USDT Stablecoin: Tether reduces stocks of commercial securities and discloses its reserves

According to Coinmarketrate.com, with a market capitalization of $66.8 billion, the USDT digital currency represents a broad functionality in the crypto sector.

Measured by volume, Tether consistently ranks first among cryptocurrencies and thus provides functional action in the entire cryptocurrency ecosystem, even at more complex stages.

In the past, there have often been voices about the security of a digital currency that is pegged to the value of the US dollar.

By adjusting its assets, Tether strives to satisfy investors and market observers and create transparency. And so, let’s look at these efforts.

The largest stablecoin by market capitalization

Well, it’s probably worth starting with what is a stablecoin? What role does USDT play for the cryptocurrency market?

To begin with, let’s briefly explain what exactly the so-called stablecoin is.

Stable coins are digital currencies that maintain or should maintain a constant value. While increased volatility is inherent in cryptocurrencies, stablecoins should offer investors a safe haven.

Stablecoins also provide investors with access from traditional fiat currencies to the world of cryptocurrencies.

Due to the stability of the value, stablecoins also make up a large part of the trading volume in the crypto sector.

In addition to trading itself, stablecoins can also be invested in centralized or decentralized protocols to obtain crypto-interest and, accordingly, profit in the form of lending or liquidity mining.

The role of Tether (USDT) in the cryptocurrency market

Tether is a cryptocurrency managed by the eponymous company Tether Limited, the value of which is stably pegged to the US dollar.

The market capitalization of more than $66.8 billion puts Tether in first place among all stablecoins and in third place among all cryptocurrencies after Bitcoin (BTC) and Ethereum (ETH).

Currently, Tether (USDT) clearly dominates the market with a market share of 45 percent, judging by the combined total market capitalization of all stablecoins. This makes USDT, its stability and security even more important for the entire crypto ecosystem.

If complications and other errors can occur with USDT, as happened with Terra and its UST coin, the consequences for the cryptocurrency sector will be catastrophic.

Tether uses capital in the form of USDT to generate profits in a wide range of financial instruments, and Tether holders receive an asset that reflects the value of the US dollar.

Individual Tether positions

But how exactly do such compounds affect Tether? To find out, let’s take a closer look at the USDT asset allocation document published by Tether.

Breakdown of individual USDT stablecoin positions, last status 31.03.2022

Here we see that most of the reserves of USDT Tether (86 percent) are placed in cash and cash equivalents, as well as in other short-term deposits and so-called commercial securities.

In the lower half of the graph, we again see a detailed breakdown. More than half of the position is represented by US Treasury bills.

U.S. Treasury bills are short-term debt obligations of the U.S. government, backed by the Treasury, with a maturity of one year or less. They can be classified as safe in the general economic context of financial markets.

On the other hand, we see that with 28.50 percent and a total position of 25 percent, so-called commercial securities and certificates of deposit make up a quarter of Tether’s reserves.

These commercial securities are a widespread type of unsecured short-term debt instrument issued by companies.

Therefore, they should be considered high-risk, especially considering how important the stability of the Tether (USDT) stablecoin is for the entire crypto ecosystem.

This is due to the fact that an increase in the risk of default exposes the reserves of Tether and, thus, the protection of the stability of the value of USDT with an increase in the share of commercial securities.

Assets of commercial securities decreased by 5 billion US dollars

In an announcement dated July 01, the company announced that it would reduce its assets on commercial securities from the current level of $8.4 billion to a minimum of $3.5 billion.

In this regard, on July 31, commercial securities in the amount of 5 billion US dollars expire, and they will no longer be added to the reserve portfolio.

Reserves disclosed

Circle, the company behind the cryptocurrency, has released a new transparency report on its USDC stablecoin, providing a complete breakdown of individual reverse positions.

Due to the high capitalization of the market and the importance of USDC in terms of cryptocurrency trading, it is even more important that these digital USDC are stably hedged in the form of cryptocurrencies.

In the case of USDC, the reserves of a stable coin are invested much more reliably than in the case of the largest stable coin – USDT.

In addition to collateral-backed reserves, Tether also relies on commercial paper, accounting for about a quarter of its reserves, which are unsecured, short-term debt instruments with a correspondingly high risk of default.

In contrast, the reserves of USDC Coin today consist of:

• 12 billion US dollars in short-term US government bonds – this corresponds to about 75 percent;
• 58 billion US dollars in cash in regulated financial institutions of the country – this is about 25 percent
• the total amount of investments is 65.8 billion US dollars;
• the weighted average maturity of assets is 43.9 days.

The total capitalization of the stablecoin market is $153 billion, which corresponds to a percentage share of 17 percent of the entire cryptocurrency market.

In addition, more than half of blockchain transactions are calculated using stablecoins: non-payments and deposits, that is, deviations from the actual guaranteed value, would be disastrous for the crypto sector.

By listing the reserves, Circle can convince USDC holders of the stability of its stablecoin. With a percentage share of 75%, US government bonds can be attributed to the safest financial investments.

The remaining 25 percent of cash issued by the country’s regulated financial institutions can also be classified as very safe.

The risk associated with centralized stable coins

However, apart from the positive aspects, we should also briefly emphasize that centralized stable coins such as USD Coin (USDC), Tether (USDT), Binance USD (BUSD) and others carry risk for their holders.

Thanks to centralized management, the companies behind stable coins can freeze individual user wallets if, for example, they violate laws, regulations, etc.

In the case of strict regulation of the crypto sphere, this may spread to different people, depending on what measures will be taken by governments.

This is due to the fact that thanks to the centralized implementation function, companies will comply with state legislation and, regardless of how appropriate or inappropriate this or that action will be considered, they will freeze the assets of affected users.

Both Tether with its stable USDT coin and Circle with its stable USDC coin have in the past frozen user accounts and, accordingly, all assets at the request of the authorities.

Tether particularly emphasizes its commitment to the cryptocurrency sector, stating in an official statement the following:

The goal is still to reduce the number of [commercial securities] to zero. Although both commercial paper and Treasury reserves are usually cash and cash equivalents, U.S. Treasury bonds will now account for an even larger percentage of Tether reserves.

This is part of a broader strategy aimed at providing a diversified Tether portfolio with restrictions on exposure to individual issuers or assets. This demonstrates the company’s commitment to reducing investments in commercial paper and confirms the transaction as part of its ongoing commitment to ensure greater transparency of the stablecoin industry.

In the current bear market, the bankruptcies of many companies and the general uncertainty, Tether’s actions to adjust the allocation of reserves are a very positive event for the cryptocurrency market as a whole.

It is still unclear how events will develop in the future.