Tether, a leading stablecoin issuer, has published an attestation report for Quarter 2 of 2023. The report shows that the company owns $72.5 billion of US treasury bills, with an excess reserve of $3.3 billion. Now, just to give you an idea, in January 2023, the United Arab Emirates and Australia held $64.9 billion and $62.2 billion worth of US debt, respectively. This demonstrates the potential of stablecoins as a significant financial instrument, provided they are adequately backed.
Paolo Adroino, Tether’s Chief Technology Officer, shared this on X (formerly Twitter). He also stated that Tether’s USDT is the most used stablecoin globally. Despite all the negative things being hurled at USDT, it became a lifeline from inflation in some countries.
What is the implication of Tether’s T-bill reserve? How does it affect crypto holders? How does it help people from inflation?
Why is Tether holding T-bills? What is a T-Bill?
In simple terms, treasury bills or T-bills are debt securities issued by the US Government’s Department of the Treasury. The proceeds from this investment instrument are used by the US to finance its spending. It is backed by the full faith and credit of the American Government. In short, the US promises to pay back the principal and interest owed to the investors.
US Treasuries are considered to be the most stable debt instrument. Why?
- The US has never officially defaulted on its obligations.
- US treasury bills are considered to have low inflation risks since the government can adjust the monetary policies that determine the inflation rate.
- T-bills have high liquidity. They are easily bought and sold in the open market.
- It is also considered prudent to have it in a well-diversified portfolio.
- Investing in US T-bills is like investing in the world’s biggest economy which is also the biggest military superpower.
We also have to understand what is the USDT or Tether. It is the largest stablecoin with an $82 billion market cap. It is a fiat-backed stablecoin, which is backed 1:1 to the US dollar. In theory, a user can exchange any amount of USDT to its corresponding dollar value at any given time. Tether does this by having a reserve of liquid assets. And according to the company, 75% is in T-bills.
How Does Holding Tether or USDT Protect from Inflation?
Inflation is the degradation of a consumer’s purchasing power. One example is if you compare how many grocery items you get with $100 today and ten years ago. Of course, you’d get fewer items today.
Several countries outside the US are experiencing hyperinflation or abnormally high inflation. Citizens of these countries lean on the US dollar to save their purchasing power. For example, in Lebanon, the greenback and the local currency are being used interchangeably. This is the same in other countries like Venezuela, Iraq and Zimbabwe. Brazilians are also turning to US dollar-backed stablecoins, like the USDT, to fight inflation.
However, converting the local currency to the US dollar is sometimes hard. Special permits might be needed or it is simply hard due to location, especially in rural areas.
Stablecoins, like the USDT, can offer users the ability to convert local currencies to a US dollar-backed cryptocurrency. With just a computer or smartphone, a resident from a high-inflation country can quickly buy some Tether.
How does Holding Tether Compare with a Bank Deposit?
Most people dream of having millions of dollars in the bank. This is a great aspiration; however, few realize banks operate on fractional reserves. This means that banks only keep a fraction of their customers’ deposits in reserves, and use the rest to create new loans or investments.
For example, a bank has $1 million in reserve and the reserve ratio is 10%. This means the bank can loan out $900,000 (90%) and needs to keep $100,000 (10%) as reserve. But what if a large number of depositors wish to withdraw at once, thus exceeding the reserve? This is how bank runs start.
Fiat-backed stablecoins, like USDT, are backed 1:1 by liquid assets like cash and US treasuries. On paper, this makes holding stablecoins much safer than holding a bank account. However, holding stablecoins brings its own set of potential problems. Unlike, banks stablecoins are not insured by the FDIC. Stablecoins issuers are also in the crosshairs of regulators, and holding them requires a crypto wallet.
The Roundup
Stablecoins, like Tether, are an essential part of the crypto industry. It gives crypto holders something “stable” in the volatile world of digital assets. But aside from crypto traders and investors, citizens from other countries have recognized it as a viable alternative to holding physical US dollars.
Tether’s transparency in showing its reserves will soothe the doubts of investors. It assures holders that assets are guaranteed 1:1. Having a majority of its reserves in US T-bills shows that the stablecoin is as strong as the most powerful country. Its strength is intertwined with the US economy and the stability of the Federal Government.
At the very least, Tether is not keeping fractional reserves.
Tether Attestation report
Featured image: Unsplash
