Tether’s Bitcoin-backed lending clashes with dollar promise

A major Tether customer said the company is lending new stablecoins in return for cryptocurrencies - a claim that further calls into question Tether's founding promise that it only uses 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 Tether has issued its so-called USDT units in return for well-known cryptocurrencies as part of a lending agreement.

"If you give them enough collateral, liquid collateral, Bitcoin, Ethereum and so on... they will resist," he said.

“For such loans, new USDT is issued,” he added, and later destroyed when the loan is closed, “so that USDT in circulation is not permanently increased.”

The comments contrast with Tether's commitments to issue units of the world's largest stablecoin only against hard currency.

Tether's long-standing one-to-one connection with dollars has been the basis for a $70 billion stablecoin that lubricates global crypto transactions and provides a frictionless way to enter and exit crypto assets like Bitcoin and Ethereum.

The stablecoin operator, which was founded in 2014 and has come under intense regulatory and media scrutiny in recent years, says in its current terms of service that “only money is accepted upon issuance.” The terms, last updated in May 2020, expressly exclude the acceptance of digital currencies such as Bitcoin for payments.

U.S. federal and state regulators fined Tether tens of millions of dollars this year after finding that it had previously misrepresented its reserves. The company has neither admitted nor denied the findings of the Commodity Futures Trading Commission and the New York Attorney General's Office. Both cases focused on what Tether did with the dollars it received rather than the issuance process.

One-to-one issuance against dollars is widely viewed as a key feature of the stablecoin industry and was a key point in Tether's white paper when it was launched seven years ago. An executive at a US crypto platform said his understanding was that “the only thing you can use to create and redeem [USDT] is US dollars.”

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

The primer states that “newly issued [USDT] must be backed by collateral” and these “redeemed [USDT] tokens will not be put back into circulation unless new collateral is provided.”

Reached for comment by the FT, Tether repeatedly declined to provide details on how its USDT lending works or clarify whether it is issuing new tokens through the program.

"We have a select, small group of customers who borrow USDTs in exchange for posting collateral. These loans are secured by collateral owned by Tether for well over 100 percent of the loan proceeds and bear interest on a monthly basis," Tether said, adding that no loans were made to affiliates.

"Our lending program was first disclosed long ago in our reserves breakdown and is no secret. The scope of the program is currently disclosed in our quarterly published audit reports. . . This practice is common among other stablecoin issuers. This lending is tight, efficient, secure and profitable," the company added.

Tether's reserves disclosure shows that as of June this year, around 4 percent of its total assets, or 2.5 billion. The disclosures do not distinguish whether the loans were made by lending USDT against collateral or by lending dollars that other customers deposited when purchasing USDT.

Mashinsky said USDT's loans are typically at least 30 percent overcollateralized, with the amount varying depending on market volatility. “If Bitcoin goes down, they give us a margin call [and then] we have to give them more Bitcoin,” he added. Earlier this month, Bloomberg reported that Celsius had borrowed $1 billion worth of USDT from Tether.

Tether is fighting a US class action lawsuit that claims it issued USDT without any backing to buy Bitcoin as part of a market manipulation scheme. The company has denied the claims, calling the case a “mess” and “a clumsy attempt at fundraising.” Last month, the federal judge overseeing the case dismissed half of the lawsuits but allowed the others to proceed.