Bloomberg Opinion Hits Tether CP
Bloomberg asks in an Opinion piece, "Can a Cryptocurrency Break the Buck." Author Timothy Massad, a research fellow at Harvard's JFK School, writes, "Disruptions in a stablecoin's value could wreak havoc on the broader crypto market unless regulators step in. One such stablecoin is Tether. With a market capitalization close to $60 billion, it is almost as big as the Reserve Fund was in 2008. Each Tether token is pegged to be equivalent to $1. But, as with the Reserve Primary Fund, the true value of those tokens depends on the market value of Tether's reserves -- the portfolio of investments made with the fiat currency it receives." He tells us, "Tether recently disclosed that as of March 31, only 8% of its assets were in cash, Treasury bills and 'reverse repo notes.' Almost 50% was in commercial paper, but no detail was provided about its quality. 'Fiduciary deposits' represented 18%. Even more troubling: 10% of total assets were in 'corporate bonds, funds & precious metals,' almost 13% were in 'secured loans (none to affiliated entities),' and the remainder in 'other,' which includes digital tokens." The Opinion adds, "So perhaps Gary Gensler, the new chairman of the SEC, should explore regulating stablecoins in a similar fashion to money-market funds: The issuance of a stablecoin should be conditioned on following risk-limiting practices designed to ensure that the tokens are in fact worth that price. These should limit investments of reserves to those of minimal credit risk and short maturity. There should be liquidity requirements as well. The SEC is about to revisit the adequacy of its regulations on money-market funds because the reforms it imposed following the 2008 financial crisis were not sufficient. When financial markets became highly stressed in March 2020, a run on money-market funds was prevented only by the extraordinary interventions of the Federal Reserve. Let's hope regulators look more closely at stablecoins before we experience the crypto version of breaking the buck." (Tether's CP holdings were first mentioned in J.P. Morgan's May 21 "Short-Term Market Outlook & Strategy," in a brief entitled, "Cryptocurrency: A growing money market connection.")
