Changpeng Zhao seems to have a rug under Tether’s feet

Changpeng Zhao

In the world of crypto two of the biggest industry players are feuding online. Binance’s Changpeng Zhao is not happy with Tether because it does not provide evidence for its proof of reserves although the real reason why CZ had a fall-out with Tether is yet unknown. The fact that Tether is not transparent is not news and CZ who is part of the “Exchange coordination group” is able to reach out directly to Tether and ask them. Recently, Tether’s face and CTO Paolo Adroino complained that someone was trying to manipulate the price of Tether to bring it down, but it is yet unclear what he was referring to exactly.

Two things are significant about this feud. Both Binance and Tether are currently being investigated by the Department of Justice and both CZ and Tether’s executives would be arrested if they landed on US soil. Apart from the DOJ’s investigation Tether’s bank fraud, there is also an ongoing investigation on Binance over sanction breaking and money laundering. Binance is also being investigated by multiple authorities in Europe while Tether will have to exit European exchanges due to new MICA regulations. Both Tether and Binance are pressured by existential legal risk and this kind of risk may prompt either of them to take unilateral and unexpected decisions regardless of the health of the crypto industry in general.

The other significant aspect in this online feud is that once again, CZ holds most of the cards by having under his control a sizable portion of Tether’s coins in the market by controlling up to 21% of Tether’s total market cap, hence rekindling memories of the FTX crash when Binance declared it was to sell its FTT holdings (even this drama back then started with an online feud). Had Binance proceeded to begin the conversion of its and clients’ Tether reserves into other stablecoins, it would put significant stress on Tether’s peg with heavy selling in the market.

If Tether had a strong and liquid balance sheet that exceeds 1:1 in reserves this would not be a problem and billions of Tether could be sold in the market, while simultaneously redemptions of Tether would be made with no problem or shocks whatsoever on Tether. The problems are numerous however, namely that Tether may be illiquid in the market, the balance sheet may not add up or may not be true at all, and the balance sheet is not actually 1:1 with Tether.

Tether is currently the biggest stablecoin in the crypto ecosystem boasting a market cap of up to $83.35 billion. Clearly, this year-round, Tether has profited and grown substantially thanks to the decline of USDC. Tether’s market cap this year started at $66.5 billion while USDC started at $44.5 billion but is now down to $26.3 billion. However, Tether did not necessarily grow solely due to UDC’s fall. Money has also flown out from crypto altogether accelerating USDC’s fall and Tether’s market cap upward trajectory began at the start of the year while USDC’s fall of this year began around the 10th of March.

One major player in this conversation was undoubtedly Binance which had up to $1 billion worth USDC of its own as part of its reserves in December 2022, according to their publicly alleged proof of reserves, and has by now sold most of it. At that time customers on Binance held just $926.3 million in USDC. The latest Binance attestation of reserves shows that it holds $829.6 million in USDC of clients and just $14 million worth of USDC of its own.

On the other hand, Binance’s own Tether reserve grew from $500 million to $2.7 billion from December of last year to last month apart from having $15.28 billion worth of clients’ Tether which increased from $13.5 billion in the same time period. So, according to Binance’s documents, Tether’s market cap grew both from client demand and also from the exchange’s preference of stablecoin reserves. Other major exchanges show they hold much less Tether on their exchange. Latest proof of reserves show that OKX holds up to $5 billion in clients’ Tether, Bybit holds €1.3 billion while Kucoin’s clients Tether amounts to nearly $1 billion.

According to its latest publicly released document on its reserves, Tether held up to $86.5 billion in assets including $8.9 billion in Overnight Reverse Repurchase Agreements collateralised by US treasuries and up to $90 million in available cash. It is not mentioned with which bank Tether has these overnight loans, but it has been alleged that Tether’s reserves are managed by Cantor Fitzgerald and recently, Forbes published an article claiming that Tether had moved $37 billion worth of reserves into a bank in The Bahamas called Capital Union in 2021. According to Forbes, another banker of Tether in The Bahamas is Ansbacher. The other Bahamian Bank which was already known to serve Tether, is Deltec Bank which also used to serve the now shut-down FTX-exchange. Deltec Bank has been a strong advocate for Tether and is known to prove to funds and institutional investors that Tether owns its reserves 1:1. In June, US Federal authorities seized several accounts at Deltec with up to $58.5 million that were used for crypto profits from a global network of spoofing sites.

Tether’s reserves in 2021 were mostly Chinese commercial paper and today, Tether’s reserves comprise mostly US treasuries which total up to $55.8 billion according to its public report. There is some mystery with regard to these treasury holdings since it is not the first time that fund managers familiar with treasury brokers have not heard of anyone selling US Treasuries to Tether. The previous fund manager who said the same thing was Kyle Bass.

We don’t know what kind of treasuries Tether own or whether they bought them through funds or third parties but the issue with them, if they exist at all may be on their value marked-to-market. Surely, Tether would have no problem with holding treasuries until maturity, but if it is forced to unload them prior to maturity or if they are in the form of funds that are at a loss, Tether may incur a significant loss in its balance sheet. On the other hand, a marked-to-market balance sheet would also need to deduct its repos, so it’s as if Tether’s balance sheet is slightly leveraged.

Now, many would argue, what’s wrong with this? No bank actually holds a 1:1 reserve, but Tether is not a bank. Although it can issue Tether tokens to crypto exchanges, Tether is not insured by a central bank and it has to rely solely on itself to redeem every token available. So, Tether, may not have the leveraged privileges that a normal bank may have.

Surely, even if its balance sheet is true, Tether clearly needs to avoid a significant rush of redemptions paired with heavy market-selling, something which CZ may very well cause. If Binance is the main conduit for Tether, and thus, the main conduit for illicit Chinese funds, what Binance needs to do to hurt Tether is simply tap on the switch and delist it from its exchange. Wouldn’t the trading of Tether be able to go elsewhere if Binance delists it? Not, very easily. Binance still holds the huge majority of liquidity in the crypto market under its house and there is as of now, no international and global equivalent to its size.


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