What to watch for in Tether's upcoming attestation report
20 May 2022 | 1:33 pm

[This is a repost of an article I wrote for CoinDesk earlier this week about what to expect from Tether's soon-to-be published quarterly attestation report. Tether's report was published the day after I wrote the article. My initial reaction to the new numbers is here, on Twitter. In brief, it's good to see Tether add more safe treasuries. The bad news is that Tether's murky "other investments" category hardly shrunk.]

What to Watch for in Tether's Upcoming Attestation Report

With the crypto bull market turning into a rout, speculators and investors have been cashing out of stablecoins in droves. Into this chaos, the world’s largest stablecoin issuer – Tether – is about to publish its most important reserve, or attestation, report ever. Here’s why Tether’s upcoming attestation is key and what investors are looking for.

It’s been a difficult few months for stablecoins. According to data from Coin Metrics available at The Block, the total value of the stablecoin market has fallen from $182 billion in April to $154 billion today, a quick 15% reduction.

Most stablecoins have hewed tightly to their peg through the Great Stablecoin Pullback of 2022, including second- and third-ranked USD coin (USDC) and BinanceUSD (BUSD), both U.S.-domiciled. The decline in the values of these stablecoins comes purely from a fall in quantity as people convert stablecoins into actual U.S. dollars. The pegs of large decentralized collateralized stablecoins like DAI and MIM have also held, as people redeem them for underlying collateral like ethereum and USDC.

This shrinking in the quantity of stablecoins is a healthy market reaction. Given that crypto activity has petered off over the last months, fewer stablecoins are needed to grease the rails of the crypto economy. It’s the task of stablecoin issuers to hoover up unwanted stablecoins in order to contract their supply and keep their price locked at $1.

Alas, other stablecoin pegs have completely broken down, most famously terraUSD, an undercollateralized “algorithmic” stablecoin that, at the time of writing, is trading at 9 cents. Several other uncollateralized stablecoins, including neutrino USD and Deus Finance's DEI, have also experienced large deviations from their peg. Kava Network’s USDX recently fell to 80 cents, reportedly due to its exposure to terraUSD backing.

Then there’s tether (USDT), the world's largest stablecoin. The price of tether on large exchanges like Coinbase, Binance, Uniswap and FTX temporarily plunged to 95 cents on March 12. It has since risen back towards $1.

But the price of tether has not quite clawed back to the exact same $1 watermark to which it adhered prior to March 12. It is trading at just under $1 on major centralized exchanges like FTX and Coinbase. On the decentralized stablecoin market Curve, $100,000 USDT can only be converted into $99,851 USDC, a small but notable discount. Also worrisome is the continued unbalancing of Curve’s 3pool, a major source of stablecoin liquidity, with tether now making up for 74% of value locked-in.

All this suggests that there's still too many tether stablecoins in the market, and that the only remedy is additional supply contractions.

Tether has already shrunk dramatically over the last week. After hitting a peak of 83.2 billion USDT in circulation just last week, redemptions have reduced this amount by 11% to 74.2 billion. To repeat, there is nothing unhealthy per se about a supply contraction. The demand for tethers is lower and supply must be reduced to adjust to this demand.

However, more redemptions will be necessary to return tether to its tight $1 peg across all trading venues. Add to this the possibility that the prices of bitcoin, ethereum and other coins may fall further, inducing additional contractions in stablecoins supply, and tether could have another few billion in shrinkage ahead of it.

Is that something tether can handle?

Unfortunately, the Great Stablecoin Pullback of 2022 comes at an inopportune time for tether users. Thanks to issuer Tether’s policy of only publishing reserve reports every 90 days, they face a shortage of timely information about the assets used to back USDT.

When a stablecoin issuer issues stablecoins into the market, it normally keeps a corresponding asset in reserve to secure, or back, the stablecoin’s peg. As redemptions requests arrive, these reserves get used up. Because a stablecoin’s reserves are key to guaranteeing stability, the big, centralized stablecoin issuers have adopted the practice of providing information about their assets. In regularly published attestation reports, an independent auditor is asked to offer assurance about the quantity and composition of reserves backing the stablecoin.

The people behind USDC and BinanceUSD publish monthly attestations. Alas, Tether has the slowest attestation schedule of the bunch, reporting on a quarterly basis. With Tether's March 31 attestation report still not published, investors find themselves having to fall back on Tether's Dec. 31, 2021, report. But that was an eon ago in cryptocurrency time.

There was plenty to like from Tether’s old report. As of Dec. 31, 44% of Tether's $79 billion in assets were held in safe U.S. government-issued Treasury bills. This constitutes a big improvement from previous quarters. For instance, when Tether first began to report its asset composition to the public in early 2021, only 2% of its assets had been placed in Treasury bills while a hefty 50% had been allocated to riskier commercial paper, the rating of this paper not being reported.

The amount of commercial paper Tether holds had been steadily reduced over time, reaching 31% on Dec. 31. And thanks to improved disclosure by Tether, we now know the rating of this paper: most was A-1 or A-2, which qualifies as investment grade.

Another $4.2 billion, or 5%, was invested in safe cash and bank deposits as of Dec. 31.

This combination of safe investments – cash, investment grade commercial paper and Treasury bills – will have been great fodder for meeting the first $9 billion or so in Tether redemptions. It will be invaluable for subsequent waves of redemptions requests, too.

These improvements are the result of an awkward and confrontational dance between Tether executives and so-called “Tether truthers.” To counter critics, the company has been forced to cough up ever more internal data, which has fueled better criticism, which pushed Tether to make follow-up changes like shifting into safer assets like Treasury bills. Tether now has a serviceable front-line defense against redemptions – thanks in no small part to its critics.

But there were problems with Tether’s Dec. 31 attestation, too. The most concerning part was the $5 billion in "other investments," which comprised 7% of Tether’s total assets.

What exactly are these investments? Did their value suffer in the generalized crypto price collapse of the last few months? Unfortunately, we don't know the answers to these questions because Tether doesn't disclose any information about its “other investments.”

Another less-than-stellar contribution to Tether’s Dec. 31 reserve report was the 10% invested in a combination of secured loans ($4.1 billion) and corporate bonds, funds and precious metals ($3.6 billion). Tether provides few details about the quality of these investments.

These are all questions a Tether owner will probably want more clarity on as they watch Tether meet the current round of redemptions. In its upcoming March 31 attestation report, which Tether should be publishing any day now, investors will be looking for some assurance on these issues.

So what would the perfect March 31 attestation report look like?

Ideally, between Dec. 31 and March 31, Tether will have shifted even more of its customers' funds into Treasury bills and cash. One hopes this movement into Treasury bills will have displaced riskier investments, particularly the murky "other investments" category. The safer Tether's assets were going into the Great Stablecoin Pullback of 2022, the more confidence investors can have that USDT’s peg will hold.

Investors will also want to know more about the quality of Tether’s more opaque investment categories. Without clarity, they could start to worry that Tether’s “other investments” or secured loans were impaired during the big drop in crypto prices. These worries, warranted or not, could ignite additional redemptions as Tether holders line up to get dibs on Tether's safest Treasury bill collateral.

In addition to the hoped-for improvements to Tether's investment quality, Tether needs to publish attestations on a more frequent basis in order to remove informational dry spells like the one investors currently find themselves in. Tether once boasted that it leads the industry on transparency. But it’s behind USDC on this front, which provides monthly reports.

Even better would be to copy competitor TrueUSD and go real-time. Can’t sleep on a Saturday night and want to see if your stablecoin is still well backed? TrueUSD provides 24/7 real-time attestations. Stablecoin owners shouldn't have to rely on information from 137 days ago to deal with breaking market conditions.

Let's hope that Tether's attestation comes out soon and dispels any worries. It remains the most important utility in the crypto economy. Everyone is watching.

The vandalization of "bitcoin accepted" signs
14 May 2022 | 12:56 pm

[Here's an article I wrote for CoinDesk's recent Payments Week series.]

Why We Need Crypto Payments to Work

Crypto has always held out the promise of a payments revolution. But that revolution never happened.

We're 13 years into the Bitcoin age, and there’s only one store in my neighborhood in downtown Montreal that advertises that it accepts bitcoin. I was passing by that store the other day and noticed that a vandal had crossed out the bright orange ₿ written on the storefront, adding a "non" in protest.

Why? The vandal didn't provide us with more information. But if I had to guess it probably had to do with their opinions on the environmental implications of bitcoin's security method, proof-of-work. Proof-of-work requires huge amounts of electricity, and in an age of global warming there's no place for such an awesome display of energy consumption.

This small example is illustrative of the crypto payments challenge. It's tough enough for crypto to gain acceptance as a payments network. The medium’s inherent volatility and novelty are huge hurdles. Add to that concerns about crypto’s effect on the environment, and getting the payments ball rolling becomes even more of a challenge.

But even normies who don't care about crypto should want it to succeed as a payments medium.

Cash is rapidly disappearing as a payment medium. The big winners are the Visa and MasterCard card oligopolies. Every time someone deserts cash, the card networks get a little more powerful. As consumers we don't often notice the few cents that the card networks extract from us when we pay with our debit or credit cards, but it leads to fantastic profits for them. Visa and MasterCard's returns on equity – 40% and 120% respectively – give testament to their wide oligopolistic moats. (The average company's return is a meager 10-15%).

There are a number of solutions to oligopolies, one of them being competition. If there are more payment networks fighting for market share, we consumers (and the retailers we frequent) can at least choose the cheapest one.

And that's why it would be nice if crypto worked for payments.

Alas, crypto usage has been mostly confined to the relatively small confines of the speculative crypto economy, only leaking out once in a while to serve as a normie payments medium. These leaks may be slowly plugging up, too. Over the last year or so, activists have been trying to push the small advance that crypto has achieved in the payments realm into retreat.

My neighborhood store is just one example. The storekeeper's internal dialogue might have gone after seeing their store window vandalized: "Why bother accepting the odd bitcoin payment when it attracts such negative attention?"

Last month, hundreds of long-time Wikipedia editors asked the Wikimedia Foundation to stop accepting cryptocurrency, the most popular reason put forth being its environmental sustainability. A few months before, Discord – a popular messaging platform – quashed rumors of a cryptocurrency integration after pushback from users concerned over energy use.

The Wikipedia editors' vehemence stands in contrast to the tiny amount of crypto that Wikimedia has collected. According to Wikimedia, just 0.08% of its donations have been in crypto, mostly bitcoin. The Wikimedia Foundation has little reason to say no to the activists. At 0.08%, crypto isn't proving to be very useful for accepting payments. Why bother pushing back?

Had the activists campaigned for Wikimedia to stop accepting Visa, for instance, it'd be a complete non-starter. Visa has an advantage over crypto. It’s already big, likely accounting for a decisive percentage of Wikimedia donations.

That you can’t say no to Visa, but you can say no to crypto, illustrates the crypto payments dilemma. Retail payments networks are notoriously difficult to bootstrap. It's the classic chicken-and-egg problem. For an individual to adopt it, a new payment option needs to be already useful (by being widely available and spendable at shops), but it can't be already useful if no one wants to try it in the first place.

Making this paradox worse is that the card networks already have firm footholds. People have grown used to their plastic, and the incumbents use dirty tricks to enforce lock-in, like card reward points and no-surcharge policies. The nut is made even harder to break by crypto's incredible volatility. Risk-averse new users are reluctant to try it.

But the crypto world has evolved a response to volatility. Stablecoins are a type of cryptocurrency that is pegged to traditional fiat money, which makes them less intimidating for people to use. And so where regular crypto comes short, stablecoins at least stand a fighting chance against the MasterCard and Visa oligopolies.

Unfortunately, stablecoins are built on energy-intensive proof-of-work blockchains, which opens them up to the growing environmental critique. Given the already difficult chicken-egg payments problem being faced by stablecoin issuers, the last thing they need is for card users to come up with one more excuse not to give stablecoins a try.

Mozilla's recent reappraisal of its crypto acceptance policy provides a good example of how I hope the debate evolves. In January, Mozilla – the nonprofit organization that makes the Firefox web browser – decided to temporarily pause cryptocurrency donations to see how crypto "fits with our climate goals."

This month Mozilla announced its new policy. Rather than closing the door on crypto, it came up with a more nuanced solution. Mozilla won’t accept proof-of-work coins, but it'll accept proof-of-stake cryptocurrencies it sees as "less energy intensive."

If Mozilla's more welcoming policy is emulated, and one hopes it is, it offers stablecoin issuers a window. But this window comes at a price. If stablecoins are ever going to compete in a meaningful way with the card networks, they need to dissociate themselves from proof-of-work. That may mean avoiding expansion to proof-of-work blockchains. At the worst, it means helplessly waiting while the proof-of-work chains on which they already exist, like Ethereum, switch over to less energy intensive security methods.

Removing as much ammunition as possible from critics will make the already difficult chicken-and-egg payments problem a little easier for stablecoins to solve. We need them to win, though. Visa and MasterCard aren't getting any less dominant.

A quick note on Tether redemptions during the current crypto bloodbath
12 May 2022 | 1:00 pm

The stablecoin market is currently weathering a crypto bloodbath, with some stablecoins doing a better job of holding their pegs than others. One odd thing I've noticed is that the supply of Tether stablecoins, by far the largest stablecoin, doesn't seem to be contracting. Tether's Ethereum address indicates that there are 39.8 billion Tethers outstanding, the same as in December 2021.

The situation at Tether's main competitor, USD Coin, suggests that this shouldn't be so. The supply of USD Coins is shrinking rapidly. There were around 48 billion USD Coins in existence (on Ethereum) in late February, at its peak. Now there are just 42.8 billion. That's an 11% contraction.

To get a better idea for how the supplies of the two stablecoins are acting differently, check out the chart below. USD Coin (USDC) is the green line and Tether (USDT) is the red line. (Note: this is the amount outstanding on the Ethereum blockchain. Both stablecoins also exist on other blockchains).


USD Coin's contraction is consistent with a crypto recession. People want to get the hell out of the cryptoeconomy. They're hurting and they're scared. To support a lower level of crypto speculation, the market doesn't require as much stablecoins as before. So USD Coin has to shrink to accommodate this reduction in demand. That's normal.

But the implication is that Tether should also be contracting. After all, it's not exempt from the broad forces hitting USD Coin. There shouldn't still be the same 39.8 billion Tethers circulating in what is now a much smaller crypto economy.

What I'm guessing may explain some of this divergence is different redemption policies among stablecoin issuers. When Circle, the issuer of USD Coin, redeems USD Coins with U.S. dollars, it simultaneously destroys those coins. And so any redemption directly reduces the total quantity of USD Coins in existence. It may be that Tether doesn't actually destroy the Tethers that it redeems. It first confines them to its treasury wallet. And so redemption don't immediately reduce the total quantity of Tethers in existence. Rather, it impounds the redeemed Tethers.

So what is happening with Tether's treasury wallet? Check out the chart below:

Since late February, the amount of Tether stablecoins sitting in Tether's treasury has increased from around $800 million to $2.5 billion. This is being driven by incoming Tether stablecoins, some of it from exchanges like Bitfinex and FTX. So given that Tether has impounded $1.7 billion Tethers over the last few months, the total circulating supply of Tether has concomitantly decreased by $1.7 billion, most of that in the last few days.

This suggests that Tether is in a contraction phase, just like USD Coin. But Tether's contraction is more muted, at least for now. USD Coin has shrunk by 11%. Using the quantity of Tethers in Tether's treasury wallet as our measure, Tether has contracted by only 4%.

P.S. I've limited my analysis to the Ethereum blockchain. Someone with more time could extend my analysis to the Tron blockchain, since there are significant amounts of both Tether and USD Coin on Tron.

P.P.S. One thing I'm not sure of is how much redeemed Tethers are held by Tether in temporary wallets that aren't its main treasury wallet. If that number is high, then Tether's contraction is further along than my blog post suggests.

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