Thread by @newmoneyreview

Thread: #Tether releases more information on its reserves: in a blog post today, Tether general counsel Stuart Hoegner disclosed details of the #stablecoin's reserve' allocation, long a topic of controversy. The most important details are as follows:
stuarthoegner.medium.com/tether-is-sett…
1/13

According to Hoegner, the 'vast majority' of the commercial paper (CP) Tether holds is in 'A-2 and above' rated issuers. We learned last week that 49% of Tether's reserves were in CP at end-March. A-2 is mid-ranking CP by quality

2/13

For example, ratings agency S&P describes this short-term rating as "susceptible to adverse economic conditions however the obligor's capacity to meet its financial commitment on the obligation is satisfactory".

3/13

A2-rated dollar CP currently yields 0.13%-0.22% for maturities under 3 months. In his Medium post, Hoegner said it doesn't make economic sense for Tether to hold only $ cash or US T-bills as they don't yield enough to make a sustainable business.

4/13

A majority of the other short-term debt instruments held by Tether (fiduciary deposits and bonds) are also at the lower end of the investment grade spectrum, says Hoegner. He uses the words 'lion's share' and 'clear majority' to say how much.

5/13

I guess we can take it as a given that the rest of Tether's CP/fiduciary deposits/bonds are in sub-investment grade paper - higher yield and higher risk. Remember, all the extra yield earned flows into Tether's pockets. Stablecoin holders earn no income.

6/13

Hoegner also says that 'Tether imposes limits on individual issuers and on regional exposure...in line with Tether’s investment policy and industry practice'. But doesn't tell us what those policies and limits are. Nor, by comparison, does #stablecoin issuer Circle (USDC).

7/13

Dollar stablecoins are functionally very similar to dollar money market funds. Both are quasi-dollars and both are widely used by investors. Both also risk creating havoc if they fail to keep their 1:1 peg against the underlying $ unit.

newmoneyreview.com/index.php/2021…

8/13

By comparison with stablecoins, $ money market funds are heavily regulated and follow strict rules, including position-level disclosure of all fund holdings (with details of issuer, principal amount, maturity, interest rate). Here's an example

usmoneymarketfunds.com/sub-pages/CFG7…

9/13

Clearly, Tether's (and other stablecoins') disclosures fall far short of this. But they are edging towards better practices (under pressure and rather reluctantly). Tether's track record of lying should also make investors sceptical.

newmoneyreview.com/index.php/2021…

10/13

As the race to build the digital dollar intensifies, stablecoins are by no means out of the picture (which includes the Fed and Facebook's Diem). They have inherent advantages (scale, high turnover, near-instantaneous settlement, programmability, low cost)

11/13

But given the potential risks in 'shadow banking' - acting like a bank without following bank regs - regulators will soon force stablecoin issuers to compete on a level playing field with money market funds when it comes to liquidity and reserve management.

12/13

Given the dollar's reserve currency status, it's hard to overestimate the importance of this competitive and regulatory battle. It's one of the most fascinating areas of finance to follow.

13/13