Barclays to Tether: The test is still ahead

It is back on the level and on the defensive, but the questions about Tether's recent detachment from his $ 1-peg value do not go away.

The most popular stable coin in the world published a letter from Mha Cayman on Thursday, an offshore outer post by British Mid Animal accountant Mha Macintyre Hudson, which certifies a consolidated total assets of just more than $ 82.4 billion. These quarterly updates are a mandatory prerequisite for the comparison of Tether with the New York General Prosecutor for 2021 and (in contrast to his PEG declarer published on Monday), it is largely new information.

The snapshot of MHA comes from March 31, so it does not record the USDT Coin’s subsequent decline in the market value by USD 8 billion. It shows less than 5 percent of barres reserves, a sum that is even put in the shade by the mysterious and indefinite category "Other investments".

Nevertheless, a higher weighting of money market funds and US treasure changes meant that more than half of the total reported assets of Tether were in categories that are considered highly liquid:

If you take the above for bare coin (which is not for everyone), the annoying deviation of the last week of $ 1 must still be explained.

The whole meaning of a liquidity buffer is to compensate for repository immediately and to absorb any risk of emergency sales. The capacities for this were obviously abundant. Tether's reported buffer was greater than that of the average institutional first -class money market fund, which usually holds around 38 percent of the assets in immediately monetizing forms.

The last big test for the use of money market fund came at the beginning of the pandemic in the middle of a “cash attack” by the company. In the two weeks until March 24, 2020, according to Barclay's research, the institutes deducted 30 percent from first-class money market funds. In comparison, the problems of Tether are nothing in comparison: On May 12, the returns reached its peak with less than 4 percent of the reports reported.

But Tether's close-free shop withdrawal recording mechanism means that it cannot be seen as a money market fund. Processing delays can occur without explanation, there is a conversion fee of 0.1 percent, and the facility is only available to be verified customers who pay at least $ 100,000. Skepticism with regard to the quality of the collateral is a reason to sell below the binding value of $ 1, but it is only one reason of many, says Barclays:

The only way to get immediate access to Fiat is to sell the token on a stock exchange, regardless of the size of the property. . . [W] While the repayment of the nominal value is "guaranteed", the secondary market price of Tether can be traded lower, depending on the willingness of the owner to accept a discount for access to immediate liquidity. As the price movement of last week suggests, some investors were willing to accept a discount of almost 5 percent in order to liquidate their USDT stocks immediately.

We think that the willingness to absorb losses, although USt is fully secured and has an overnight liquidity buffer that exceeds most first-class funds, indicates that the token could be susceptible to preventive runs. Owner with immediate liquidity needs have an incentive (or first-mover advantage) to sell quickly on the secondary market before the range of tokens from other liquidity seekers increases. The fear that USDT may not be able to maintain the bond can lead to RUS, regardless of its actual ability to support redemption based on the liquidity of its collateral.

It also does not help that Tether (according to yesterday's publication) reports to skeletal numbers once in a quarter. The lack of a real -time view in combination with the short -term nature of the entire portfolio can leave the suspicion of eyewip at the end of the quarter.

All of this makes stable coins more of ETFs than for money market funds, says Barclays. The issuer sells a token, whereupon the secondary markets take control. For ETFs, there is complete transparency via the underlying portfolio, which enables Market Makers to keep the trade in ETF shares in harmony with their benchmark. In the case of stable coins, market liquidity and mood determine how close the token is traded on the realizable net inventory value:

When the prices for crypto-assets rise, it is easy to sell stable coins because there are many eager buyers who are willing to purchase the token at the nominal value. But this liquidity quickly dries up when other crypto-asset prices fall. . . Even a modest sale means that the price differences drop and the transaction sizes shrink when the buyers disappear. In the case of Tether, the sales pressure is reinforced by the inability of most investors for direct repayment and the inherent First-Mover advantage: to sell the token quickly before its price falls further.

Open investment funds can apply "swing pricing" mechanisms in which ad hoc exit penalties who think they smell smoke, stop to rush to exit. But for stable coins, as with ETFs, the only discounts that are available in times of escalating panic are over the secondary market. And while below average sales for arbitrageurs with access to the repayment window should be free money, their firepower is limited by the position size, potential delays and the uncertainty as to whether the issuer can liquidate collateral without a deduction.

For this reason, stable coins - even those that are covered in contrast to Tether and his competitor one to one by a fully tested base of assets - still have an unavoidable market risk. Back to Barclays:

Theoretically, an arbitrage must be carried out on the tokens' creation and redemption processes. This is analogous to ETFs that are traded around their navs, while market maker use the Create/Redem processes to keep prices at a level near the underlying security. There are several reasons why even this level of arbitrage can fail, for example if there are no willing arbitrageurs if they do not have enough balance sheet to absorb all sales flows, or if they fear that their repayment applications will not be paid in time or not completely. Ultimately, complete conservation helps to reduce the risk of stable coin, but does not remove it.