Tether’s bitcoin-backed loans collide with dollar promise


A prominent Tether client said the company is lending new stablecoins in exchange for cryptocurrencies – a claim that further challenges Tether’s founding promise that it only uses real dollars to issue its tokens.

Alex Mashinsky, whose crypto lending platform Celsius Network has borrowed from Tether and considers it an equity investor, told the Financial Times that, as part of a loan deal, Tether issued its so-called USDT units in exchange for well-known cryptocurrencies. .

“If you give them enough collateral, liquid collateral, bitcoin, ethereum, etc. . . they will oppose it, ”he said.

“A new USDT is issued for such loans,” he added, then destroyed when the loan is closed “so that it does not permanently increase the USDT in circulation.”

The comments contrast with Tether’s pledges that it will issue units of the world’s largest stablecoin only in exchange for hard currency.

Tether’s long-standing connection to dollars has been the basis of a $ 70 billion stablecoin that lubricates global crypto transactions and provides a smooth way to enter and exit crypto assets like bitcoin and ethereum. .

The stablecoin operator, which was launched in 2014 and has come under intense regulatory and media scrutiny in recent years, states in its current terms of service that “only cash will be accepted upon ’emission”. The terms, last updated in May 2020, explicitly exclude the acceptance of digital currencies such as bitcoin for payments.

U.S. federal and state regulators fined Tether tens of millions of dollars this year after discovering he had previously misrepresented his reserves. The company has neither admitted nor denied the findings of the Commodity Futures Trading Commission and the New York attorney general’s office. Both cases focused on what Tether did with the dollars it received rather than its issuance process.

The one-for-one for dollars issue is widely seen as a key feature of the stablecoins industry and was a focal point of Tether’s whitepaper when it launched seven years ago. An executive at a US crypto platform said he understands that “the only thing you should be able to use to create and redeem is [USDT] is the US dollar ”.

Regardless of its terms of service, in an “introduction” to its issuance process released in May of this year, Tether used broader language to describe how USDT is put into circulation from its inventory.

The alphabet book indicates that “newly issued [USDT] must be backed by a guarantee ”and that“ redeemed [USDT] the tokens are not put back into circulation unless new guarantees have been provided ”.

Asked for comment by the FT, Tether has repeatedly declined to provide details on how its USDT loans work or whether it is issuing new tokens through the program.

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“We have a small group of selected clients who borrow USDT in exchange for collateral. These loans are secured by collateral held by Tether representing well over 100% of the loan proceeds and earn monthly interest, ”Tether said, adding that no loans had been made to affiliated entities.

“Our loan program was first disclosed long ago in the allocation of our reserves and it is no secret. The extent of the program is currently disclosed in our Insurance Opinions, published quarterly. . . This practice is common to other stablecoin issuers. This loan is made in a tight, efficient, secure and profitable manner, ”the company added.

Tether’s reserve disclosures show that about 4% of its total assets, or $ 2.5 billion, as of June this year were “secured loans,” up from 12.6% earlier in the year. The disclosures do not distinguish whether the loans were made by lending USDT in exchange for collateral or by lending dollars that other clients had paid when purchasing USDT.

Mashinsky said USDT loans are typically at least 30% oversized, with the amount varying depending on market volatility. “If bitcoin goes down, they give us a margin call [and then] we have to give them more bitcoins, ”he added. Earlier this month, Bloomberg reported that Celsius had borrowed $ 1 billion in USDT from Tether.

Tether is fighting a class action lawsuit in the United States that alleges it issued USDT without any support in order to make bitcoin purchases as part of a market manipulation program. The company has denied the allegations, calling the case a “mess” and “a clumsy attempt to steal money”. Last month, the federal judge handling the case dismissed half of the complaints but allowed the others to continue.

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