FT Alphaville, the blog over at the Financial Times, recently made much of the fact that Tether, the supposedly one to one backed by US dollars stablecoin, is not in fact backed one to one by US dollars. Specifically, they insist that it's not backed by cash. In this of course they're entirely correct, it ain't backed by cash. Who would be so stupid as to think it might be?
At a rough guess there's about $17.38 (that's my, rough, guess, and yes, seventeen dollars and thirty eight cents) in cash backing there. This is because they cracked the petty cash box last night and broke the Benjamin to order in pizza*.
Tether isn't fully backed of course, as Alphaville says:
Tether used to claim all its tokens were backed one to-one by US dollars held in cash reserves, but in an April 2019 affadavit, its general counsel Stuart Hoegner revealed that in fact only 74 per cent of Tethers were backed by “cash and cash equivalents”, with the rest in a “less liquid form”.
OK, how much less liquid is an interesting thought. Although to be fair to Tether that does mean they've a lot of liquidity to get through – like 74% of issuance has to be redeemed – before they start facing liquidity problems. We've be impressed with a bank that did this even if the shareholders wouldn't be.
Alphaville though goes further.
As you can see, the blue pie chart shows that 75.85 per cent of Tether’s reserves are, according to the company, backed by “Cash & Cash Equivalents & Other Short-Term Deposits & Commercial Paper”. The smaller, orangier pie chart breaks down that 75.85 per cent, and it turns out that the stablecoin that used to say it was 100 per cent backed by cash reserves is in fact . . . 2.9 per cent backed by cash reserves (3.87 per cent of the 75.85 per cent). Fancy that!
The burn, it hurts, crypto is dead and SNARK!
The chart is taken from Tether itself.
And, well, yes. Except who does actually believe that “cash” means cash, cash notes and coins? Tether has a vault which is where they film the Scrooge McDuck scenes? Well, no one who has thought about it for a moment would think so, no.
So, in fact that money is going to be in a bank. Where it isn't going to be cash at all. It's a liability of the bank's, true, it is repayable on demand and all that but it is still just a ledger entry somewhere.
And guess what – there's no insurance on such deposits in a bank like that. Well, maybe corporates get the guarantee we do as individuals, the first $100k, maybe $250k the government guarantees but beyond that? And Tether has some tens of $ billions. Banks do actually go bust too, this does in fact happen.
So of course no one with tens of billions does have it in cash – Disney's requirements for Scrooge McDuck filming locations is low – and no one does leave it in a bank account either. Have a look at the accounts of any of the large corporates sitting on a cash pile. Apple, Microsoft, all of them. It's all in cash equivalents, near cash equivalents. Spread around quite a lot too. Commercial bills, Treasury notes, this sort of stuff. Something that can be sold, immediately, for money – still not cash, briefcases of Dead Presidents went out of style some time ago – and something that isn't reliant on whatever else the bank might be throwing its money at.
Where is Tether's money? In exactly all the same places.
Which reduces the burn, the snark, somewhat.
Or as we might properly put it, “cash” in the meaning of “we're holding our assets in cash” doesn't mean cash. It means things that are near cash – bills, notes, commercial and Treasury – and that for good reason. Holding actual cash in a vault costs money – say, 1% of value per year at a guess. Holding something that produces interest but is immediately cashable spreads risk and also provides a – small at current rates – income. So, everyone does agree that holding near cash instruments is what we mean by “holding cash”.
Yes, there are risks even here. MF Global went a bit too illiquid and risky in its search for income and went bust as a result. But still, in the general parlance – OK, the specific financial jargon – Treasury notes, commercial bills, repo, these are cash.
Of course, I still wouldn't touch Tether with a bargepole but that's another matter. It wouldn't be because it was being sensible about where it was putting its cash that turned me off.
*There may or may not be much truth to this part of the story but the general principle holds.