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Tether’s bitcoin-backed lending clashes with dollar promise

A major customer of Tether has said the company lends out new stablecoins in return for cryptocurrencies — a claim that calls further into question Tether’s founding promise that it uses only real dollars to issue its tokens.

Alex Mashinsky, whose crypto lending platform Celsius Network has borrowed from Tether and counts it as an equity investor, told the Financial Times that, as part of a lending arrangement, Tether has issued its so-called USDT units in return for well-known cryptocurrencies.

“If you give them enough collateral, liquid collateral, bitcoin, ethereum and so on . . . they will mint tether against it,” he said.

“New USDT is issued for such loans,” he added, and later destroyed when the loan is closed “so it does not permanently increase USDT in circulation”.

The comments contrast with Tether’s commitments that it issues units of the world’s biggest stablecoin only in exchange for hard currency.

Tether’s longstanding one-to-one link with dollars has been the foundation of a $70bn stablecoin that lubricates global crypto transactions and offers a smooth way to hop in and out of crypto assets such as bitcoin and ethereum.

The stablecoin operator, which launched in 2014 and has faced intense regulatory and media scrutiny in recent years, says in its current terms of service that “only money will be accepted upon issuance”. The terms, last updated May 2020, explicitly rule out accepting digital currencies such as bitcoin for payments.

US federal and state regulators have fined Tether tens of millions of dollars this year after finding it had previously misrepresented its reserves. The company neither admitted nor denied the findings by the Commodity Futures Trading Commission and New York attorney-general’s office. Both cases focused on what Tether did with dollars it received rather than its issuance process.

Issuance on a one-for-one basis against dollars is widely understood to be a key feature of the stablecoin industry and was a central point in Tether’s whitepaper at its launch seven years ago. An executive at a US crypto platform said his understanding has been that “the only thing you should be able to use to create and redeem [USDT] is US dollars”.

Separate to its terms of service, in a “primer” on its issuance process published in May this year, Tether used broader language to describe how USDT is issued into circulation from its inventory.

The primer states that “newly issued [USDT] must be backed by collateral” and that “redeemed [USDT] tokens are not released back into circulation unless new collateral has been provided”.

Asked to comment by the FT, Tether repeatedly declined to provide details on how its USDT lending operates or to clarify whether it was issuing new tokens through the programme.

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“We have a select, small group of customers that borrow USDTs in exchange for posting security. These loans are secured by collateral in Tether’s possession of well in excess of 100 per cent of the loan proceeds and earn monthly interest,” Tether said, adding that no loans were made to affiliated entities.

“Our lending programme was first disclosed long ago in our reserves breakdown and is not a secret. The extent of the programme is currently disclosed in our assurance opinions, published quarterly . . . This practice is common to other stablecoin issuers. This lending is undertaken narrowly, efficiently, securely, and profitably,” the company added.

Tether’s reserve disclosures show that around 4 per cent of its total assets, or $2.5bn, as of June this year were “secured loans”, down from 12.6 per cent earlier in the year. The disclosures do not distinguish whether the loans were made by lending out USDT in return for collateral or by lending out dollars other customers had paid in when buying USDT.

Mashinsky said the loans of USDT are typically at least 30 per cent overcollateralised, with the amount varying depending on market volatility. “If bitcoin drops, they give us a margin call [and then] we have to give them more bitcoin,” he added. Earlier this month, Bloomberg reported Celsius had borrowed $1bn worth of USDT from Tether.

Tether is battling a US class-action lawsuit that alleges it issued USDT without any backing in order to make purchases of bitcoin as part of a market manipulation scheme. The company has denied the claims, calling the case a “shambles” and a “clumsy attempt at a money grab”. Last month, the federal judge overseeing the case dismissed half of the claims but allowed the others to continue.

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