Short Sellers Bet Tether, Crypto’s Central Bank, Is Vulnerable to a Run

According to people familiar with the matter, some investment firms, including Fir Tree Partners and Viceroy Research LLC, have made substantial bets in recent months that the price of Tether will drop. Tether is the most popular currency for bitcoin trading and is believed to have a fixed value pegged to the US dollar.

Some hedge funds arranged Tether short sales with Genesis Global Trading Inc., one of the large crypto brokerages for professional investors, said Matt Balenswig, co-head of trading and lending at Genesis. About a dozen funds discussed doing so with Genesis, but many did not move forward, Mr. Bolenswig said.

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

Short sellers follow a group of regulators, lawmakers, prosecutors, prosecuting lawyers and amateur investigators who have spent months, or even years, in some cases, trying to figure out details about a cryptocurrency that can be used It has more than just 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 bank accounts or wire transfers.

A Tether spokesperson said the short sellers appear to be involved in a “smart plan to raise capital from those less-informed, by taking advantage of propaganda with the ultimate goal of collecting management fees.”

“Tether has been repeatedly stress tested and passed with flying colors. Throughout events like this, its peg remained solid, with all redemptions awarded and even priced on exchanges. remained stable,” said the spokesperson.

Tether has not traded less than 0.999 cents against the US dollar over the past year, which means short sellers’ bets are yet to pay off. And most of Genesis’ initial customers have since dropped out of the initial trade, Genesis said, although some investors have been looking to discuss ways to smaller Tether in recent weeks. Fir Tree’s lack of tether was first reported by Bloomberg News.

According to some people familiar with the short position, short sellers are betting that the $82 billion portfolio that underpins Tether’s value is now the size of a large money-market fund, the parent company did not disclose. . ,

A Tether spokesperson said the company takes transparency seriously.

“Tether manages a portfolio of conservative, diversified, liquid assets,” Tether said. It said its reserve-fund assets exceed their liabilities.

Regulators, lawmakers and other critics have accused Tether of being too opaque. Its parent company, Tether Holdings Ltd., has for years promised a full audit of its reserves, but never produced one. A year-long investigation by the attorney general of New York, and charges of misleading Tether’s customers, ultimately settled $18.5 million, revealing to Tether that each quarter was through its accounting firm only in broad terms. What is in To prevent further disclosure, even in mundane matters like the name of its chief investment officer, Tether has gone to court to block public-record requests about its business.

Tether said that providing a full audit is a priority. It did no wrong as part of its agreement with the Attorney General of New York. Tether’s lawyers argued in the court filing that additional disclosure of its reserve investments would hurt its competitive position in the market and that disclosing the name of its chief investment officer would be “an unwarranted invasion of privacy.”

If the Tether token is “one-to-one backed, then go and disclose it,” said Viceroy founding partner Fraser Pering, who previously noticed accounting problems at German fintech company Wirecard AG. “We know every single really good short about us, they’ve obscured something.”

“Certainly management can, to allay this fear, properly publish each line item,” said Mr. Pering.

Tether issues new Tether tokens when it receives the corresponding dollars from customers. It then invests those proceeds in a reserve fund that backs the token, a portfolio that includes both safe investments, such as cash and short-term U.S. government securities, and riskier ones, including short-term ones known as commercial paper. Includes IOUs, secured loans to companies and other cryptocurrencies.

Some short sellers believe that a portion of Tether’s commercial-paper holdings, which totaled $24 billion at the end of 2021 and accounted for slightly less than a third of Tether’s, came from volatile Chinese property developers. A faltering Chinese real-estate market and concerns about developers’ excessive debt levels have led to a sell-off in their bonds and a downgrade in their ratings.

Tether said it has intentionally reduced its commercial-paper holdings since a settlement with the New York attorney general, including a 21% drop in the last three months of 2021. In response to questions about credit exposure to Chinese property developers, Tether referred to a January report from crypto exchange Coinbase that looked at what Tether has disclosed about its commercial paper. That report said that even if Tether “has any short-term liabilities associated with vulnerable sectors such as Chinese real estate, it will no longer be in its portfolio, as rating agencies consider the majority of that debt to be sub-investment grade.” Downgraded in last year.”

A short seller also sees trouble holding Tether’s money-market funds and Treasury bills. That firm learned that an affiliate of Deltec Bank & Trust Ltd., a Bahamian bank where Tether does business, sought to invest billions of dollars in external hedge funds that invest in highly liquid securities, in this case. people familiar with said. The money, much of which the short seller believed came from Tether, could be locked in those funds for months or even years, meaning redemption requests were needed for Tether to get it back in time. Will have a hard time meeting a wave of

Tether declined to comment on Deltec’s deal with the hedge fund. Deltec did not respond to requests for comment.

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

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

Some short sellers believe Tether’s “other” bucket includes equity stakes or digital tokens issued by uncertified crypto startups, people familiar with their trades said. This type of investment is riskier than ultrasafe Treasury bonds.

Tether did not respond to questions about those investments.

Companies including cryptocurrency lender Celsius Network LLC and Exordium Ltd., makers of an upcoming science-fiction videogame, have said that companies affiliated with Tether or its executives have made stock or token investments.

Short sellers also liked the oddity of the business: According to Genesis, borrowing Tether to sell it costs between 6% and 8% per year at a low cost. It is more expensive than many stocks, but will still yield substantial gains if Tether falls sharply. Meanwhile, there was little chance that Tether would trade above $1 for an extended period of time, since then its holders would receive a premium by selling it, according to Genesis. This means that a small squeeze into Tether would not be possible.

Tether’s opacity, coupled with its rapid growth, has made it a frequent topic of conversation in Washington. The Commodity Futures Trading Commission found last year that Tether held equivalent dollar reserves in its accounts in only a quarter of a day over a nearly two-year period, leading Tether to a $41 million settlement with the regulatory agency. Tether has neither acknowledged nor denied wrongdoing as part of its settlement with the CFTC.

The stablecoin giant said at the time that the investigation focused on its past actions and fixes the issues involved when it updated its terms of service in 2019.

At a congressional hearing in February, Nellie Liang, a senior Treasury Department official, said she expected Tether not to be fully collateralized, citing Tether’s disclosures and understanding of its unregulated status.

He also echoed concerns about stablecoins in general raised by the Treasury-led panel in its November report. “If investors were to lose confidence in the quality of assets backing stablecoins, a race could ensue, with potential systemic risk consequences,” said Ms. Liang.

Tether said that when the November report was published, it was waiting for clarity regarding stablecoin regulation and that it “looks forward to working with global governments and regulators to facilitate the issuance of stable assets such as the Tether token and To ensure proper compliance for issuance.”

In the past, Tether executives have taunted short sellers. After Hindenburg Research offered a $1 million reward for previously undisclosed information about assets backing Tether, its parent made a statement calling Hindenburg’s announcement a “pathetic bid for attention”. , which was “attempting to discredit not just Tether, but the entire movement.”

Tether’s technology chief Paolo Ardoino then posted a cartoon on Twitter mocking Hindenburg as a tin-foil-hat-wearing conspiracy theorist. “Wow a matching dollar reward,” read the cartoon portion.