Tether to eliminate borrowing from its stablecoin backing fund

In response to doubts about its solvency and backing of its stablecoin, Tether announced that it will gradually reduce borrowings to zero by 2023.

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Tether Limited, issuer of Tether USD (USDT), plans to eliminate collateralized loans from its reserves. Although it will be progressive, as stated by the same organization in a press release, the intention is to bring them to zero during the year 2023.

As Tether explains in the aforementioned text, published on Tuesday, December 13, the initiative seeks to dispel the most recent criticisms about the reserves that back its assets. Particularly, as far as loans are concerned, the organization argues that it has a higher backing than its loaned assets, so there is no risk of defaulting on its commitments – and therefore, of the parity of its various stablecoins.

Although it did not give a specific timeline for the execution of this plan, Tether stated that their fund management is “professional and conservative”. This is precisely what they plan to demonstrate by eliminating loans from their reserves. They will do so by “successfully liquidating the loan business at a loss, as all loans are over-collateralized by liquid assets.”

Regarding the criticism, Tether claims that this is a new effort by “the rumor mill” and journalists in the service of FUD (Fear, Uncertainty and Doubt) that has always been questioning the transparency of its reserves.

However, they say they understand why there are such doubts at the moment, given the events that have occurred in the industry this year. In particular, two events have made a dent in the confidence of the cryptocurrency market this year: the debacles of Luna and its stablecoin UST; and the collapse of FTX, associated precisely with a lack of liquid assets to meet its obligations.

Changes to Tether’s reserve fund

Last October, Tether had already eliminated all of its reserves in corporate commercial paper. Tether’s backup fund held some $30 billion in these instruments, for an equivalent that hovered around 50% of its reserves.

Criticism of Tether’s reserves is not new. For years, the backing that gives parity to USDT (the most widely used stablecoin in the market and the asset with the highest trading volume among cryptocurrencies) has been called into question.

Even competitors such as Circle (which issues USDC) have taken a stand, despite also not having 100% dollar-backed reserves 1:1 against its stablecoin. More recently, one of the world’s most powerful exchanges, Coinbase, took a stand in favor of USDC. This is not surprising, given that the exchange was involved in the founding of that project.

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