Should Tether’s Bitcoin Buying Plans Concern?[Column]| coindesk JAPAN | Coindesk Japan

Tether, the issuer of the #1 market cap stablecoin Tether (USDT), recently said it would use its surplus profits to “continuously” buy Bitcoin (BTC) to boost its reserves. Announced.

Related article: Tether Continues to Buy Bitcoin to Strengthen and Diversify its Reserves

Earlier, Tether released a surprisingly complete assurance report (by BDO Italia, the world’s fifth-largest accounting firm, not audited). It was revealed that the profit for the first quarter of 2023 was 1.48 billion dollars (about 200 billion yen, converted to 135 yen per dollar).

The “reserve surplus” nearly doubled to $2.4 billion, probably due to the $81.8 billion in “consolidated total assets” (mostly cash, cash equivalents for use in backing the USBT).

A week after the assurance report, a new Bitcoin purchase plan announced Tether joins the ranks of many institutional investors buying up Bitcoin.

In particular, MicroStrategy, whose stock now effectively trades like a Bitcoin exchange-traded fund (ETF), after two years of continuous Bitcoin purchases, accounted for 1 of Bitcoin’s total circulation. I own close to 100%.

Tether already holds more than 52,000 bitcoins, making it one of the top holdings of bitcoins among companies. In addition, 15% of the “tangible profit from operation” will be used for Bitcoin purchases. Tether’s “conservative and prudent” investment strategy also includes a sizeable investment in gold.

USD risk aversion

Not many details were released about Tether’s Bitcoin purchase plans, but the plans could be seen as risk aversion to the US dollar.

As confidence in US fiscal and monetary policy declines, there is growing debate about “de-dollarization,” an attempt by countries and companies to reduce their dependence on the US dollar. Specifically, the US Federal Reserve Board (FRB), which is in charge of monetary policy, was caught between inflation control and concerns about an economic recession, while the US Congress, which is in charge of fiscal policy, was stuck in the “debt ceiling issue.” and the world is looking for an alternative to the US dollar.

Tether’s biggest rival, Circle, is “diversifying” its investment in US Treasuries (often considered “risk-free” in portfolio construction) into the “repo” market.

Both Circle and Tether candidly say they are reducing their reliance on “pure bank deposits” in the wake of a string of bank failures in the US. In a press release, Tether CTO Paolo Ardoino praised the strength of Bitcoin and said it was working to “align itself with innovative technology,” but such a move would not hurt the U.S. dollar. It is also the flip side of weakness.

good tether

There’s nothing wrong with Tether’s plans, of course. It’s a private company, so you can use your funds freely. Austin Campbell, former portfolio manager of Paxos, which issued Binance US Dollar (BUSD), a Binance-branded stablecoin with a market capitalization of about $22 billion at the time. As Campbell said:

“If you are using your profits to buy bitcoin and add it as a safety buffer, you are just speculating on the bitcoin price and it is not particularly harmful.”

As long as you are not replacing Bitcoin with cash or cash equivalents such as US Treasuries, which you always have ready to exchange USDT 1:1 with USD, you should be fine. Tether has indeed stated that it will use its profits to buy bitcoin.

But the plan may scare some people. But first, it’s worth noting that Tether continues to issue assurance reports after it was found by the New York Attorney General that it “sometimes” lied to users and investors about its reserves.

Tether is currently benefiting from recent events such as the rise of Bitcoin, cryptocurrency volatility, and bank runs that have made alternative stores of value such as stablecoins look attractive. It’s been well received. It also coincidentally drags Circle’s USD coin (USDC) out of its position as the most reliable option. But I don’t know how long this trend will last.

Related article: Tether has become the safest stablecoin amid banking crisis: Analyst

The bitter memory of Mr. Do Kwon

Potential regulatory crackdowns aside, Tether’s recent moves show the arrogance that sometimes scheming crypto companies show before they get bogged down.

Perhaps my memory is that Mr. Do Kwon, the creator of UST, an algorithmic stablecoin that no longer exists, said, “We will become the number one holder of bitcoin in the world, other than (the creator of bitcoin) Satoshi.” You may have been influenced by what you said.

But using volatile assets to store money for times of trouble feels like an unnecessary risk. Kwon planned to buy $10 billion in bitcoin for peace of mind when LUNA/UST’s market capitalization exceeded $80 billion. rice field.

One might think that these bitcoin buying schemes are the reason for cracking down on stablecoin issuers. The EU, for example, just passed new rules requiring stablecoin issuers to strictly maintain reserves.

Meanwhile, Congress appears split on how to address the issue, leaving it to issuer self-regulation. Tether’s holdings of Bitcoin and Gold were revealed because Tether chose to add “additional categories” to its report to “increase transparency”, which is strange. is that what it is?

Given USDT’s structural importance to the crypto market, crypto stakeholders may request not only information about Tether’s investment decisions, but also control over their investments.

Of course, Tether and Mr. Kwon have completely different business models and risks. There is a world of difference between algorithmic and non-algorithmic stablecoins. UST was a decentralized Ponzi scheme in that it used fake currency to issue stablecoins and could have fallen into a “death spiral.”

Contradiction behind US dollar hedging

In practice, however, buying Bitcoin with surplus funds is unlikely to affect USDT users (although it may benefit Bitcoin holders). This plan will fail when so many other things go wrong.

I never understood Kwon’s criticism of the US dollar, arguing that his “decentralized currency” (backed by fiat currency) would beat the global reserve currency, the US dollar. Similarly, Tether’s support for Bitcoin as a hedge implicitly acknowledges the risks of its flagship product.

If the US dollar collapses, no amount of Bitcoin will save Tether. But until that happens, Tether can accept the money and respond to withdrawals. You can invest the profit you get from it however you like.

｜Translation and editing: Akiko Yamaguchi, Takayuki Masuda
| Image: Mathieu Stern/Unsplash
｜Original: Should We Worry About Tether’s Bitcoin-Buying Plan?