Short-sellers are betting on crypto central bank Tether vulnerable to a run

A few investment firms, including Fir Tree Partners and Viceroy Research LLC, have been betting in recent months that the tether’s price will fall, according to people familiar with the matter. Tether is the most popular currency for bitcoin trading and is supposed to have a fixed value pegged to the US dollar.

Some hedge funds have run tether shorts with Genesis Global Trading Inc., one of the largest crypto brokerage firms for professional investors, said Matt Ballensweig, co-director of trading and lending at Genesis. About a dozen funds have considered doing the same with Genesis, but many have not moved forward, Ballensweig said.

With approximately $82 billion in circulation, tether is the world’s largest so-called stablecoin, a digital asset pegged to the dollar and backed by cash reserves or other financial instruments.

The short sellers follow a group of regulators, lawmakers, prosecutors, plaintiffs’ attorneys and amateur sleuths who have spent months, and in some cases even years, trying to uncover details about a cryptocurrency. whose use has far exceeded its transparency.

Tether is not a household name, but it is a cornerstone of the crypto ecosystem. Traders on major exchanges often use tether as an easier way to buy crypto than through bank accounts or wire transfers.

A Tether spokesperson said short sellers appear to be involved in a “shrewd scheme to raise capital from the less knowledgeable, leveraging misinformation with the end goal of collecting management fees.”

“Tether has been tested time and time again and has been adopted with flying colors. During such events, its peg remained strong, all redemptions were honored, and even the trade price remained stable,” the spokesperson added.

This price stability – tether has not traded below 0.999 cents against the US dollar in the past year – means that bets by short sellers have yet to pay off. And most of Genesis’ original customers have since exited the original transaction, Genesis said, although some investors have wanted to discuss ways to shorten ties in recent weeks. The Fir Tree short was reported earlier by Bloomberg News.

Short sellers are betting the $82 billion portfolio that underpins Tether’s value, now the size of a large money market fund, is at risk of losses the parent company has not disclosed, according to some of the people familiar with short positions. .

Tether’s spokesperson said the company takes transparency seriously.

“Tether manages a portfolio of conservative, diversified and liquid assets,” Tether said. He said his reserve fund assets exceeded their liabilities.

Regulators, lawmakers and other critics have accused Tether of being too opaque. Tether Holdings Ltd., its parent company, promised a full audit of its reserves for years but never produced one. It took a year-long investigation by the New York Attorney General and an eventual $18.5 million settlement of charges that Tether misled customers, for Tether to reveal what it has in store. general terms each quarter through its accounting firm. To prevent further disclosure of even mundane matters like the name of its chief investment officer, Tether went to court to block requests for public records about its company.

Tether said completing a full audit remains a priority. He has not admitted any wrongdoing as part of his settlement with the New York Attorney General. Tether’s attorneys have argued in court filings that further disclosure of its on-reserve investments would harm its competitive position in the market and that revealing the name of its chief investment officer “would constitute an unwarranted invasion of privacy.” private life”.

If the tether token is “supported one on one, go ahead and disclose it,” said Fraser Perring, founding partner of Viceroy who previously spotted accounting issues at German fintech company Wirecard AG before its collapse. of ours, they obscured something.”

“Management, to allay that fear, could surely post exactly every post,” Mr. Perring said.

Tether releases new tether tokens when it receives a corresponding dollar amount from customers. It then invests this proceeds in reserves that back the tokens, a portfolio that includes both safe investments, such as cash and short-term US government securities, and riskier investments, including IOUs. term called commercial paper, secured business loans and other cryptocurrencies.

Some short sellers believe that part of Tether’s commercial paper holdings, which totaled $24 billion at the end of 2021 and accounted for just under a third of Tether’s reserves, came from shaky Chinese property developers. A faltering Chinese property market and worries about developers’ excessive debt levels led to sell-offs and downgrades of their bonds.

Tether said it has consciously reduced its commercial paper holdings since its settlement with the New York Attorney General, including a 21% drop in the last three months of 2021. In response to questions about exposure to the credit of Chinese property developers, Tether referenced a January report from crypto exchange Coinbase that looked at what Tether disclosed about its commercial paper. This report stated that even if Tether “had held short-term liabilities associated with weak sectors, such as Chinese real estate, it would no longer be in its portfolio, as rating agencies have downgraded much of this debt to under-investment grade over the past year.”

A short seller also sees problems in Tether’s holdings of money market funds and treasury bills. This company has learned that a subsidiary of Deltec Bank & Trust Ltd., a Bahamian bank where Tether does business, is looking to invest billions of dollars in outside hedge funds that invest in highly liquid securities, people said. close to the file. That money, much of which the short seller said came from Tether, could be locked away in those funds for months or years, meaning Tether would struggle to get it back in a timely manner to respond to a surge. of redemption requests, people mentioned.

Tether declined to comment on Deltec’s dealings with hedge funds. Deltec did not respond to requests for comment.

Tether also said it has about $5 billion, or about 6%, of its reserves at the end of 2021, in what it called “other investments.” These investments included digital tokens.

By comparison, the assets backing USD Coin, the second-largest stablecoin after tether, consist solely of cash and short-term US government securities, according to its issuer.

Some short sellers believe Tether’s “other” buckets include stakes in stocks or digital tokens issued by unproven crypto startups, people familiar with their trades said. These types of investments are riskier than ultra-safe Treasury bonds.

Tether did not respond to questions about these investments.

Companies such as crypto lender Celsius Network LLC and Exordium Ltd., the maker of an upcoming sci-fi video game, said companies affiliated with Tether or its executives made investments in stocks or tokens. .

Short sellers also liked the asymmetry of the trade: Borrowing link to sell it short costs between 6% and 8% per year, according to Genesis. It’s more expensive than many stocks, but it would still yield huge profits if the tether drops precipitously. Meanwhile, there was a very low probability that tether would trade above $1 for an extended period, as its holders would then pocket a premium by selling it, according to Genesis. This meant that a short squeeze in the tether would be unlikely.

Tether’s opacity, combined with its rapid growth, has also made it a frequent topic of conversation in Washington. The Commodity Futures Trading Commission discovered last year that Tether only held equivalent dollar reserves in its accounts for just over a quarter of days for a period of around two years, leading Tether to conclude a $41 million settlement with the regulatory agency. Tether has neither admitted nor denied wrongdoing in its settlement with the CFTC.

The stablecoin giant said at the time that the investigation focused on its past operations and that it had corrected the issues at issue when updating its terms of service in 2019.

During a February congressional hearing, a senior Treasury Department official, Nellie Liang, said she expected tether not to be fully collateralized, citing her understanding of tether disclosures and its status. unregulated.

She also echoed concerns about stablecoins more generally that a Treasury-led panel raised in a November report. “If investors were to lose faith in the quality of the assets backing the stablecoin, there could be a run, which has potential implications for systemic risk,” Ms. Liang said.

Tether said that when the November report was released, it was awaiting clarification on stablecoin regulations and looked forward to working alongside governments and global regulators to ensure compliance and asset issuance. stable like Tether tokens.

In the past, Tether executives have mocked short sellers. After Hindenburg Research offered a $1 million reward for previously undisclosed information about assets backing Tether, its parent company released a statement calling Hindenburg’s announcement a “pathetic offer of attention” that ” was trying to discredit not just Tether, but an entire movement.”

Paolo Ardoino, Tether’s chief technology officer, later posted a cartoon on Twitter mocking Hindenburg as a conspiracy theorist wearing a tinfoil hat. “Woah A miLon daollar bounty,” the cartoon said in part.

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