The Unsolvable Problem in Tether’s Reserves

Tether is extraordinarily large and has very little cash. Approximately half of their reserves are in commercial paper that we know very little about. However, the strange thing to me is that it seems like they could be an extraordinarily profitable business, even if their reserves were massively less risky.

There are currently 62.5 billion tethers. The assumption is that Tether was at one point given a dollar for every single one of these tethers and then they converted it to the various shit assets in the reserve.

The current return on a 10 year US treasury, one of the safest assets in the world, is 1.38%. If Tether’s reserves were entirely in 10 year treasuries (with enough liquid cash to handle the rare redemptions), then they would be making over $800 million in interest from those alone.

This does not include any extra fees that Tether collects on issuance, redemption, or recovery. They would be making nearly a billion dollars a year on the interest alone, even if they were in one of the safest assets possible.

However, Tether’s assets are not primarily in those assets. Is the reason for this that Tether was so desperate to make more that they had to keep finding riskier assets, or is the reason more insidious?

The most likely reason to me is that they have not received a dollar for every Tether issued.

I think the financial arrangements between Tether and it’s clients are much more complex.

Consider that we know from the NYAG case that Tether was loaning Tethers to a New York based trading firm (likely Galaxy Digital). I think it’s extraordinarily likely that other clients of Tether have entered into financial agreements with Tether that result in them getting Tethers where they did not first provide the dollars.

What exactly these agreements look like is unclear at this point, but I am extraordinarily curious about the commercial paper, the ‘Secured Loans’, and the ‘Fiduciary Deposits’. This might also explain some of the reticence to show what redemption look like, my intuition is that they often do not look like getting cash back, but instead are applied against loans or other agreements.

We are unlikely to know all the details unless someone comes forward with them.

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