Barclays to tether: the test is yet to come

It went back to equality and defense, but the questions about Tether The last disconnect The $ 1 link has not disappeared.

The most popular stablecoin in the world on Thursday Publish a letter From MHA Cayman, an overseas outpost of UK accountants MHA MacIntyre Hudson, Indicating a total consolidated assets of just over $ 82.4 billion. These quarterly updates are a mandatory requirement of Tether Arrangement 2021 With the Attorney General of New York and (in contrast Explanatory-mini peg Published on Monday) are mostly new information.

The MHA’s snapshot is from March 31, so it does not capture the USDT’s next currency A decrease of $ 8 billion in market value. It shows less than 5 percent of cash reserves, an amount overshadowed even in the mysterious and undefined “other investment” category.

However, higher weights of U.S. money market funds and treasury bills means that more than half of Tether’s reported assets were in categories that are considered highly liquid:

If the above is taken at face value (i.e. Not everyone’s preference), Last week’s disturbing drift away from $ 1 still needs explanation.

The whole point of a liquidity pool is to adjust the redemptions immediately and absorb any risk of selling a fire. The ability to do so was probably plentiful. Tether’s reported pool was oilier than that of an average institutional money market prime fund, which typically holds around 38% of assets in immediate realizable forms.

The latest big test for attracting money market funds came at the beginning of the epidemic against the backdrop of a corporation “Jump for cashIn the two weeks to March 24, 2020, according to a Barclays study, institutions pulled 30% of money market fund balances. Tether’s troubles are like nothing in comparison: Redemptions peaked on May 12 with less than 4% of reported reserves.

But Tether’s closed redemption mechanism says it cannot be seen as a money market fund. Processing delays can happen unexplained, there is a 0.1 percent conversion fee, and the facility is only available to verified customers who spend at least $ 100,000. Skepticism about the quality of collateral is a reason to sell below $ 1, but it’s just one of many reasons, says Barclays:

The only way to get instant access to fiat is to sell the token on the stock exchange, regardless of the size of the holding. . . [W]Hile revenue ‘guaranteed’ at face value, tther secondary market price can be traded lower, depending on the willingness of the holders to get a haircut in exchange for access to immediate liquidity. As evidenced by the price action last week, some investors were willing to accept a nearly 5 percent discount to liquidate their holdings in USDT immediately.

We think the willingness to incur losses, even though USDT is fully guaranteed and has an overnight liquidity surplus that exceeds most prime funds, suggests that the token may be preventative runs. Holders with immediate liquidity requirements have an incentive (or advantage of a first carrier) to rush to sell in the secondary market before the supply of tokens from other liquidity seekers increases. Fears that the USDT will not be able to keep the pair up may drive runs regardless of its actual ability to support redemptions based on its collateral liquidity.

It also does not help that Tether reports skeletal data once a quarter with a significant lag (according to yesterday’s post). Lack of real-time vision combined with the short nature of the entire portfolio can raise suspicions about window coverage for the end of the quarter.

All of this makes Stablecoins more like ETFs than money market funds, Barclays says. The issuer sells a token, and then the secondary markets take over. With ETFs, there is full transparency in the base portfolio, which allows market makers to maintain trading in ETF shares according to their benchmark. In the case of stable currencies, the liquidity and sentiment in the market determine how close to the value of the net asset redeemable the token will be traded:

When the prices of cryptocurrencies rise, it is easy to sell stable currencies, as there are many avid buyers who are willing to purchase the token at an equal price per capita. But this liquidity dries up quickly as the prices of other cryptocurrencies fall. . . Even modest sales cause lower gaps and transaction sizes shrink as buyers disappear. In the case of Tether, the selling pressure intensifies due to the inability of most investors to redeem directly, as well as the inherent advantage of the first factor: sell the token quickly before its price drops further.

Open-ended investment funds can apply “Swing pricingMechanisms in which ad hoc exit penalties deter any investor who thinks they are smelling smoke from the latch toward the exit. But with stable currencies, as with ETFs, the only haircuts available in times of intensifying panic are through the secondary market. For arbitrators with access to the revenue window, their firepower is limited by position size, potential delays and uncertainty as to whether the issuer itself can eliminate collateral without wearing a discount.

This is why stablecoins – even those that, unlike Tether and its competitors, are backed up one by one in a fully controlled asset base – will still carry an inevitable degree of market risk. Back to Barclays:

There is, in theory, arbitrage that needs to be done through the processes of creation and redemption of the token. This is equivalent to ETFs, which are traded around their NAV, while market makers use creation / redemption processes to keep prices at levels close to the basic collateral. Overall, there are a number of reasons why even this arbitrage tier may fail, for example, if there are no arbitrators ready, if they do not have enough balance to absorb all the sales flows, or if they fear that their redemption requests will not be honored in time or in full. Ultimately, full collateral helps reduce the risk to stablecoin, but does not eliminate it.

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