Is Tether's Bitcoin-Buying Plan a Cause for Concern?

Similar to other Bitcoin maximalists, Tether, the issuer of the largest stablecoin USDT, has taken the approach of holding its own coins. In a recent blog post, Tether disclosed its intention to regularly purchase bitcoin using its surplus profits, aiming to establish a substantial reserve. This move comes after an impressive attestation referred to as an "Assurance Report," conducted by the reputable accounting firm BDO Italia (although not a full audit), which revealed that Tether generated a profit of $1.48 billion in the first quarter of this year. Consequently, the company's reserves have nearly doubled, reaching $2.4 billion, and this amount would likely be included in its reported "consolidated total assets" of $81.8 billion. These assets mainly consist of cash, cash equivalents, and other investments that Tether acquires to support its stablecoin.

Following the recent announcement of their bitcoin-buying initiative, which came just a week after the attestation, Tether has joined the league of institutional giants accumulating BTC. Notably, MicroStrategy, the publicly-traded technology company that has effectively become a de facto bitcoin exchange-traded fund (ETF) after nearly two years of consistent purchasing, is now approaching ownership of approximately 1% of the total bitcoin supply. Tether, on the other hand, already possesses a little over 52,000 BTC, making its bitcoin treasury one of the largest among corporate entities. Additionally, Tether plans to allocate 15% of its "tangible gains from operations" towards acquiring more bitcoin. The company follows a "conservative and prudent" investment strategy that also involves a significant investment in gold (although it is unclear whether this gold is self-custodied as well).

While not explicitly stated, Tether's bitcoin-buying plan can be interpreted as an effort to mitigate its exposure to the U.S. dollar and reduce associated risks. Currently, there is a growing trend of discussing "dedollarization," which refers to the process of countries (and to a lesser extent, companies) decreasing their dependence on the U.S. dollar. This shift in sentiment is driven by diminishing trust in the fiscal and monetary policies of the United States. The Federal Reserve, responsible for managing monetary policy, finds itself in a challenging position, balancing the need to control inflation while avoiding a recession. Meanwhile, the U.S. Congress, responsible for fiscal policy, is engaged in a contentious debate over the "debt ceiling," which poses a genuine risk of the U.S. Treasury defaulting on its loans. These circumstances have prompted the global community to seek alternatives, creating a search for alternative currencies and assets.

It wouldn't be entirely unfounded to make such an inference. Circle, Tether's primary competitor, is currently "diversifying" its holdings of U.S. Treasuries (often deemed low-risk assets in portfolio construction) by venturing into the overnight "repo" market. Both stablecoin issuers have openly acknowledged their efforts to reduce their reliance on "pure bank deposits," driven by concerns surrounding the increasing number of bank failures in the United States. While Tether's Chief Technical Officer, Paolo Ardoino, chooses to emphasize bitcoin's strengths and the company's alignment with transformative technology in their press release, the decision is equally motivated by the vulnerabilities inherent in the U.S. dollar.

"There’s really no amount of bitcoin that would save the firm if the buck breaks. But until that happens, Tether just has to take in funds and pay out withdrawals – and it can invest the spread wherever it wants"

None of this poses any concern, naturally. Tether operates as a private company and has the autonomy to utilize its funds as it sees fit. Austin Campbell, a former portfolio manager at Paxos who previously managed the Binance-branded BUSD stablecoin during its peak value of around $22 billion, expressed his view, stating: "if they are buying bitcoin with profits and adding that as a safety buffer, it's just a way for them to speculate on BTC prices that is not particularly harmful.”

As long as the company refrains from exchanging bitcoin for its cash or cash-equivalent reserve assets, such as U.S. Treasuries, which are intended to guarantee the 1:1 redemption of USDT for the U.S. dollar, there is no cause for concern. Tether has explicitly stated that it is solely utilizing its profits for these purposes.

However, the situation may still cause some unease. It is important to highlight that Tether continues to release attestations following the New York Attorney General's discovery that the company had occasionally misled its users and the public regarding the nature of its reserves. Presently, Tether is experiencing success, benefitting from a combination of recent factors such as the surge in Bitcoin's price, overall cryptocurrency volatility, and a bank run that reinforced the argument for alternative stores of value like stablecoins. As a result, Tether has surpassed Circle's USDC as the most reliable option, albeit somewhat coincidentally. Nevertheless, it remains uncertain whether these favorable circumstances will endure.

Setting aside the impending regulatory challenges, Tether's recent actions appear to display the kind of overconfidence often observed before cunning cryptocurrency companies encounter significant obstacles. Perhaps my judgment is influenced by Do Kwon, the supporter of the now-defunct algorithmic stablecoin UST, boldly stating, “Besides Satoshi [Bitcoin’s creator], we will be the largest single holder of bitcoin in the world,”" This audacious move seems like an unnecessary gamble, utilizing an extremely volatile asset to construct a contingency fund. In case you don't recall, Kwon had intended to purchase $10 billion worth of bitcoin as a safety net when his intricate LUNA/UST contraption was valued at over $80 billion.

Naturally, Tether and Kwon operated under entirely distinct business models and faced different risks. The contrast between algorithmic (algo) and non-algorithmic stablecoins is significant. While UST relied on a decentralized Ponzi scheme, susceptible to "death spirals" due to the use of counterfeit funds to generate representations of real currency, Tether functions more akin to a decentralized Ponzi-like scheme resembling a bank. Tether acquires capital, issues an equivalent amount of its stablecoin, and invests the received funds while retaining the profits. As long as Tether maintains reserves equal to or exceeding the amount of USDT available for redemption, it remains a lucrative venture.

Undoubtedly, there are individuals worldwide who argue that Tether's plan to purchase bitcoin is precisely the reason why stablecoin issuers require regulatory oversight. The European Union, for example, recently implemented regulations mandating strict reserves for issuers. In contrast, the U.S. Congress appears divided on how to approach the issue, essentially leaving issuers to self-regulate. Isn't it peculiar that we only recently discovered Tether's holdings of BTC and gold, with the company claiming to have included these "additional categories" in its reports to enhance transparency? Considering the significant role USDT plays in the cryptocurrency markets, stakeholders in the crypto community might demand not just increased insight into Tether's investment decisions but also control over them.

However, in reality, using surplus cash to buy bitcoin is unlikely to directly impact USDT users (and may even benefit BTC holders). For the trade to go awry, numerous other factors must also go wrong. It has never truly made sense to me when Do Kwon criticized the US dollar while asserting that his “decentralized money” (which was pegged to fiat!) would surpass the world's reserve currency. Similarly, Tether's decision to hedge with bitcoin implicitly acknowledges the risks associated with its own primary product. No amount of bitcoin holdings would truly safeguard the company if the US dollar were to collapse. However, until such an event occurs, Tether can continue to receive funds and facilitate withdrawals, while investing the resulting spread wherever it deems fit.