Will it silence critics, mollify investors?

There is an old Arabic proverb: “The dogs bark, but the caravan moves on.” It could summarize the journey to date of Tether (USDT), the world’s largest stablecoin. 

Tether has been embroiled in legal and financial wrangling through much of its short history. There have been lawsuits over alleged market manipulation, charges by the New York State attorney general that Tether lied about its reserves — costing the firm $18.5 million in fines in 2021 — and this year, questions voiced by United States Treasury Secretary Janet Yellen as to whether USDT could maintain its peg to the U.S. dollar. More recently, investment short sellers “have been ramping up their bets against Tether,” the Wall Street Journal reported on June 27.

But, Tether has weathered all those storms and seems to keep moving on — like the proverbial caravan. On July 1, the company announced that it had dramatically reduced the amount of commercial paper in its reserves, which has been a sore point with critics for some time.

Embracing U.S. Treasury reserves?

Tether’s commercial paper reserves are expected to reach a new low of $3.5 billion by the end of July, down from $24.2 billion at the end of 2021. The company added that its “goal remains to bring the figure down to zero.” 

Many stablecoins like Tether are stand-ins for the U.S. dollar, and they are supposed to be backed 1:1 by liquid assets like cash and U.S. Treasury bills. But, historically, as much as half of USDT’s reserves were in commercial paper, which is generally seen as less secure and more illiquid than Treasuries. Hence, the potential significance of the commercial paper statement.

It raises questions too. On the positive side, does it signal a new maturity on the part of Tether, embracing more of a leadership position in favor of “increased transparency for the stablecoin industry,” as the company declared in its announcement? Or is this rather just more distraction and obfuscation, as some believe, given that Tether continues to avoid a more intensive, intrusive and comprehensive audit, in favor of a more limited “attestation” with regard to the firm’s reserves?

Is it telling, too, that Tether’s “independent accountant reports” are issued by a small Cayman Islands-based accounting firm rather than a Big Four audit group?

Finally, what if the short sellers are right and there is less to Tether’s collateral than meets the eye? What would happen to the crypto and blockchain sector if…