A few weeks ago the Wall Street Journal reported that some hedge funds had previously taken positions shorting Tether. Since Tether has a rather complex and at some times controversial past this is not the most surprising thing. Tether has never really been the best at disclosing its reserves and while it has shown to have the assets previously a large part of that was in what is called "commercial paper".
In a great economy, commercial paper is not that bad of an investment. They typically mature in less than 120 days and even though they are not secured to any asset there is typically not enough liability to cause concern. That is in a great economy though and anyone who has been out purchasing things or watching the markets can see the economy is not too healthy right now. This makes that debt much more of a concern and because of that, some hedge funds have smelled blood in the water.
Now if it came out that there were not enough reserves this really wouldn't be the first time Tether has run into this issue as well the State of New York has previously fined them tens of millions of dollars over their previous claims. The Tether Team though hasn't been blind and has kept its eye on the economy and appears to be making changes to help keep their current reserves stable. Last Wednesday Chief Technology Officer Paolo Ardoino announced that Tether was going to trim its amount of corporate debt (commercial paper is a type of corporate debt).
Currently, Tether has 30% of its reserves in this type of debt and with Tether having roughly an $82 billion market cap that is a lot of debt that is far from ideal. In an ideal world if Tether did not have the amount in USD just sitting in a bank they would have something like a US government bond. US bonds are treated as the equivalent to having the actual amount as the odds of the US government defaulting are slim to none. While people could point to recent government shutdowns and default threats at the end of the day, the government will not let that happen.
While it may sound odd for a Hedge Fund to short a stablecoin there are some arguments to be made for it in this situation. Tether has run into regulator trouble before with how it backs its stablecoin and what it says about it. With the commercial paper being used it is a pretty large risk to the stability of the coin. Since those loans do not have collateral if they stop paying there is not much Tether can do to recover their funds. That is what the short-sellers are banking on a collapse in the commercial paper debt which would lower the amount of money behind tether and thus knock it off its peg. It is a long shot but not something that is entirely unheard of especially in a market like we are in right now.
When Tethers CTO discussed this trimming he did say that Tether was going to move the commercial paper holdings to US Treasuries which while safer and much more secure. This is something that would burn a short-seller as it would really destroy the idea of Tether getting knocked off its peg. The Treasuries though do cause an interesting issue that could benefit the short-sellers still depending on how Tether handles the transition.
Commercial paper has a much higher interest rate than US Treasuries do so by moving to this new holding they will lose out on the higher interest payments. How the company handles this will be something interesting to watch as they will most likely end up buying more Treasuries or investing in something else to try and make up for this shortcoming. This interest rate drop-off is a very interesting curveball that is being thrown at Tether.
It will be telling if the company buys short-term Treasuries or if they start buying 20-30 year notes. Depending on what they buy will give us an insight into how much the interest rate matter to the company. The interest can be used for a variety of things that do not involve backing the stablecoin-like operations. They could also use them to overcollateralize and even to issue additional Tether and thus keep expanding. If they opt for the long-term bonds then it would appear that they have found another way to replace the interest that they are earning from the commercial paper.
Tether has said that they will become more and more transparent with their reserves but right now a lot is still unknown besides the general breakdown. The commercial paper could be in very good companies or very bad it really just depends however what results from the choice is how much the interest payment will be. The worse the company the higher the interest rate which is something you really give up with having US Treasuries. In the end, this is what the short-sellers are interested in and trying to make a play on.
Please know I am not a financial advisor I am just someone who picked up on a trend and wanted to express it! Makes sure you always do your own research and never invest money you cannot afford to lose! If you enjoyed this article and would like to further support me below are a couple of referral links that if you used when signing up I would appreciate it! Also, follow me on Twitter @Cje95_
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