{"id":289721,"date":"2021-07-02T20:31:54","date_gmt":"2021-07-02T17:31:54","guid":{"rendered":"https:\/\/en.buradabiliyorum.com\/stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether\/"},"modified":"2021-07-02T20:31:54","modified_gmt":"2021-07-02T17:31:54","slug":"stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether","status":"publish","type":"post","link":"https:\/\/buradabiliyorum.com\/en\/stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether\/","title":{"rendered":"# Stablecoins under scrutiny: USDT stands by \u2018commercial paper\u2019 tether"},"content":{"rendered":"<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_89 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<p class=\"ez-toc-title\" style=\"cursor:inherit\">Table of Contents<\/p>\n<label for=\"ez-toc-cssicon-toggle-item-6af6d8eec9253\" class=\"ez-toc-cssicon-toggle-label\"><span class=\"\"><span class=\"eztoc-hide\" style=\"display:none;\">Toggle<\/span><span class=\"ez-toc-icon-toggle-span\"><svg style=\"fill: #dd3333;color:#dd3333\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" class=\"list-377408\" width=\"20px\" height=\"20px\" viewBox=\"0 0 24 24\" fill=\"none\"><path d=\"M6 6H4v2h2V6zm14 0H8v2h12V6zM4 11h2v2H4v-2zm16 0H8v2h12v-2zM4 16h2v2H4v-2zm16 0H8v2h12v-2z\" fill=\"currentColor\"><\/path><\/svg><svg style=\"fill: #dd3333;color:#dd3333\" class=\"arrow-unsorted-368013\" xmlns=\"http:\/\/www.w3.org\/2000\/svg\" width=\"10px\" height=\"10px\" viewBox=\"0 0 24 24\" version=\"1.2\" baseProfile=\"tiny\"><path d=\"M18.2 9.3l-6.2-6.3-6.2 6.3c-.2.2-.3.4-.3.7s.1.5.3.7c.2.2.4.3.7.3h11c.3 0 .5-.1.7-.3.2-.2.3-.5.3-.7s-.1-.5-.3-.7zM5.8 14.7l6.2 6.3 6.2-6.3c.2-.2.3-.5.3-.7s-.1-.5-.3-.7c-.2-.2-.4-.3-.7-.3h-11c-.3 0-.5.1-.7.3-.2.2-.3.5-.3.7s.1.5.3.7z\"\/><\/svg><\/span><\/span><\/label><input type=\"checkbox\"  id=\"ez-toc-cssicon-toggle-item-6af6d8eec9253\" checked aria-label=\"Toggle\" \/><nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/buradabiliyorum.com\/en\/stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether\/#Stablecoins_run_the_crypto_market\" >Stablecoins run the crypto market?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/buradabiliyorum.com\/en\/stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether\/#Better_auditing\" >Better auditing?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/buradabiliyorum.com\/en\/stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether\/#What_if_USDT_faltered\" >What if USDT faltered?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/buradabiliyorum.com\/en\/stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether\/#STABLE_Act_needed\" >STABLE Act needed?<\/a><\/li><\/ul><\/nav><\/div>\n<p>&#8220;<strong># Stablecoins under scrutiny: USDT stands by \u2018commercial paper\u2019 tether <\/strong>&#8221;<\/p>\n<div class=\"post-content\" data-v-128018ef>The stablecoin market has been growing exponentially, and last week, Eric Rosengren \u2014 president of the Federal Reserve Bank of Boston \u2014 <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/download-scripts-themes-apps\/\" data-internallinksmanager029f6b8e52c=\"9\" title=\"Download Scripts &amp; Themes &amp; Apps\" target=\"_blank\" rel=\"noopener\">app<\/a>eared to raise a cautionary flag.\u00a0<\/p>\n<p>\u201cThere are many reasons to think that stablecoins \u2014 at least, many of the stablecoins \u2014 are not actually particularly stable,\u201d he said in <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.bostonfed.org\/news-and-events\/speeches\/2021\/official-monetary-and-financial-institutions-forum-fed-week-financial-stability-session.aspx\">remarks<\/a> before the Official Monetary and Financial Institutions Forum, voicing concerns that \u201ca future [financial] crisis could easily be triggered as these become a more important sector of the financial market, unless we start regulating them.\u201d <\/p>\n<p>Moreover, in an accompanying slide presentation, the bank CEO referenced Tether (USDT), the dominant stablecoin issuer, noting that its basket of reserve assets looks very much like a \u201cvery risky prime fund\u201d \u2014 the sort that got into trouble in the last two recessions.<\/p>\n<p>Was Rosengren right to call out Tether by name for its reserve assets, which include commercial paper, corporate bonds, secured loans and precious metals? Could the parabolic growth of stablecoins truly destabilize short-term credit markets, and would the stablecoin sector be better served by more rigorous reserving and auditing?<\/p>\n<p>Also, given that Tether by far remains the dominant player in the global stablecoin market, what would happen if it falters \u2014 could it bring down the larger crypto market along with it? As the chart below used in Rosengren\u2019s presentation shows, stablecoin market capitalization relative to prime money market mutual funds under management now exceeds 20%.<\/p>\n<figure><img decoding=\"async\" src=\"https:\/\/s3.cointelegraph.com\/uploads\/2021-07\/5fd2e832-5319-4e2f-93ff-76286a470f45.png\"><\/figure>\n<p>Francine McKenna, adjunct professor at American University\u2019s Kogod School of Business, understands Rosengren\u2019s concern. She told Cointelegraph that these new stablecoin funds are, in a sense, \u201cinterlopers\u201d in the traditional short-term credit markets and that the Boston Fed president and his peers could be realizing that \u201csuddenly we don\u2019t have our fingers on all the levers.\u201d<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Stablecoins_run_the_crypto_market\"><\/span>Stablecoins run the crypto market?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Stablecoins are affecting short-term credit prices now, but these instruments could just as quickly exit the market. In mid-June, a \u201crun\u201d on the Iron Finance protocol, for instance, caused the price of its IRON stablecoin to move off peg and crushed its native token, TITAN, by almost 100%, impacting investor Mark Cuban among others.<\/p>\n<p>Rohan Grey, assistant professor at Willamette University College of Law, told Cointelegraph that if Tether collapses, it could have dire effects on the cryptoverse: <\/p>\n<blockquote><p>\u201cTether is still one of the most widely traded asset pairs for almost every other crypto, and provides a huge amount of liquidity to the sector. So yes, a crash in Tether would have significant knock-on effects for the rest of the ecosystem.\u201d <\/p><\/blockquote>\n<p>Circle and a few other stablecoins have begun to take market share from Tether, \u201cSo it\u2019s definitely possible that some other stablecoin will step into the breach, but even without Tether, the rest of the crypto industry remains built on a foundation of stablecoins,\u201d he added.<\/p>\n<p>Controversy has dogged USDT through much of its short history, and in February, Tether and its Bitfinex affiliate agreed to pay the state of New York $18.5 million for misrepresenting the degree to which USDT was backed by fiat collateral.<\/p>\n<p>\u201cTether\u2019s claims that its virtual currency was fully backed by U.S. dollars at all times was a lie,\u201d <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/ag.ny.gov\/press-release\/2021\/attorney-general-james-ends-virtual-currency-trading-platform-bitfinexs-illegal\">said<\/a> New York State Attorney <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/general\/\" data-internallinksmanager029f6b8e52c=\"3\" title=\"General\" target=\"_blank\" rel=\"noopener\">General<\/a> Letitia James when announcing the settlement, which also requires Tether and Bitfinex to submit mandatory quarterly reports on USDT reserves \u2014 the first of which was <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.bostonfed.org\/-\/media\/Documents\/Speeches\/PDF\/20210625-charts.pdf\">summarized<\/a> in Rosengren\u2019s slide deck.<\/p>\n<p>Not all were reassured by the March USDT report, however. The fact that commercial paper accounted for half (49.6%) of assets was a particular eyebrow-raiser. \u201cThe fact that Tether is holding so much corporate paper and corporate bonds is a huge issue,\u201d Grey told Cointelegraph, adding: \u201cNo one knows what it is, and it\u2019s completely at odds with their claim for years that they were only invested in cash or cash-like assets.\u201d <\/p>\n<p>A \u201ccash equivalent\u201d has to be something especially \u201cliquid with no market uncertainty,\u201d McKenna explained to Cointelegraph: \u201cCommercial paper is not generic. There are all sorts of commercial paper.\u201d She said that it\u2019s not like the old days when people said that General Electric\u2019s commercial paper was \u201cas good as gold.\u201d Today, \u201cYou have to see who the issuer is.\u201d<\/p>\n<p>\u201cUSDT has been a big question mark since its inception,\u201d Sidharth Sogani, founder and CEO of research firm Crebaco, told Cointelegraph. If Tether is investing assets in something other than U.S. dollars, then what happens if those assets \u2014 e.g., precious metals or corporate bonds \u2014 fall in price? \u201cWill USDT lose its value?\u201d Also, how are earnings being distributed? Tether\u2019s users presumably own the bonds and commodities backing the stablecoin, \u201cSo the interest earned is the users\u2019 right,\u201d said Sogani.<\/p>\n<p>Not everyone has a problem with Tether pegging its token to a basket that includes commercial paper, however. \u201cTo my mind there is nothing inherently wrong with a stablecoin \u2014 USDT or not \u2014 holding or being backed by commercial paper, as opposed to being 100% backed by a specific fiat currency,\u201d Sean Stein Smith, assistant professor in the Department of Economics and Business at Lehman College, told Cointelegraph.<\/p>\n<p>That said, Stein Smith acknowledged potential \u201ccomplications\u201d that could arise \u2014 a \u201crun\u201d on the stablecoin could destabilize a specific tranche of the commercial paper market, for example. Or conversely, if the commercial paper market \u201cseized up,\u201d it could disrupt redemptions of that particular stablecoin.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"Better_auditing\"><\/span>Better auditing? <span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Would a regular audit of Tether\u2019s reserves by a Big Four accounting firm improve its standing regarding the \u201cbacking\u201d question? \u201cRegular auditing would absolutely help,\u201d said Stein Smith, \u201cboth in raising the confidence in the backing of USDT, and creating crypto-specific standards that could be adopted by other stablecoin issuers going forward.\u201d<\/p>\n<p>But others aren\u2019t so sure. USD Coin (USDC), the second leading stablecoin, has Grant Thornton LLP confirm that it has sufficient U.S. dollar reserves every month, for instance. This is often cited as a better approach, but even this has serious limitations, in McKenna\u2019s view. All that is really happening, McKenna explained, is a monthly verification of the issuer\u2019s bank balance. Two minutes after the auditor examines the bank statement, the stablecoin issuer could simply transfer funds elsewhere.<\/p>\n<p>What\u2019s the answer then? According to Mckenna, it\u2019s escrow accounts \u2014 i.e., \u201csegregated client funds like broker\/dealers are required to have.\u201d In any event, \u201cThere are lots of ways to tie up money so it can\u2019t be touched.\u201d<\/p>\n<p>Elsewhere, another sticking point for people is the fact that according to Tether itself, only 2.9% of USDT\u2019s asset backing is in cash, which has led some to say that Tether is acting like a bank \u2014 but without being subject to a bank\u2019s heavy regulation.<\/p>\n<p>\u201cIt is pretty clear looking at the makeup of the reserves \u2014 a tiny proportion of the reserves are cash on account at banks \u2014 that Tether is operating like a bank but with none of the normal disclosure,\u201d Martin Walker, director of banking and finance at the Center for Evidence-Based Management, <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/www.ft.com\/content\/529eb4e6-796a-4e81-8064-5967bbe3b4d9\">told<\/a> the Financial Times.<\/p>\n<p>Meanwhile, all the publicity about reserves probably isn\u2019t helping the stablecoin attract new users. According to CoinMarketCap, USDT\u2019s market capitalization has barely <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/coinmarketcap.com\/currencies\/tether\/historical-data\/\">budged<\/a> over the past month. With U.S. dollar-backed stablecoins, market capitalization is a good proxy for total supply because each coin is very close to $1.00. Meanwhile, USD Coin and Binance USD (BUSD), Tether\u2019s closest competitors, have both increased their market cap substantially during this period \u2014 <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/coinmarketcap.com\/currencies\/usd-coin\/\">10%<\/a> and <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/coinmarketcap.com\/currencies\/binance-usd\/\">12%<\/a>, respectively, since the start of June.<\/p>\n<p>Cointelegraph invited Tether\/Bitfinex to comment on the idea that it seems to be losing ground to its competitors but did not receive a response.<\/p>\n<h2><span class=\"ez-toc-section\" id=\"What_if_USDT_faltered\"><\/span>What if USDT faltered?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>There is no sign of any imminent USDT collapse, but given Tether\u2019s continuing market dominance, such an event is often a topic of conversation \u2014 as a matter of speculation. Sogani told Cointelegraph:<\/p>\n<blockquote><p>\u201cThe BTC\/crypto pairs would be sustained, but still there would be a bloodbath. I believe the market would lose between 10 to 15% \u2014 USDT circulating supply is $64 billion right now \u2014 in market cap and a sudden correction of up to 35% could be seen if USDT collapses as it would trigger a panic.\u201d <\/p><\/blockquote>\n<p>Stein Smith, by contrast, doesn\u2019t agree that stablecoins generally, or USDT specifically, represent much of a threat to financial stability or the crypto ecosystem. \u201cIf stablecoins truly did pose a global systemic risk, why are so many central banks experimenting and deploying central bank digital currencies \u2014 which are at a basic level government issued-stablecoins,\u201d he said, adding: <\/p>\n<blockquote><p>\u201cIf Tether collapsed there would certainly be some volatility and headlines foretelling the \u2018end of crypto,\u2019 but it would not crash the entire sector.\u201d <\/p><\/blockquote>\n<h2><span class=\"ez-toc-section\" id=\"STABLE_Act_needed\"><\/span>STABLE Act needed?<span class=\"ez-toc-section-end\"><\/span><\/h2>\n<p>Elsewhere, stablecoin regulation could be coming, at least if certain initiatives prove successful. \u201cIt is important that when a fiat-currency-pegged stablecoin is issued that it is regulated,\u201d said Sogani, \u201cor else it is like creating value out of thin air to keep buying more crypto, especially Bitcoin. Since stablecoins are centralized in most cases, strict regulations must be in place because of lack of transparency.\u201d<\/p>\n<p>The stablecoin market is fragmented globally, too, as different organizations have their own stablecoins, and many stablecoins are available on multiple chains. USDT, for example, is available as an ERC-20 token on Ethereum, a TRC-20 token on Tron and a BEP-20 token on Binance Smart Chain and can also be used via the Omni Layer on Bitcoin (BTC), which makes auditing more difficult. <\/p>\n<p>\u201cStablecoin is essentially unregulated free banking that issues deposits. However, free banking never worked in the past, even in cases where the government required backing,\u201d Yale University finance professor Gary Gorton recently <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/bcf.princeton.edu\/events\/gary-gorton-on-recent-changes-and-the-future-of-the-us-financial-system\/\">presented<\/a> along with his opinion that \u201cThere needs to be credible backing for Stablecoin as they are now runnable without any entity overseeing them.\u201d <\/p>\n<p>\u201cThe sector could profit from more regulation,\u201d Willamette University\u2019s Grey told Cointelegraph. Grey helped draft the Stablecoin Tethering and Bank Licensing Enforcement (STABLE) Act, which was <a rel=\"nofollow noopener\" target=\"_blank\" href=\"https:\/\/tlaib.house.gov\/media\/press-releases\/tlaib-garcia-and-lynch-stableact\">introduced<\/a> in the United States House of Representatives in December 2020. The STABLE Act would, among other things, require U.S. stablecoin issuers to obtain bank charters and prior approval from the Federal Reserve, the Federal Deposit Insurance Corporation and the appropriate banking agency in their jurisdiction.<\/p>\n<p>All in all, stablecoins have exploded recently, and as a result, they are attracting more attention from financial regulators. Tether sits at the top of the stablecoin pyramid, but questions remain about whether all fiat-based stablecoins are really pegged one to one, said McKenna. \u201cIf I need cash to honor redemptions or pay taxes am I going to get dollar for dollar?\u201d <\/p>\n<p>After all, when money market funds \u201cbroke the buck\u201d during the 2008 financial crisis \u2014 i.e., when their net asset value fell below $1 \u2014 it was because those funds had invested in derivatives, commercial paper and other suddenly illiquid assets. McKenna concluded: \u201cYes, there are enormous reasons for the Fed and its presidents to be concerned.\u201d <\/p>\n<p><template data-name=\"subscription_form\" data-type=\"markets_outlook\"><\/template><\/div>\n<blockquote><p><strong><span style=\"color: #ff6600;\">If you liked the article, do not forget to share it with your friends. Follow us on\u00a0<span style=\"color: #ff0000;\"><a style=\"color: #ff0000;\" href=\"https:\/\/news.google.com\/publications\/CAAqBwgKMLG0nwswvr63Aw\" target=\"_blank\" rel=\"nofollow noopener noreferrer\">Google News<\/a><\/span>\u00a0too, click on the star and choose us from your favorites.<\/span><\/strong><\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\">For forums sites go to <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/forum.buradabiliyorum.com\/\" target=\"_blank\" rel=\"noopener\">Forum.BuradaBiliyorum.Com<\/a><\/span><\/strong>\n<\/p><\/blockquote>\n<blockquote>\n<p style=\"text-align: center;\"><strong>If you want to read more <a href=\"https:\/\/buradabiliyorum.com\/en\/category\/news\/\" data-internallinksmanager029f6b8e52c=\"2\" title=\"News\" target=\"_blank\" rel=\"noopener\">News<\/a> articles, you can visit our <span style=\"color: #ff9900;\"><a style=\"color: #ff9900;\" href=\"https:\/\/en.buradabiliyorum.com\/general\/\" target=\"_blank\" rel=\"noopener\">General category.<\/a><\/span><\/strong><\/p>\n<\/blockquote>\n<p><span style=\"color: black;\"><a style=\"color: #ff9900;\" href=\"https:\/\/cointelegraph.com\/news\/stablecoins-under-scrutiny-usdt-stands-by-commercial-paper-tether\" target=\"_blank\" rel=\"noopener\">Source<\/a><\/span><\/p>\n","protected":false},"excerpt":{"rendered":"<p>&#8220;# Stablecoins under scrutiny: USDT stands by \u2018commercial paper\u2019 tether &#8221; The stablecoin market has been growing exponentially, and last week, Eric Rosengren \u2014 president of the Federal Reserve Bank of Boston \u2014 appeared to raise a cautionary flag.\u00a0 \u201cThere are many reasons to think that stablecoins \u2014 at least, many of the stablecoins \u2014&#8230;<\/p>\n","protected":false},"author":1,"featured_media":289722,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"fifu_image_url":"https:\/\/images.cointelegraph.com\/images\/1200_aHR0cHM6Ly9zMy5jb2ludGVsZWdyYXBoLmNvbS91cGxvYWRzLzIwMjEtMDcvYmUzZTg5YmItZWVkNy00YmE0LTg4OTgtOTQ4NzRmNjc4ODA2LmpwZw==.jpg","fifu_image_alt":"","footnotes":""},"categories":[1],"tags":[74862,75493,117,70934,36041],"class_list":["post-289721","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-general","tag-bitcoin","tag-stablecoin","tag-business","tag-regulation","tag-tether"],"_links":{"self":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/289721","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/comments?post=289721"}],"version-history":[{"count":0,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/posts\/289721\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media\/289722"}],"wp:attachment":[{"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/media?parent=289721"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/categories?post=289721"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/buradabiliyorum.com\/en\/wp-json\/wp\/v2\/tags?post=289721"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}