Speaker 1: This is Bloomberg Crypto and Daily Bloomberg. I heard podcast
Speaker 1: and I'm Stacy Marie Ishmael, Managing editor of Crypto for
Speaker 1: Bloomberg News. It's Wednesday, August thirty one. Did you know
Speaker 1: the tether, which is a stable coin that trades under
Speaker 1: the ticker u s D t TSN. Tether is the
Speaker 1: third largest digital token by market value, or that it's
Speaker 1: one of the most actively traded tokens in the entire
Speaker 1: crypto ecosystem. Unlike some of its volatile counterparts, or shall
Speaker 1: we say more volatile counterproducts, Tether comes with two promises.
Speaker 1: First that each tether has a stable value, and that
Speaker 1: value is one dollar. And second, that each of these
Speaker 1: tokens or tethers is back by a real asset like
Speaker 1: the dollar, or a similarly liquid and reliable financial product
Speaker 1: like a bond issued by the US government. But those
Speaker 1: promises haven't always been kept, and that's something that keeps
Speaker 1: Tether in the cross hairs of regulatory scrutiny and investors speculation.
Speaker 1: Bloomboog reporter Emily Nicole joins me now for the latest
Speaker 1: on Tether and its asset reserves. It's that murky gray
Speaker 1: area of what happens the token while it's out in
Speaker 1: the crypto ether that regulates are concerned about Emily. Before
Speaker 1: we dive into tether, let's let's step back. Let's ignore
Speaker 1: recent history with regulation and algorithmic stable coin collapses, and
Speaker 1: let's just start from a place of what is a
Speaker 1: plane vanilla stable coin? Why are these digital assets important
Speaker 1: in the crypto market? At present, Tether is around of
Speaker 1: all state ball coins in the market, and that entire
Speaker 1: sector is about one hundred and fifty billion dollars UM
Speaker 1: and it's mostly used by traders to kind of act
Speaker 1: as either a store of wealth if they're trying to
Speaker 1: get out of volatile prices elsewhere, so they can keep
Speaker 1: their money in crypto without having to be exposed to
Speaker 1: the downsides of crypto um. But they're also often used
Speaker 1: as well as a means of for example, if you
Speaker 1: wanted to pay someone some cash and not be exposed
Speaker 1: to volatility that side um And if you are listening
Speaker 1: to this podcast, you'll know that we've spoken about bridges before,
Speaker 1: which are platforms that help crypto traders move a token
Speaker 1: from one blockchain to another when those different blockchains obviously
Speaker 1: can't you know interact with each other as easily, and
Speaker 1: so stable coins can be away around that. Right, You could,
Speaker 1: for example, usual bitcoin by a ton of tether or
Speaker 1: usdt um and have that dollar value of your crypto
Speaker 1: state solid while you're then trying to put that back
Speaker 1: into another cryptotope and like ethereum got it. So let's
Speaker 1: actually talk about Tether, like why are the biggest currently?
Speaker 1: Where did the where did they come from, and where
Speaker 1: they're going. So Tether is one of the oldest stable
Speaker 1: coins around, and that is one of the reasons why
Speaker 1: I think it is one of the most popular still today.
Speaker 1: It has kind of been around since I think about
Speaker 1: tween in in large amounts anyway, UM, and has been
Speaker 1: progressively getting bigger ever since. So even if we think
Speaker 1: about just the last year alone, at the start of
Speaker 1: one Tether's entire market cap was about twenty billion, in
Speaker 1: a in a sector of stable coins that was twenty
Speaker 1: eight billions, so its dominance was even bigger then, And
Speaker 1: now it's got a stable market capitalization of about sixty
Speaker 1: six billion. That's about three times bigger than it was
Speaker 1: at the start of last year UM. And that growth
Speaker 1: is largely because at the same time as Tether has
Speaker 1: been going so has all of crypto. Right, people have
Speaker 1: become more familiar with how to use crypto, they've become
Speaker 1: more aware of tokens other than bitcoin and so and
Speaker 1: particularly as well. Actually, as the market sentiment has changed
Speaker 1: around crypto, we've gone from a bear market to a
Speaker 1: ball market to a bear market again. All of these
Speaker 1: things mean that as traders are getting more comfortable with
Speaker 1: making riskier bets or wanting to cash out of the
Speaker 1: market when it's becoming more volatile, stable coins are a
Speaker 1: source of safety in that so you would expect to
Speaker 1: see a direct correlation between volatilty and other parts of
Speaker 1: the crypto markets and sort of investors are speculators piling
Speaker 1: into stable coins like tether. Yeah, So if you look
Speaker 1: at the total market cap of all stable coins over
Speaker 1: the last year, you would see a pretty steady incline
Speaker 1: going up over the last year or so, because as
Speaker 1: even as crypto became more volatile and bitcoin came down
Speaker 1: from its peak last November, people were still moving into
Speaker 1: stable coins. So those those numbers were still going up,
Speaker 1: even if if steadily. Um, but that's not to say
Speaker 1: that they're you know, impervious, and they do have their
Speaker 1: own market events. So in May you'd see that line
Speaker 1: actually go off a bit of a steep cliff because
Speaker 1: one of the biggest experiments in how stable coins maintain
Speaker 1: their dollar value a stable coin called terror USD. It
Speaker 1: collapsed in on itself and it's now worth next to nothing.
Speaker 1: Everybody lost a bit of confidence in the stable coin
Speaker 1: market and it hasn't actually really recovered since. Now stable
Speaker 1: coins like tether have to have reserves of assets that
Speaker 1: are themselves reliably gonna be worth sort of a one
Speaker 1: to one value of the number of tethers in circulation.
Speaker 1: So if there's a hundred and eighty billion stable coins
Speaker 1: in circulation, or whatever the number might be, then there's
Speaker 1: got to be somewhere in hopefully not suitcases or mattresses,
Speaker 1: but like you know, in fairly legitimate custodial arrangements, a
Speaker 1: hundred and eighty billion dollars worth of assets. Is that correct? Yeah,
Speaker 1: So for the collateralized stable coins anyways, I called them earlier,
Speaker 1: So that's tether, that's circles, U, s dc UM. They
Speaker 1: rely on reserves of of assets to keep that peg,
Speaker 1: and that's usually cash cash equivalence, but not always are
Speaker 1: those assets, you know, the kind of highly liquid assets
Speaker 1: that you know you'd see in a bank, which is
Speaker 1: why they are different from banks, right, they're not actually
Speaker 1: banks because of that um or at least not all
Speaker 1: of them anyway. UM. And when we look at these reserves,
Speaker 1: that's how we can tell, you know, for example, if
Speaker 1: if I was want somebody who wanted to buy some
Speaker 1: U s d T or some U s dc UM,
Speaker 1: I could then look at the reserves and see, okay,
Speaker 1: when I know that they had, you know, this much
Speaker 1: in cash, this much in US Treasury bills, this much
Speaker 1: in commercial paper in the reserve, and you can kind
Speaker 1: of make a bit of an educated guess about you
Speaker 1: whether or not you'd think it'd be safe to put
Speaker 1: a certain amount of money to that company and get
Speaker 1: their tokens back and hopefully at some point in the
Speaker 1: future then be able to do the reverse and get
Speaker 1: your cash back at the end of it. So what's
Speaker 1: been the problem with Teather's reserves? So at present, Tether
Speaker 1: files at the stations on its reserves. Quarterly they come
Speaker 1: from an accountancy partner that it has set up in
Speaker 1: That accounty partner has changed over time. Originally, back when
Speaker 1: these documents first start to come out. They'd kind of
Speaker 1: come out on an ad hoc basis around twenty eighteen.
Speaker 1: But in February one tell their incident into assessment with
Speaker 1: the New York Attorney General alongside its sister crypto exchange
Speaker 1: bit for nex because the New York Attorney General had
Speaker 1: accused Tether of lying about its reserves, and the two
Speaker 1: settled on those charges. And I want to read from
Speaker 1: that settlement agreement, or at least, you know, from at
Speaker 1: least the New York Attorney General side, because it was
Speaker 1: pretty it was pretty aggressive from from New York. It said,
Speaker 1: and this is a statement from New York Attorney General
Speaker 1: the teacher James bid for x and Tether recklessly and
Speaker 1: unlawfully covered up massive financial losses to keep their scheme
Speaker 1: going and protect their bottom lines. Tethers claim that its
Speaker 1: virtual currency was fully backed by U S dollars at
Speaker 1: all times was a lie. In response to that statement
Speaker 1: from the New York Attorney General, you know, Tether said
Speaker 1: that they share a goal of transparency, of they share
Speaker 1: the Attorney General's goal of increasing transparency. But they also said,
Speaker 1: and I quote, contrary to online speculation, after two and
Speaker 1: a half years. There was no finding that Tether ever
Speaker 1: issued tethers without backing or to manipulate crypto prices. When
Speaker 1: we say they accused them of lying, they straight up
Speaker 1: did accused them of lying. Tether, of course came back
Speaker 1: and what did you know, what did they do in response?
Speaker 1: In response to those accusations, Tethers now side to file
Speaker 1: those at a stations quarterly, and they've been coming from
Speaker 1: accountancy firms kind of around the world. The first partner
Speaker 1: was a company called more Um, and then they started
Speaker 1: using a Cayman Island's accountancy firm called m h A
Speaker 1: Cayman for two stations, and then most recently in July,
Speaker 1: they said they'd switched to using another firm called Video
Speaker 1: specifically it's Italian subsidiary UM. And each time these accounting
Speaker 1: firms have gotten, you know, slightly bigger in size. Video
Speaker 1: is the fifth largest accounting network in the world. But ultimately,
Speaker 1: all these ATTA stations are are an agreement by an accountants.
Speaker 1: You found to say, you know, Tether's accountants presented us
Speaker 1: with these figures. They presented us with a set of
Speaker 1: their accounting policies that are set by Tether Management, and
Speaker 1: we agree that these figures roughly meet the accounting policies
Speaker 1: that Tether says it meets. It doesn't actually, you know,
Speaker 1: take a look at the data underneath the numbers. They
Speaker 1: don't go into someone's bank account and poke around and say, yeah,
Speaker 1: that's that looks about right. Um. And that's the difference
Speaker 1: between an at a station and a full audit, which
Speaker 1: Tether has yet to have, but some of its rivals
Speaker 1: do have. Circle has been having annual audits now for
Speaker 1: for a while, you know. I think it was maybe
Speaker 1: in June that Circle's CFO, Jeremy fox Gen, put out
Speaker 1: a statement that Circle's financial statements were being audited annually
Speaker 1: and that they have those monthly at a stations. Okay,
Speaker 1: so great. So it sounds like all of these stable
Speaker 1: coin folks have now said, hey, here's our stuff. Why
Speaker 1: are people still worried about the assets that these firms
Speaker 1: say they are backed by if there's all of this
Speaker 1: paperwork floating around, I think one of the biggest concents
Speaker 1: that these are still pretty much unregulated markets from a
Speaker 1: crypto perspective, right be once you, for example, if you
Speaker 1: if you give a dollar to tether, and Tether then
Speaker 1: gives you one U s DT in return, it will
Speaker 1: have some kind of track record of that purchase happening.
Speaker 1: But once the U s DT is out in the open,
Speaker 1: it stops paying attention. So where those tokens then go
Speaker 1: that's less of a of a clear market. And the
Speaker 1: problem is is that these tokens, even after they've passed
Speaker 1: beyond the realm of being controllable or um having any
Speaker 1: kind of scrutiny over them by the issues themselves, they
Speaker 1: can be used for whatever and then brought back to
Speaker 1: an issue and be exchanged again for a dollar and
Speaker 1: you get your dollar back. And so it's that murky
Speaker 1: gray area of what happens to the token while it's
Speaker 1: out in the crypto ether that regulates are concerned about. So,
Speaker 1: particularly after the crash of terror USC early this year
Speaker 1: as well, where around forty billion dollars in stable coin
Speaker 1: collateral was lost, regulators have in moving faster on putting
Speaker 1: in place rules and regulations for what stable coin issuers
Speaker 1: need to do in order to assure customers that they
Speaker 1: do have that money and assure regulators too, right um,
Speaker 1: and they'll also have to hold only certain types of
Speaker 1: assets in the reserves, so you know, you can't be
Speaker 1: holding anything too risky. It needs to be stuff that's
Speaker 1: relatively liquid, so that if there was any kind of
Speaker 1: bank run on your token, you could meet redemptions quickly,
Speaker 1: easily and at a dollar. We'll be right back with
Speaker 1: more from Bloomberg's Emily Nicole about Tether's reserves and what ties,
Speaker 1: if any, it had to China. So in terms of
Speaker 1: things that are perceived as risky, you know, there's been
Speaker 1: this like persistent drum beat for years that Tether holes
Speaker 1: Chinese commercial paper and specifically lower quality, higher risk Chinese
Speaker 1: commercial paper as part of its reserves. Tether came out
Speaker 1: recently and flat out said we don't have any of that.
Speaker 1: Just you know, what's what's been going on there? Where
Speaker 1: did that speculation come from? Well, it should be interesting
Speaker 1: to note that when they said that recently, they said
Speaker 1: we don't hold any commercial paper right now, So they
Speaker 1: never said, you know, we don't hold any We never
Speaker 1: have um. But so this kind of speculation had been
Speaker 1: around up where as you said, a few years and
Speaker 1: then our colleague seek Fox did an investigation into Tether's
Speaker 1: commercial paper paper trail. I guess you'd call that. He
Speaker 1: wanted to find out you know, exactly where the money
Speaker 1: would lead, and it did lead in his findings to China.
Speaker 1: There was some paper in there that was of Chinese origins.
Speaker 1: The reason why this is concerning is because at the
Speaker 1: time Tether was purportedly backing its dollar pegged token with
Speaker 1: commercial paper from a region where they were not using dollars.
Speaker 1: So if you were running wondering about you know, if
Speaker 1: there was a bank run on Tether and it was
Speaker 1: going you know, people were piling into Tether's website and saying,
Speaker 1: I want my dollars back, and it was going to
Speaker 1: have to cash out of some of these positions, particularly
Speaker 1: with the state of the market at that time in China,
Speaker 1: where some of the people who might have owned that
Speaker 1: commercial paper were in distressed positions. They wouldn't have been
Speaker 1: able to give Tether's money back immediately. That could have
Speaker 1: then culminated in a situation where Tether wasn't able to
Speaker 1: redeem the amount of dollars coming in. We also saw
Speaker 1: at the start of twenty during the pandemic, the commercial
Speaker 1: paper market itself melted town and so that appropriate added
Speaker 1: more fuel to the fire of you know, whether a
Speaker 1: commercial paper should be considered an asset that is liquid
Speaker 1: enough to support something like a stable coin. So in
Speaker 1: the US stable Coin Bill, there is expected to be
Speaker 1: requirements around what kind of assets these stable coin providers
Speaker 1: can hold, and commercial paper is like it to be
Speaker 1: singled out as one that is is not permitted absolutely
Speaker 1: And in that same blockburst, where as you note they
Speaker 1: say they hold no Chinese commercial paper and as of
Speaker 1: today they're reducing their exposure overall, they also say that
Speaker 1: they plan to reduce their exposure to commercial paper to
Speaker 1: zero by the end of October early November. Regulators have
Speaker 1: been paying a lot of attention to stable coins, and
Speaker 1: it you know, it really strikes me that so much
Speaker 1: of what folks have been talking about, folks have been
Speaker 1: talking about for a long time, right, Like, it's not
Speaker 1: that we woke up in March of two when everything
Speaker 1: was going down with with Luna, etcetera, and we're like, wow,
Speaker 1: this this seems like an area of concern. Is that
Speaker 1: people have been concerned for ages. What about the events
Speaker 1: of this year in particular, do you think have finally
Speaker 1: started to accelerate that conversation In the UK? For instance,
Speaker 1: So in the UK, it's kind of as you put it,
Speaker 1: those stable coin conversations have been happening for a while.
Speaker 1: They want to make sure that stable coin issuers that
Speaker 1: could present bankruptcy risks are given certain provisions. So in May,
Speaker 1: when Lunas started to fall apart and terra USD collapsed, UM,
Speaker 1: the UK started thinking about things like bespokensolvency arrangements so
Speaker 1: that if a stable coin were to get big enough
Speaker 1: that it was to present a systemic risk to the
Speaker 1: UK economy, they could step in and help keep that
Speaker 1: stable coin not afloat but still exchangeable in in payments companies.
Speaker 1: You know, if if I was going into a shop
Speaker 1: and I wanted to buy an orange for a pound,
Speaker 1: but using whatever stable coin it was that was crashing,
Speaker 1: I could still do that even if the stable coin
Speaker 1: itself was going through bankruptcy proceedings. At present, though, the
Speaker 1: bankomng AND has said there are no stable point in
Speaker 1: that are big enough to meet that, not even tether
Speaker 1: and I think that's that's an important point, right, which
Speaker 1: is a lot of the regulatory framework is in response
Speaker 1: to the actual fact of the collapse of an algorithmic
Speaker 1: stable coin, which is different from the collateralized table coins
Speaker 1: that we're talking about, and the perceived risk in the
Speaker 1: future of one of these collateralized stable coins really you know,
Speaker 1: sort of bad things happening to them. But at the
Speaker 1: time that we're talking, we don't have a current example
Speaker 1: of a stable coin, like you know, Tether itself is
Speaker 1: not on a downward trajectory that is specifically worrying regulators
Speaker 1: right now because for example, when so when Nina crashed,
Speaker 1: Tether lost about twenty billion of its market cap, but
Speaker 1: it's it's slowly going back towards that um And even
Speaker 1: now if we think about like these is, as you said,
Speaker 1: these rules were created for a company the size of Matter,
Speaker 1: so they were created for a token to be as
Speaker 1: systemic because you know the fact that everybody has a
Speaker 1: Facebook product on their mobile phone, and we have yet
Speaker 1: to have crypto or stable points reached that level. So
Speaker 1: in certain places anyway, the rules are a little bit
Speaker 1: further out of reach of the market at present, perhaps
Speaker 1: for the good. So well, thank you so much Emily
Speaker 1: for joining us. Really appreciate you taking the time, Thanks
Speaker 1: for having me. You can find more of Emily Nichol's
Speaker 1: reporting on the Bloomberg terminal on Bloomberg dot com or
Speaker 1: follow her on Twitter at Emily J. Nicole. That's n
Speaker 1: I c O L L E. On the next episode
Speaker 1: of Bloomberg Crypto, black Rock, the world's largest asset manager,
Speaker 1: teamed up with the crypto exchange coin Base, in a
Speaker 1: move that both Wall Streets and cryptotypes are watching pretty closely,
Speaker 1: not least because of the challenges the coin bases faced recently.
Speaker 1: We'll dive into the latest on the partnership and what
Speaker 1: this all might mean for both Wall Street and cryptom.
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Speaker 1: At is our engineer. Original music by Leo Sidrn. I'm
Speaker 1: Stacy Marie Schmal We'll be back tomorrow