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Reserves Breakdown for Assets Backing Tether Stablecoin

Albert Morgan

Sep 19, 2023 — 3 min read

This article is for informational purposes only and does not constitute investment advice. Always do your own research (DYOR) before making any financial decisions.

Tether (USDT) has become one of the most widely used stablecoins in the cryptocurrency market. As a stablecoin, Tether aims to maintain a value pegged to the US dollar. This allows cryptocurrency traders and investors to have a stable store of value amidst the volatility of the markets.

Backing Reserves for Tether

A key aspect of Tether is its backing reserves. Tether Limited, the company that issues USDT, states that every USDT in circulation is backed 1-to-1 by reserves held by the company. This backing provides the basis for Tether's USD peg.

Tether's reserves have been a source of much discussion and speculation in the cryptocurrency community. There have been questions raised about the breakdown of assets making up Tether's reserves and whether they are sufficient to fully back the amount of USDT in circulation.

Breakdown of Tether's Reserve Composition

Tether provides periodic reserve attestation reports that give a breakdown of its reserves. The most recent attestation in November 2022 showed that Tether's reserves consist of:

Cash & Cash Equivalents: This includes actual cash held in bank accounts and other highly liquid cash equivalents. Cash & cash equivalents made up around 49% of Tether's reserves.
Treasuries: These are debt instruments issued by governments with high credit ratings. Treasuries accounted for 18% of reserves.
Secured Loans: These are loans collateralized by other assets held by Tether. Secured loans were 13% of reserves.
Corporate Bonds, Funds & Precious Metals: The remainder of Tether's reserves (20%) were held in these asset categories.

Changes in Tether's Reserve Makeup

Tether's reserve composition has shifted over time. In its early days, Tether claimed its stablecoin was 100% backed by fiat currency reserves.

However, reserves now include other assets like bonds and precious metals. The percentage of reserves held in cash and cash equivalents has also declined. These changes have led to allegations that Tether reserves are insufficiently liquid and that its USD peg is unsustainable.

Tether maintains its reserves are highly secure and that it can meet all redemption requests for USDT. The company also points to attestations showing it holds sufficient assets to back all USDT tokens in circulation.

Ongoing Calls for Better Reserve Transparency

While Tether does provide periodic reserve reports, many have called for more transparency and third-party validation. There have been requests for real-time reserve accounting, as well as an independent audit of Tether's reserves and operations.

Tether has so far resisted calls for a formal audit, though it does work with an accounting firm to produce its attestation reports.

The makeup and transparency of Tether's reserves will likely continue being a point of controversy. As one of the most widely used stablecoins, trust in Tether's backing system is critical for overall confidence in the stablecoin market.

"As the author of this article, I recognize the importance of providing full transparency into Tether's reserves. While Tether has made efforts to disclose its holdings, more can be done to demonstrate the stability of its USD peg and ensure market trust."

Cash breakdown of reserves over time
Changes in asset composition of reserves
Calls for fully independent audit

What are the main risks from Tether's changing reserve composition?

Tether's shifting reserve composition introduces several risks, including:

Liquidity risk - With fewer highly liquid assets like cash, Tether may have difficulty meeting a surge in redemptions if there is a loss of confidence in its peg. This could destabilize the wider stablecoin market.
Credit risk - Reserves now include debt instruments like bonds which carry a risk of default. This makes the reserves more vulnerable to credit downturns.
Transparency concerns - More opaque assets in reserves make it harder to verify Tether's backing. This contributes to doubts about whether Tether is fully backed.
Regulatory pressure - Questions around reserve composition may lead to greater regulatory scrutiny of Tether's operations and reserves.

While Tether maintains its reserves are solid, the makeup introduces new risks compared to when reserves were entirely in cash and cash equivalents. Ongoing calls for an independent audit suggest the market is still concerned about reserve stability amid the shift towards less liquid holdings.

How does Tether's reserve backing compare to other leading stablecoins?

Tether's reserve composition stands in contrast to some other top stablecoins:

USD Coin (USDC) - USDC states all tokens are backed 1:1 by cash and short-duration US Treasuries. This suggests more liquidity than Tether's mixed reserves.
Binance USD (BUSD) - BUSD is issued by Paxos and claims 100% of tokens are backed by cash and cash equivalents. This represents a more liquid backing than Tether.
Dai - Issued by MakerDAO, Dai uses crypto assets held in smart contracts as collateral backing. Users can verify reserves on the blockchain, improving transparency.

Compared to these stablecoins, Tether appears to hold a smaller portion of its reserves in the most liquid assets like cash. Lower cash reserves could make it more vulnerable to heavy redemptions. Tether also lacks the on-chain transparency of crypto-collateralized stablecoins like Dai.

However, Tether remains the largest stablecoin by market capitalization. The company insists its mixed reserves are secure and that attestations prove it holds sufficient assets to back USDT tokens in circulation. But calls for greater transparency and independent auditing reflect a desire for Tether's reserves to align more closely with the practices of other leading stablecoins.