Certain cryptocurrencies known as stablecoins are today’s economic equivalent of money-market funds, and in some cases their practices should have us worried that they could break the buck, creating significant damage in the broader crypto market. One such stablecoin is Tether. With a market capitalization close to $60 billion, it is almost as big as the Reserve Fund was in 2008. Each Tether token is pegged to be equivalent to $1. But, as with the Reserve Primary Fund, the true value of those tokens depends on the market value of Tether’s reserves — the portfolio of investments made with the fiat currency it receives.
Tether recently disclosed that as of March 31, only 8% of its assets were in cash, Treasury bills and “reverse repo notes.” Almost 50% was in commercial paper, but no detail was provided about its quality. “Fiduciary deposits” represented 18%. Even more troubling: 10% of total assets were in “corporate bonds, funds & precious metals,” almost 13% were in “secured loans (none to affiliated entities),” and the remainder in “other,” which includes digital tokens. Tether separately provided a report from the accounting firm Moore Cayman stating that Tether’s assets exceed “the amount required to redeem” outstanding tokens. But that report provided no description of assets. It appeared to be based solely on management’s accounting, noting that Tether’s policy is to use “historic cost,” and that “the realizable value of these assets … could be materially different.” These facts should put holders of Tether — and other stablecoins — on notice that they may have trouble getting back $1 for each token. “If some of Tether’s investments were to become worthless or decline in value, it would suffer the equivalent fate of breaking the buck,” says Massad. “And if, for any reason, a wave of Tether holders suddenly tried to convert their tokens to cash, we do not know whether Tether could liquidate sufficient investments quickly to satisfy the demand.”
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