Stablecoin series: Tether, the big bridge connecting two mountains

As an "advertised stable digital currency with a 1: 1 peg of US dollar assets," Tether serves as an important "bridge" in the cryptocurrency market, connecting key trading assets with other virtual assets.

However, with the huge bridge that once accounted for nearly 10% of Bitcoin's market value, which holds more than half of Yu 'Bao's assets, the bridge is crowded, and its modern trading volume is also greater than that of Bitcoin, as well as coins. The product has become a “global savings” on virtual assets.

This article explains how fiduciary-backed stability coins, as represented by Tether, provide process security, compared to compliance with other stable coins, and the coin count the stability that comes with real estate assets.

Why did Stabilitycoins form?

Daily comparison report for BTC, Dow Jones and S&P 500. Source: Messari

In terms of daily volatilityThe volatility of virtual assets is greater than that of traditional trading products, and the difference can be ten times greater. In this case, there is a strong demand for investors to find tokens that retain their value and can be protected as "safe" for their investment.At the same time, since tokens have a more stable value than other tokens, the market wants to convert them into a medium of exchange accordingly.

When it comes to Tether, he was one of the early pioneers in the industry and has grown into one of the industry's financial stability leaders. Until now, Tether has held a key position in the fixed price market.Since July 20, daily trading volume has exceeded BTC, making significant gains for the cryptocurrency market., with more and more people using USDT as their major exchange rate, establishing "global savings" directly in the crypto industry, making USDT a significant part of the currency in many markets.

But how do fiat-recoverable stablecoins like Tether Stable Exchange Rates go through the process?

The HKMA exchange rate has always been

In fact, for Tether, the practice of pledging USD assets to define USDT is similar to traditional exchange rates.Since 1983, the Hong Kong Monetary Authority has adjusted the US dollar / Hong Kong dollar exchange rate to 7.75-7.85 and ensured that enough foreign assets were secured to increase profits.Therefore, there are two logics when multiple inflows and outflows: when external inflows, profits rise, the USD / HKD exchange rate depreciates, when external inflows come in, earnings fall, and USD / HKD falling and the exchange rate is bullish.

The exchange rate, which is around 7.75-7.85, is the only exchange rate applicable to Hong Kong interest rates whenever foreign capital inflows and outflows and the price exchange rate change in advance. Source: Hong Kong Monetary Authority

At the same time, in this exchange, many market participants will make different times and try to keep the exchange rate within the range. In this regard, the Hong Kong Monetary Authority is actively and aggressively intervening through Lean Against Air to influence the interest and devaluation of the local currency to achieve the stabilizing effect of the target exchange rate. Hong Kong's foreign exchange reserves more than doubled the exchange rate throughout the year, ensuring financial security. CornThese security measures have been widely used in the world of fiat money as regulators criticize the currency in the commodity market, allowing them to adjust the currency directly to disrupt the price movement.

Left: HKMA is almost twice a specialized country to protect a fixed period. Source: Bloomberg

Fixed price exchange is represented by Tether

According to research data "What keeps Stablecoins stable?" by Richard K. Lyons and Ganesh Viswanath-Natraj, researchers:Companies that issue Stablecoins, represented by Tether, as USD-backed assets often cannot be fixed by the payment side, but are more dependent on the needs of the second company.

In the normal amount of transactions, the company is selling foreign funds, which affects the transfer mole mechanism is taken by delivery. However, in the case of collateralised stablecoins such as Tether, scientists disagree on the security of the device, but trade it through the application side - arbitrage - which leads to the stability of the value of the rates. fixed exchange rates.

In the case of Tether, there is a strong demand for a safe haven for stability coins in the volatile cryptocurrency market.And changes in direct demand cause the exchange rates to fluctuate from the USDT to its currency, the USD.(exchange rate difference). It is this price difference that supports Tether investors in arbitrage and risk arbitrage to trade the USDT for face value in the first market and sell it in the second market to affect the exchange rate and come back. at the 1: 1 exchange rate against

In the real estate division of Dollar Investor, some positions are subject to USDT / USD arbitrage, and similar real-life transactions are subject to foreign exchange. Source: NBER

In order to better understand how to apply a market controlled exchange rate, the guide above describes this process.

Assuming the USDT / USD exchange rate in the market is less than 1, for example the price in the secondary market (Crypto Market) is lower than that in the first market (Tether Treasure), the speculator risks (red lane) towards the USDT. The second market and the sale of Tether Teasury made the decision. This results in an endogenous increase in the level of Tether at a ratio of one to one.(Bank forDoT to sell, reduce tourism, andebt recursion)

Assuming the USDT / USD exchange rate in the market is greater than 1, for example the secondary market price is higher than the secondary market price, the risky speculator (blue lane) buys and sells USDT on Tether Treasury. As the second largest arbitrage market, the rise of this order results in exogenous downward pressure on the value of Tether, moving Tether towards a one-to-one parity.(This is the equivalent of buying USDT from the Bank to increase shipments and know how to buy well on USDT)

The value of USDT in a foreign currency account is greater than that of Tether Treasury. Source: NBER

In this surveyWe can clearly see that Tether's financial strength in the mid-market is greater than the savings of Tether Treasury.. In principle, in the event of a large-scale liquidation of Tether under extreme market conditions, Tether's Treasury can use its actual hold to protect itself against attacks. Too low, the administration of the exchange rate by Tether is generally up to traders, pushed by Please, and Tether itself will not be affected in the industry like the normal situation, he said from the outside. So in such a system, the supply of Tether usually depends on the demand of the traders, the supply will increase further when the trader decides to deposit USD with Tether. Inc., and stocks will increase further when the trader decides to withdraw USD. deposits. Collapse to remove Tether from circulation.

Tether Grow Offshore Dollar Liquidity

Over the years, the outside world has maintained its skepticism about Tether's claims that "USDT said 1: 1" and has also been criticized for its skepticism over a long period of market research. However, the increase in USD savings for Tether users is surprising, and the measure of greater USD savings for international payment center users is not a bank like PayPal.

Currently, the USDT real-time revised contract reported on Tether's official website has exceeded $ 62 billion, or about 3,970 trillion yuan.Compared to Yu'ebao, which was once the world's largest financial market (according to first quarter data, Yu'ebao manages RMB 972 billion in assets), Tether's assets make up almost half of Yu'ebao. . These treasures are worth worrying about.

JP Koning once compared the benefits of consumer savings to US bank accounts, and you'll be amazed to learn that Tether will soon enter the top 40 banks for savings. United States. It should be noted that the USDT provided by Tether is an IOU for all users, and this IOU must be strictly refundable and immediately redeemable.So, Tether is essentially an interest-free or savings bank with no FDIC coverage.In this case, even if Tether holds an actual deposit of 100%, the other assets associated with the proceeds of property sharing will still face the income risk due to the time lags.

As Mikko said, “Everyone would be surprised if Tether had 100% USD assets to support the USDT campaign. Is there a risk of execution? In fact, no, all short term fundingIt also has its own terminological mismatch (balance sheet mismatch), the short-term danger is the night danger.Since USDT itself is a special liquid, no one seems to be concerned about potential defaults. However, the real financial risk of USDT comes from the assets, that is, the assets we are talking about. "

Many banks because the customer saves from the bank account by the 400 bank by the first month. Customer. America dollar deposits. Source: MX.

However, years ago USDT holders were unaware of tying procedures and credit risks, and due to the lack of strict external oversight,All of this allows him to open up the possibility for Tether to hide real money and manage user savings.So this is all a big deal.

In a lawsuit between the New York Attorney General (NYAG) and Tether and Bitfinex in February this year, New York Attorney General Letitia James said Tether and its partners, the cryptocurrency exchange Bitfinex, were previously stable. became an alloy of phosphorus. through. According to the ancient writings of Attorney General James, “Tether the claim that virtual currency has always been sponsored by the United States is false. ")

Gemini, Binance, Circle, and Paxos are all accredited by the American Institute of Accountants auditing standards for regular asset reporting and review, but Tether does not accept third-party audits. . Source: JP Koning blog post

In fact, in the invoice Tether sent to the New York attorney, consultant Tether Hoegner once acknowledged that only 74% of USDT was returned by the Service. of the USDT. However, as an industry leader, Tether seems low-key and people still choose to use it due to its network issues.This means that anyone can cross that bridge to the other side of the mountain and the reputation of the USDT won't, as long as everyone ignores their credit risk and likes to trust the name of this "bank" will not lose money. . Depreciation and lack of liquidity in terms of collateral.

What about the furniture? What is liquidity risk? In fact, in this experiment, Tether was forced to disclose the assets of its assets, which is the first time that Tether has declared USDT's assets approved.

Source : Coindesk

here we can seeOnly 75.85% of U.S. assets include cash, cash equivalents, business cards, and other luxury items., 12.55% are securities lenders, 9.96% are securities and metals companies and 1.64% are other securities. Of these 75.85% of assets, 65.39% are commercial files.

Business information is short, insecure information provided by a business for short-term financial gain, and is rated by the credit rating agency by rating the solution. Of the assets which represent more than half of the stationery market, Tether did not disclose the credit rating or the originator of these scripts, nor the borrowers of these scripts which are a secured loan. The guarantee for the support is scaled.So at the asset level, Tether clearly indicates the market risks. Success will happen more when the real estate market pulls back only in economic conditions, such as the spread throughout March.

Besides USDT, why not USDC, BUSD, TUSD or PAX?

Content of Stablecoin data guaranteed by Fiat general public. Source: Data compiled by CryptoYC

In fact, the security mechanisms of other fiat-based stability coins are the same, and it's probably the degree of compliance that makes it a competitive advantage over Tether.

Currently, USDC is doing its best to monitor compliance, and its developer, Circle Internet Financial, LLC, is listed as a joint venture and venture capital firm. not onlyFirst BitLicense provided by the New York State Department of Financial Services (NYSDFS),Many states also have an MSB license.(Issuer license) andObserve the anti-money laundering rules(Financial assistance compliance);The latter two are currently the simplest rules for trading and holding cryptocurrency in the United States, and BitLicense allows the Circle to raise public funds to advertise the USDT.

Stable coins outside the circle, such as Paxos and Gemini, are submitted to the NYSDFS for a financial license called the Limited Purpose Trust. If the request is approved, these trustworthy companies could save many states the inconvenience of requesting MSBs and provide quick access for monitoring and trust implications on crypto assets.Given the importance of compliance oversight, it would also require less capital, more financial oversight, and provide investors with FDIC protection.

For Tether, which has neither BitLicense nor Limited Purpose Trust, complying with anti-money laundering laws is not enough.Therefore, in the final judgment of the law, Tether was prohibited from doing business with individuals and organizations under the jurisdiction of New York State.As such, Tether is headquartered in Hong Kong and has traditionally been placed on the US dollar coast, its assets are held in non-FDIC Bahamian banks, then buy many stocks on the US coast to compete with institutions. public finances. The organization does all the business.

Based on an analysis of external information,All major fundraisers use third-party auditors to perform their audits and publish monthly or quarterly audit reports., they almost always report the equity of assets and liabilities as total funds and choose not to release additional information about their assets. So I sometimes refer to this situation as "only advertise for more X quality".

At the same time, for BUSD and HUSD, we can choose to adopt PAXO fixed deposit model. It's because of compliance.Paxos Trust Company provides depositors with third party FDIC accredited verification and escrow services. However, according to Coindesk reporter Frances Coppola, the insurance provided by the FDIC is minimal, as the standard limit for FDIC banks is equivalent to $ 250,000 per person. . , and only the first $ 250,000 is paid by FDIC insurance. For Paxos, this not only provides care for its own depositors, but also BUSDs, so you will need to open an account at one of the many FDIC-recognized banks. In fact, the BUSD Monthly Review Report shows that a large portion of your savings exceeds the FDIC guaranteed amount, and you need to be sure that your BUSD use is not fully FDIC protected.

Left: In the offshore USD market, Binance does not have a partnership with Bank of America, but can use USDT for USD gains to trade most BTC. Unfortunately, the consolidation of the USDT was led by the BUSD. nuv. Politics: USDT / BTC outperformed other national currencies, including USD, at the start of 2019. Source: JP Morgan

After all, there are still inconsistencies here. That said, the least compliant, least opaque Tether will eventually become the largest US currency investor in crypto assets, but going forward, will Tether retain its power?

Old Bridge, USDT

We talked about the future development of how fiat-based Stabilitycoin works.

First, we need to be aware of the fact that cryptocurrency assets have increased further in the currency. In fact, when the USDT is traded based on the profitability and savings of a large exchange, or when DeFi becomes a marketable product for mining income, the process is defined as a financial standard, which is the process of use of USDT as USD. Dollar liquidity (debt side of tether) mapped to asset credit (asset side of tether) supports all asset prices.Therefore, as the assets of BTC and ETH gradually depreciate, the cycle of dollar appreciation and contraction is an external asset of the asset.

So we have to face the risk of risk, in fact, if the US dollar appreciates over the past year, crypto assets might not have a dangerous asset, and without massive entry from US dollar payments , in the absence of market involvement of existing companies, BTC would not enter the investment portfolio. inflation hedging, and Tether and other trust fund-backed stability coins played an important role in the bridge. Break the "gap" of old and virtual things.

Left: When it comes to market capitalization, USDT and BUSD, which have more regulatory oversight, largely hurt USDT. Policy: Regarding growth potential, BUSD, USDC, SUSD and GUSD have experienced rapid growth since the start of the year despite their small size. Source: Messari

As a result, Tether, who does not play by his own rules, has been hit by the US legal community since the start of the year and sells traditional money himself. futures and commodities that offer good and stable returns are subject to the same level of management as investments. Is money still used even though it is used as a raw material?

In the face of all the political climate that supports its own lowest tax rate in the world and higher tax revenues, we believe compliance with benefits is stable. will become an even bigger challenge going forward and Tether risk management will continue to do so. .