WSJ claims Tether's loans increase risks, official refutes: Don't understand operational mechanism

The questioning of Tether has become a cyclical event in the cryptocurrency industry, and this time The Wall Street Journal has raised concerns about the gradual increase in "secured loans" on Tether's balance sheet, which may increase market risks.

The Wall Street Journal points out that in Tether's audit report, as of September 30, secured loans on the balance sheet amount to approximately $6.1 billion, accounting for 9% of total assets, compared to only $4.1 billion at the end of 2021, representing 5%, thus increasing repayment risks.

The media stated that while most of Tether's balance sheet consists of cash and cash equivalents such as government bonds, with no repayment concerns, secured loans cannot guarantee the full amount of funds will be recovered. Although a Tether spokesperson claimed that these loans are short-term and over-collateralized, in the event of a run, there is a risk of insolvency.

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The Wall Street Journal wrote: "The vast majority of assets in Tether's audit report are cash, government bonds, and other assets that are easily convertible back to dollars, but secured loans are different. Tether is not certain whether the loans will be repaid, whether they can be sold to others for dollars in critical moments, or if the collateral is sufficient."

Tether Criticizes Misunderstanding of Its Operation Mechanism

Tether officials recently clarified that there are many misunderstandings in The Wall Street Journal's understanding of Tether's operation. The most obvious one is that Tether's collateral loans are denominated in USDT, so if the price of USDT falls, it will affect Tether's ability to repay.

"This completely misunderstands Tether's mechanism, thinking that USDT is the collateral for the loan. In fact, Tether's collateral loans are over-collateralized, sometimes even supplemented by Tether's own assets to support the loan."

Tether then explained how collateral loans work.

Firstly, Tether only issues loans to a few investigated institutions, and in addition to over-collateralization and margin, it also controls the quantity and ratio of loans.

More importantly, compared to traditional banks, Tether's additional margin mechanism is quite strict. Once users fail to meet Tether's margin requirements, the collateral will begin to be liquidated.

Just like the case of Celsius mentioned in the report. Before the incident erupted, Tether had already begun liquidation, repaid some collateral to Celsius after repaying the loan.

Tether stated that their lending policy is very conservative, and the additional margin mechanism is very effective, as evidenced by the Celsius case. However, this article not only fails to appreciate their margin mechanism but also reports it in a distorted manner.

Additionally, Tether also emphasized that they will not purchase any bad loans from financially troubled companies, but rather control the quality and quantity of collateral and provide over-collateralized loans to eligible users.

A Dialogue of the Deaf

Both sides are adamant, but they each have their blind spots.

Tether claims that The Wall Street Journal misunderstands the operation mechanism, but in reality, the report did not misunderstand the way loans are denominated.

Even with over-collateralization, in extreme market conditions, the collateral price may indeed fall below the loan amount.

What Tether truly responded to The Wall Street Journal's doubts is the emphasis on investigating borrowers, over-collateralization, and further support from their own equity.

On the other hand, The Wall Street Journal wrongly compared it to a run-on case. The report insinuated that even if Tether's collateral loans only account for 9%, it could still lead to insolvency in the end.
These two cases are somewhat different.

FTX faced a frenzy of runs by all users, including retail investors, institutions, and market makers within three days, while Tether may slowly liquidate equivalent cash assets with limitations and gradually settle collateral during this period. The pressures on the two are incomparable.

For more details, please see: Tether Condemns The Wall Street Journal: A Media That Always Creates USDT Panic, Have They Warned FTX, 3AC, and Terra?