Senate Banking Committee Chairman sent issuers half a dozen stablecoins letters Wednesday (November 24), demanding that they explain how their tokens are minted and redeemed.
Most of the questions were the same, but they were largely directed at, or at least caused by, one company: Tether.
Read more: Senate wants answers from Tether CEO
By far the largest stablecoins issuer, Tether has 72.5 billion USDT coins in circulation, almost half of the entire $ 150 billion stablecoins market. That’s about $ 21 billion more than any other company Senator Sherrod Brown contacted combined. These included the issuers of the # 2 stablecoin, USDC, with a market cap of $ 37 billion, and the # 3 stablecoin, BUSD, with a market cap of $ 12.9 billion.
The USDT is also the most controversial stablecoin, with serious questions raised about its governance and reserves, and in particular its ability to damage the financial system, particularly if it loses its peg to $ 1.
Most stablecoins maintain their $ 1 value by holding an individual reserve of fiat currency or other highly liquid and, in theory, safe investments. They are widely used to facilitate the trading and lending of cryptocurrencies like bitcoin and ether.
Brown’s six questions all demanded answers about how stablecoins are and have been bought, issued and redeemed.
But the key was the sixth question: “Please summarize any internal reviews or studies your company has conducted on how specific levels of buyback would affect Tether, including its convertibility to US dollars, or affect your company’s financial position.” . “
That is, what would happen if there was a run on your stablecoin?
Run for the hills
In traditional bank runs, so many buyers try to redeem their funds that the bank cannot meet the demand and fails. It’s terrible for customers, but if this bank is big enough, a leak could pose a systemic risk to the US economy.
In the case of a stablecoin, its value could – and in many cases smaller – drop to zero.
This is where Tether stands out.
Most cryptocurrencies are bought and sold in stablecoins, and Tether is used in many of these transactions. To put it in perspective, 24-hour Tether trading volume on Wednesday stood at $ 86.1 billion, almost 20% above its total market cap. Without USDT, it would become much more difficult to buy and sell cryptocurrency.
But more damaging, many cryptocurrency investors, especially the big ones, put huge sums of money into Tether.
If Tether failed and lost its one-to-one peg with the dollar, there would be “a severe liquidity shock in the larger cryptocurrency market,” JP Morgan said earlier this year.
Five questions for Tether
Brown’s letter was pretty clear that the committee is only looking for a “better understanding of the basic workings and limitations” of stablecoins like Tether, as they are trying to understand the risk there is to the economy in the broad sense.
Here are the toughest questions about Tether that need to be asked.
- Do you have enough cash in your reserves to cover an increase in redemptions?
There are some pretty strong arguments to prove that the answer is no. After years of refusing to provide an audit of its reserves – many of them claiming the USDT was backed “one-to-one” by US dollars – Tether in May issued a “statement” from a firm of Caribbean audit, Moore Cayman, which found that only 2.9% of its reserves were held in cash.
Tether said he had always been able to cover repayments, even when bitcoin collapsed by around 30% in two weeks last May.
- So where’s the rest and what’s the sound?
Almost half of Tether’s reserves were held in commercial paper, which are short-term, unsecured business loans. Tether did not reveal any information about the ratings of these loans, or the companies to which they were made.
Another 12.5% ââwas in secured loans, 10% in corporate bonds and precious metals, and about 18% in escrow deposits, and the rest in cryptocurrency, treasury bills and other investments.
- Why haven’t your reserves been officially audited?
Another problem is that an attestation is not an audit. An audit would show an income statement, cash flow, balance sheet detailing assets, liabilities and equity. A certificate is just a snapshot of the company’s finances.
- Why did it take a lawsuit from the New York attorney general to get you to disclose information about your reservations?
Tether only released information about its reserves after settling a lawsuit filed by the NYAG office, which accused the company of fraud and securities law violations after covering up that its reserves had plummeted. to 74% of its market cap after loaning hundreds to sister company Bitfinex. million dollars in 2018. Bitfinex – which shares management and ownership – was stolen $ 850 million by its payment processors in 2017.
The lawsuit was settled without an admission of wrongdoing with a $ 18.5 million fine – and a promise to provide details of its reservations – in February. The Commodity Futures Trading Commission (CFTC) fined Tether $ 41 million for the actions in October.
- How big of a buyout run could Tether cover before it is unable to meet the demands?
If Tether was unable to meet redemption requests, it could lose its peg at $ 1, destroying the entire cryptocurrency market. Such a collapse is a scenario that has raised “significant concerns from the perspective of investor protection and market integrity,” according to a long-awaited stablecoin report released on November 1 by the Interagency Task Force of the president of financial markets.
See more : Stablecoin Risk Mandates Legislation
The report’s solution was to recommend that Congress pass legislation allowing only federally insured banks and deposit-taking institutions to issue stable coins.
That’s why the Chairman of the Senate Banking Committee wants to know how tough Tether and his fellow stable issuers can resist.