Tether - steady outflows a drain on reserves

Tether's market cap has fallen from $82bn on 31 Mar 2022 to $67bn on 22 Jun 2022. It decreased by $15bn in close to 3 months (falling on average by $5bn per month).

Assuming this rate of decline doesn't decrease, by the end of the year, we could see tether supply falling to ~$37bn. By Jun 2023, we could see supply drop to ~$7bn.

We know from Tether's reserve report (link below) that as of 31 Mar 2022, they had total assets of $82bn. Of which:

• $70bn is in very high-quality and liquid assets (cash/treasury bills/high quality commercial paper) that can easily be converted into cash.
• Remaining $12bn is in secured loans/corporate bonds/and others.

As tether tether circulation decreases, Tether is likely liquidating its highest quality reserves, that $70bn of cash/treasury bills/high quality commercial paper, to meet redemptions first, because they are the most liquid and easiest to convert into cash.

Once tether runs out of those high-quality reserves, it will have to liquidate its remaining $12bn of reserves. its unclear what these assets actually are, for example, tether has $3bn of secured loans as their reserve, but who's the borrower? what is the security backing these loans? Are the collateral crypto related assets? Do they need to be marked down? How quickly can these loans be liquidated? These questions have to be asked for other assets on Tether's balance sheet too.

As discussed elsewhere, tether also has a history of poor corporate governance and internal control, as documented in a US lawsuit (link below). Among others, tether:

• Loaned close to $1bn to Bitfinex (context: Bitfinex put customers deposits in a firm called Crypto Capital, and Crypto Capital's accounts got seized by the Polish regulators, so Bitfinex couldn't access its customer's deposits and needed a bailout from Tether)
• Tether didn't have a bank account for 6months but continued to issue tether. Tether deposited its cash to its general counsel's account, instead of a company account
• At one point, Tether only had $61m in its bank account but had $440m tether in circulation.
• Tether is banked by Deltec Bank, a Bahamas bank. Has anyone heard of this bank?
• Tether's auditor is 3rd/4th tier
• Tether had a one point over $80bn of assets, but its reserve report (which are not even audited) is just a few pages. This type of disclosure is very weak and does not meet financial reporting standards in the US for financial institutions.

Due to the poor internal controls, poor reserve disclosure, rising interest rates which may negatively affect the value of Tether's reserves, we have to take a discount when evaluating Tether's reserve. I'd say 10-20% as a minimum.

So I'd guesstimate tether's real reserve to be worth $66-74bn (being $82bn discounted by 10-20%). That means, if the amount of tethers in circulation falls by another $51-59bn, tether would not have sufficient liquidity to fund redemptions. At the current rate of supply decrease of $5bn per month, Tether would run out of reserve in 10 months. Which would also mean, if you get out of tether now, you can have all of your money back, if you choose to exit in 10 months, you might not.

Disclosure: this is my opinion only, I have no long or short positions in tether or any other crypto

tldr: If tether supply continues to decrease at the current pace, I think tether's liquidity will be drained in 10 months

links:

• tether reserve reports: https://tether.to/en/transparency/#reports
• US lawsuit against tether: https://ag.ny.gov/sites/default/files/2021.02.17_-_settlement_agreement_-_execution_version.b-t_signed-c2_oag_signed.pdf