After the big fall of Alameda linked to the FTX exchange, many questions and doubts have been raised about the merits of Tether issuing the stablecoin USDT.
In particular, there have been long discussions about whether Alameda’s failure poses a risk to Tether, the issuer of USDT, the market’s main stablecoin. The answer is very simple: absolutely not, USDT issues are not exposed to the risks associated with the FTX/Alameda collapse.
Tether Statements About USDT Issuance: No Real Risk
The failure of Alameda Searchrelated to the FTX exchange which consequently led FTT to collapses up to 85%undoubtedly represents a critical moment for the blockchain world and a turning point in the history of the cryptocurrency industry.
Indeed, in addition to being one of the biggest financial failures, it also set off a chain of other leveraged failures that rippled through the industry. Unfortunately, in this phase of the bear market, we have seen all the prices of the most prestigious cryptos crash precipitously: Bitcoin, Ethereumand so many others.
The story of the Double Alameda/FTX bankruptcy isn’t finished and we’ll likely hear a lot about it over the next few weeks, with more parties involved.
Meanwhile, Tether has made statements regarding a topic that has emerged since the FTX failure. Is Alameda’s failure a risk for Tether’s stablecoin?
As already expected, USDT is the stablecoin pegged to a stable reserve asset based on the US dollar (USD). That is why the question arose for many.
And that is why Tether was quick to respond in the negative: no, there is no real risk for the stablecoin. Let’s see why.
First, it is important to clarify what it means to be a large issuer of USDT. Second, it is essential to understand what it means when the bankruptcy of such a major player could trigger a cascading series of negative events, given its interconnectedness with the wider ecosystem.
How does issuing USDT work?
Dot one, USDT is issued when institutional parties send USD to Tether and Tether issues USDT on a 1:1 basis equal to the amount of USD sent to the stablecoin. In turn, Tether then converts that USD into reliable, liquid, and conservative collateral (US Treasuries, etc.).
At this point, all USDT is fully backed by Tether’s reserves and each USDT can be traded 1:1 with USD. So what does it mean that Alameda issued USDT?
This means that they sent Tether USD and stablecoin USDT broadcasts. Therefore, here is the answer key, these reserves are still held by Tether and are not on Alameda’s balance sheet. Thus, Alameda’s collateral backing USDT is not on its balance sheet.
Alameda can only do one thing with its USDT, and that is redeem those in its possession through Tether’s redemption feature. Moreover, this applies to any other USDT holder in the world.
Thus, insurance and peace of mind seem assured: no risk for Tether, despite the collapse of Alameda and its function as a USDT issuer.
A problem for many, but not for the stablecoin USDT: no funds loaned to Alameda
Another area where many companies ran into serious trouble after the Alameda collapse, and where the confidence of many in the crypto world faltered are the large loans made to Alameda before the collapse.
Indeed, the main problem that countless other companies face is that they have recklessly loaned Alameda various assets based on extremely illiquid collateral.
Since Alameda cannot repay these loans at this time, these companies have a big hole in their balance sheets. However, Tether is also getting out of this uncomfortable business, as it has never lent Alameda USDT or any other type of funds.
Additionally, Tether has no outstanding loans of USDT from Tether’s reserves or any other funds. This is not how the issuance of USDT works and this is by no means the behavior that stablecoin has adopted with Alameda.
The only time Tether engages in lending is, as the Celsius example shows, when Tether lent USDT to selected clients based on excessive collateral with extremely liquid assets.
Indeed, demonstrating its divergence and concern about the behavior of other companies, Tether said:
“We believe the approach of many lenders in this area has been reckless, lending huge sums of money and accepting FTTs (and other illiquid assets) and sworn pinkies as collateral.”
This is further confirmed by the way in which, despite the sudden collapse of Celsius, Tether operations were not disrupted. In fact, even under the very unstable conditions of The Collapse of TerraTether was able to liquidate Celsius’ guarantee with such precision that it was even able to return part of the guarantee.
The other doubt against Tether: leverage
As is known, leverage played a key role in the dramatic liquidation of FTX. However, Tether does not engage in leveraged trading, leveraged transactions, or loans secured against its reserves.
In fact, Tether does not accept high-leverage directional bets on digital assets as part of its operations. Far from it, Tether is designed to withstand the incredible volatility in the cryptocurrency markets.
While the FTX situation was unique in many ways, it does not pose a risk threat to Tether or USDT, that’s for sure. The stablecoin continues to operate as normal and processes redemptions whenever requested; it has no exposure to FTX or Alameda.