised the company for not disclosing much information about its reserves. In October, Tether announced that it will be eliminating $30 billion worth of commercial paper from its reserves and converting them to U.S government treasury bonds. This comes in anticipation of a bill being worked on by U.S lawmakers that will require crypto companies operating in the country to maintain their reserves in cash or government issued bonds.
Now the company has promised to wind down its lending business and eliminate all secured loans from its reserves starting next year.
“Tether is professionally and conservatively managed, and this will be demonstrated once again by successfully winding down the lending business without loss – since all loans are over-collateralized by liquid assets,” said the company in a statement.
This comes during a time when the market is facing an unprecedented crisis from the collapse of once second largest exchange FTX. Many crypto companies are now attempting to reassure clients that they are solvent by showing their proof-of-reserves. After FTX announced bankruptcy, Tether issued a statement assuring investors that its reserves are “extremely liquid” with 83% of the total assets being held in cash, cash equivalent and other short-term deposits.
With a total market valuation of over $65 billion, USDT is one of the most popular dollar pegged stablecoins in the sector and is supported on multiple chains including Ethereum, Polygon, Polkadot and Solana. According to data from The Block, Tether makes up 31.6% of all stablecoin supply on the Ethereum network.