Why $104bn Tether ‘exists at the pleasure’ of the banking system

With over $104 billion in market value, USDT is by far the largest stablecoin in the world.

While the currency's issuer, Tether, has been plagued for years with rumors that his assets are not fully backed, Arthur Hayes, founder of crypto exchange BitMEX, recently wrote that the company's weaknesses have nothing to do with the state of its reserves.

Rather, it is the way it is integrated into the broader financial system that poses risks for the company.

Tether banking partners

According to Hayes, Tether's vulnerabilities lie in its relationships with the Federal Reserve, the US Treasury, and its own banking partners.

“Tether exists for the pleasure of its poorer TradFi banking partners,” Hayes wrote, using the crypto term for traditional finance.

"The jealousy of the banks and the problems that Tether creates for the guardians of the Pax Americana financial system could instantly spell the end of Tether," he added.

The first problem has to do with Tether's five banking partners: Britannia Bank & Trust, Cantor Fitzgerald, Capital Union, Ansbacher and Deltec Bank and Trust.

The problem, according to Hayes, is that none of these banks have master accounts at the Federal Reserve. That means each must use a correspondent bank to move Tether's US dollars throughout the financial system.

And while Tether's banking partners are comfortable providing services to crypto companies like Tether, their correspondent banks may not feel the same way.

“Sometimes certain crypto customers are excluded from smaller banks at the behest of the correspondent bank,” Hayes wrote. "If the smaller bank does not comply, it loses its correspondent banking relationship along with the ability to move dollars internationally."

In other words, these correspondent banks could pressure Tether's banking partners to leave the company, which would, in turn, lock Tether out of the financial system.

The Federal Reserve

Tether also acts as a fully reserved bank, Hayes said, because it accepts deposits in US dollars, issues USDT coins in exchange and does not lend out the deposits.

But the US central bank doesn't like fully reserved banks, according to Hayes. This is because they are expensive: the Federal Reserve pays interest on the banking system's reserves to incentivize fractional banks (banks that lend out some of their deposits) not to lend too much, with the goal of avoiding another bank failure like the one in 2008.

While Tether cannot deposit directly with the Federal Reserve, it has access to a similar program through money market funds. The company has more than $80 billion in money market funds and Treasury bills.

The interest rate you receive on these is close to the federal funding rate, which now ranges between 5.25% and 5.5%.

Put another way, the Federal Reserve is paying Tether billions of dollars simply for processing USDT deposits and refunds.

“Tether is questioning the Federal Reserve. And the Federal Reserve doesn't like it,” Hayes said. "Yeah [correspondent] "Banks abandon Tether for some reason, the Fed won't do anything to help."

The US Treasury

The US Treasury is also not very interested in Tether, Hayes said, because Tether's holdings of Treasury bills are huge.

The binding was between The top 22 holders of US debt in September, ahead of other nations such as the United Arab Emirates, Spain, Mexico and Australia, according to Tether CEO Paolo Ardoino.

And with US Treasury market liquidity on the decline, it would take a smaller amount of selling to disrupt the market.

"If Tether were to quickly sell its holdings for any reason, it could cause chaos in global bond markets," Hayes said.

The Treasury will likely step in to ensure Tether can unwind its positions in an orderly manner should correspondent banks decide to cut it, Hayes said.

"But what Yellen certainly won't do is help Tether find another long-term banking partner," he added, referring to US Treasury Secretary Janet Yellen.

Hayes' fund, Maelstrom, is a founding advisor to Ethena Labs, a crypto company that launched its own stablecoin in February.

Tether did not respond to requests for comment.

Crypto market drivers

• Bitcoin fell 1.5% to trade at $69,660 on Friday.
• Ethereum followed with a 1.7% drop as it changed hands for around $3,500.

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Tom Carreras is a markets correspondent at DL News. Do you have any advice on the crypto markets? Contact tcarreras@dlnews.com